Untangling credit default swaps
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- Опубликовано: 2 ноя 2008
- When the analysts and experts talk about the current financial crisis, they often refer to credit default swaps. So, what exactly is a credit default swap? Paddy Hirsch goes to the whiteboard for this explanation. #MarketplaceAPM #GreatRecession #EconomicExplainers
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Very well explained. Thirteen years later it is fascinating to watch a description of credit default swaps from 2008, after it turns out that so many partially colateralised insurance contracts existed and that the losses were ultimately socialised onto the general population by governments who decided to support some subset of high stakes gamblers.
It will be interesting to see how decentralized finance contracts address this and hopefully avoid the moral hazard.
Its amazing how u have explained such a complex stuff so simply!
At the end of it all, the banks (and hedge funds) find themselves needing a drink.
Thats what I thought of commenting as well.
The way you explain complex concepts is amazing. Thank you!
You are excellent. Such complicated issues yet you make it so simple and very interesting to follow. Thank you. A Ince
So well explained. Thank you!!
This channel deserves to be bigger! Very great videos! Thank you very much!
People do not want to have to sit and learn they want to make fast money as easily and as speculatively as possible and skip having to sit and learn too much first.
People want to hit the ground running and turn $20 into $2,000,000 in a year following the trendy stock of the day or week without having the discipline to sit and learn everything they need to no first people wand fast easy lazy money.
thanks for the explanation which is crystal clear, as it is supported by an appropriate analogy which makes the concept easy to understand
This is AMAZING! I can't believe how well this was explained!
This video is 15 years old. Back when RUclips was not a grifter heaven for flashy and trashy clickbait content
Great explanation - thank you
Very nicely explained indeed.
Here before Credit Suisse defaults
Very well explained. thanks
Hey Paddy!
quick q: has any of it changed in the past decade? is there a government agency that's keeping track of how big the "web" is becoming and how interdependent companies are?
2 thumbs up good and reliable content From this host consistently videos recommended.
Thanks, Wall Street!
These are so good.
it was to help with the insurance analogy :)
Best explanation to a layman about CDS
thought ' we all needed a drink' in the end! :)
How do the SHFs hide their shorts in the TRS? We see direct SSI being removed, but how is it being hidden in swaps?
Wonder how credit suiesse is going to do this week?
watching from India thanks sir
@4:42 you say 'that's the little wrinkle that makes a CDS different from an insurance contract' because the insurance company insuring the GM bonds insured the insurance policy for the GM bonds. But @3:19 you say the insurance policy on the GM bonds is essentially a CDS. So are there 2 CDS's in your example? Does something have to be specifically titled a CDS to be a CDS such as a bank CD is titled CD which distinguishes it other bank holdings?
Good video
THANK YOU!! oh my gosh
The real cause underlying this was the fact that we required banks to loan money to people who could not afford the home they were buying simply because they were a miniority. It started in 1977 with Community Reinvestment Act and then further strengthened in 1992. Thus banks were overly regulated to the extent that they could not use sound banking practices normally used in evaluating credit for home purchases.
Why isn't Jim just buying the GM Bond himself and taking the risk in the movement on the price rather than a capped upside (the premium) vs an unknown downside (the cost of paying out maximum that the bond goes to zero)?
An ape thanks you for the explanation
This gets complicated because the insurance contract are not regulated by the banks or FI properly. Suppose, there were constraints or no permits on the credit swap by way of bonds held in a company to an insurance contracts, plus the reselling of such contracts are restrained to few, it could stop the hole or web of defaults in the financial system in easier way.
One part of this I still don't understand. At the end you say 'Sam' may have no exposure to the GM bonds. Meaning he doesn't have to actually own the bonds in order to do a CDS contract on them? As noted that just makes it basically a bet. Was trying to think about that relating to insuring the more traditional Ferrari. You would have to actually own the vehicle you want to insure, right? Or would you?
That was a hypothecation.Those hypothecations didn't make a lot of sense.Generally, to obtain insurance, one has to show they have an interest or a need. I can't just offhandedly insure my neighbors house. The insurer would have to be concerned I would destroy the house just to collect. As to owning the Ferrari example. If I hold an IOU from someone and the Ferrari is his collateral, I could obtain insurance but likely would require the knowledge and consent and signature of the Ferrari owner.
I might be wrong.
but i believe you don't have to own the underlying assets e.g. the bonds.
most of these cds contracts are derivative trades.
so sam can pay aig/jim the premium on the derived price of GM bonds that is traded on the market.
so sam will pay the 1% premium for whatever amount of cds insurance he wants to aig, say 10million.
and then when gm motors defaults and a credit event happens, the bonds collapses.
then a credit default auction is held. where the defaulted gm bonds arr auctioned off.
in the auction market, say the bonds lost 90%. sam goes to aig and asks for his 90% of 10mlllion.
the contract will probably have the terms and conditions for what constitutes a credit event that triggers the claim. and how to settle the claim.
it seems cds contracts are derivatives. and no one actually owms the bonds. they are all just gambling on prices and events .
Thank you for that, It was very interesting and on a level where I could understand what was really happening. This web seems like an interesting phenomenon that will be restricted in some sense in the near future. I am not sure how the gambling on the system works though, it seems like you are just keeping the same value, unless you get to keep the collateral...
You may understand his example but does it accurately reflect what he claims?
So who was Marc Baum in this ? I understand the concept but not where the guys who made all the Money where in the equation
Frontpoint (Mark Baum), Brownfield (Jamie & Charlie) purchased CDS's through Jared V's bank. Scion (M. Bury) purchased CDS's through multiple institutions. They were the part in his example about not having a direct interest in GM. They didn't own any MBS's products. They were shorting the MBS's; i.e., 'betting' against them, just on the off chance they would fail.
I feel sorry for Jim.
in short sam is paying the other guy to take on the risk in case the bonds defult or go bust
yea.. and with all those companies going bust malangope, thousands if not milions people would lose their jobs, meaning they would have no income to repay their mortages, their homes would be repossed and put on sale increasing the supply again and pushing the prices of homes down even further..and then it'd be really bad man!
someone did a poor job computing riek
one day we might be able to look back and partially go 'fossil' hunting, with a computer generated visual of all the interlinks
good point about people betting on the counter party to accept a bad end of a deal
This video is 15 years old. Back when RUclips was not a grifter heaven for flashy and trashy clickbait content
Needing badly a drink
"It's not alchemy".
I'm not convinced.
But as you admit, it's gambling.
And the taxpayers were losers when then weren't even involved.
Rake in the premiums but when things go awry they were unable to cover their bets.
Maybe not alchemy but they sure tried for the easy money like an alchemist.
Except for the money funneled to political cronies, the Gov't was more than reimbursed. AIG stock (acquired through TARP) recovered and the Gov't sold it at a premium. The Gov't grabbed the dividend proceeds from Fannie Mae and Freddy Mac and all in all did well for itself. Not sure any of this benefited taxpayers though.
SCOTTDAVIDSON32: Please explain how it is we have been slaves?
im not SCOTTDAVIDSON32: but im my own opinion in your question or statement i would like to say this: ignorance is bliss meaning people do not care about what they don't know and knowing is about discovering and testing your idea's that were generated through making connections from creating your own methods that float your bloat in the process of trial and error
This is madness
Then let the companys that made these foolish contracts go down with them and don't bail them out with the tax payers money.
What about the deductible? This is gambling with other people’s money. If I get into an accident, the taxpayers don’t pay the insurance company to fix my car. More than somebody needing a drink, somebody needs to go to prison for this scam.
Where's the scam? Insurance companies have failed before. During the Savings and Loan mess in the Carter administration insurance companies saw the collapse imminent and declared bankruptcy and turned over all their assets to the government and walked away. The insurance companies saw the problem building and unsuccessfully tried to get the government oversight agencies to crack down. Same as what happened with sub-prime mortgages. As early as 2002, during a House banking committee hearing, the monitors were scolded and threatened with dismissal for raising issues which were looming.
Nice explanation.. but one more complication to the web is the first guy could resell or lend the 5mil because he no longer had the risk.. this could have gone in infinitely.
And that is why we need democrats to re regulate the corps that have shown they could not regulate themselves. :)
Let me save you 11 minutes - Wall Street is a casino and the house always wins.
Just wondering how you feel about it 9 years later. I'm a buy and hold investor. I've done very well. How did that bank savings account work out for you? lol!! The house only wins if you play their game.
Yeah lol. They let me win too- I bought apple in 09. Still have most of it. Glad I went to the casino.
EAT THE RICH!
first the africans who were brought here was involuntary servitude Now, are you obliged to do as a police officer says? How bout a judge? IRS? If you can be commanded by someone else and will end up behind bars if you don't, are you not a slave? The funny thing is that we have agreed to be slaves! Googlevideo: robert menard and winston shrout I am learning how to become a free man once again let me know what you think
I follow the CDS index. If you see that shooting through the roof that means the economy is doomed.