I've been watching like 10 straight videos from this same person and I would just like to say the way he explains things and breaks things down is amazing and really worth watching I can learn very easy and quickly difficult topics when he teaches them
Ok, so, I'm a beginner to this whole complex idea and I gotta say - your explanation totally nailed it. You are a really, really good teacher. I appreciate the simple explanations which include examples, not just more jargon I'm somehow magically expected to know.
I was trying to understand movie called “the big short”. I have watched movie 3 times, I didn’t understood, watched 3 videos explaining big short in RUclips and still confused, all of sudden khan academy videos comes up, I was like ok.. but the way you described is very much easy to understand. I loved it
Right? teaching has to be considered a difficult job already everywhere in the world. Better teachers, better understanding thus better educated society... ultimately a better world
How did the guy make money though because with a swap your basically just insuring your loan so if it defaults you just don’t lose your money. I think maybe he took out a default swap on other companies loan. So company A loans B a billion and berry’s hedge fund take out a swap on company A’s loan even though he has nothing to do with it. Be like your friend taking out insurance on your house haha
you know what your video is more awesome than i thought. i completely understood fast money tonight. except for the part where they went into the g7 conference for injecting liquid cash directly to non-financials. whatever that means.
With the financial crisis in hindsight, its easy to criticize the CDS model. To me it seems like this model of 'pooled risk' is very similar to any other insurance company, or similar to a bank which loans out its money. Corporations such as AIG that distribute risk, as far I can tell, seem to serve the useful purpose of increasing market liquidity, giving corporations access to the capital they may need to grow. From Sal's explanation, the problem that I see with a corporation like AIG . . .
Sat to watch the movie 'The Big Short'. Understood nothing. Watched this video. Now I'm going back feeling like I have a degree on this 😂. Thanks man, learned a lot❤
Khan Academy , you guys are wonderful I am already a donor to your academy , just want to support your endeavours where i am learnign and you spread knowledge also all the best Atul
KhanAcademy has made my understanding of CDS soo much better! I thank you for these 2 videos. Keep on making more! What other factors played into the huge bust? besides the housing market bubble where people failed to pay mortgages?
Thank you Sal, you are awesome! One day when I graduate college and get a job, I'm going to donate to you big time. No money right now lol You are helping me so much :DD
Great video. My only criticism of it is the assumption you make that the government will do a better job at evaluating those companies when the government is the institution that bailed them out. In a free market, those companies would all be out of business, so other companies wouldn't make the same mistakes in the future. Although, that would also mean a lot of people would have lost a lot of money in the process.
You are right, there's no need for a connection to Company B. Regarding your second question, the hedge fund is not insuring itself against anything, they are just betting that Company B will default and they will get 10 B just by paying 200 bp/year.
Thank you this video has cleared my concept. What happen to investor when it defaults ..is it something investors will be on risk of loss , When insurance companies downgrade with their ratings?
I am not sure you know how lobbying works in the U.S. and how large banks are able to avoid any kind of responsibility for screwing up the whole economy. And you also seem to confuse that what banks "should" do is not the same as what they do in practice. In addition, you are a rude person and you do not deserve an answer, so this comment is not meant for you.
No from what you first wrote, it's you that doesn't know that what they 'should do' isn't 'what they do'. That was the whole point of Sun Fun's question. Because they DON"T have the money to pay their obligations they should be REQUIRED to. When Sun Fun asked if they are now required to you laughed and chided him, which was by the way, extremely rude. You are both ignorant and obnoxious.
Can someone suggest a video to explain how the outside betting on certain payments works? Like how would the hedge fund in this example have been aware of the credit default swaps from the lenders in the first place? How are they able to rope in an insurer to bet against someone else's debt?
@lilpenguinboy The point Sal is trying to illustrate is that these insurance companies and other entities who hand out swaps don't need to set aside money for the risk of default.[cos of loosely defined mandate (pre-crises)] Thus making them in Buffet's words "financial weapons of mass destruction".
great lecture! Now, Goldman is using CDS to bet on Greece's default. Of course, Goldman would be H1 and Greece would be Corp B in the video. P1 and P2 is probably the EU countries, such as Germany. I am curious to know who plays the role of the insurer, I 2 in the video, in terms of the situation in Greece?
think about what your asking for. no company would pay 100% of their interest rate for a possibility of default. there is no reward for their share of the risk (the 1b dollars) What if the company doesn't default? Then they realize none of their investment. No company would do this. At rating BB as in his example, the risk of default is (supposed to be) relatively low.
This video should now be considered outdated, not because the explanation of credit default swaps wasn't beautiful. It was, but there are portfolio margin algorithms that certainly can accurately manage the risk on a mark to market basis even in high leverage 100x or more within milliseconds. The highest leverage I ever saw a broker offer was 800x which I think is absolutely criminal.
How do insurance companies decide if to insure a company's loan or default? Do they make an audit or just by looking at market data, such as stock market, etc?
Yes, there is no connection between the H1 and I2, that's why their transaction is a just a bet, a simple bet. H1 bets that B is on brink of failure (maybe they have some information I2 does not). The insurance H1 takes from I2 is, essentially, the bet.
Thank you for this great video! But what happens if insurance company doesn't have enough money to the pension fund in case the company A or B is bankrupt? Thanks
I think you made a mistake at 10:40. You said P2 was holding some of A's debt which they will have to unload because A was insured by I1. But I1's rating wasn't downgraded , it was I2 that was downgraded. So I think you meant to say P2 had to unload A's debt because it was insured by I2. That would make sense.
Great video. However, it should be emphasised that an insurer should not need to have enough capital to finance ALL the dept it insures. It should need to have enough to insure the amount that is likely to default. This is normal practice as far as I know. The problem here is that these insurers did not even do this.
. . . is not the CDS model, but the amount of risk that comes from the inputs to this particular insurance model. When something like AIG becomes "too big to fail" and will be bailed out in a bad situation, it is no longer accountable for its failures. To me, it seems that CDS are fine, even useful, but should be regulated, perhaps by implementing a investment cap (preventing "too big to fail"), or by requiring insurance corps to have more collateral.
So why would a company need to borrow a certain amount of money from some sort of fund in the first place? They just need capital and it sort of works as a loan?
one of the problem is not about Moody's shadiness but more because Moody's isn't hold responsible/accountable if their rating is incorrect. I do believe there is value for company like Moody's, just have to make sure they work effectively and I think by holding them accoutable should help.
At that time, their answer to such complains were that their ratings are only "recommendations" and no one has to take them serioualy if one doesn't believe in it. So they got away with it.
Seems to me there is hardly any accountability in most of the parties involved. The CDS seller doesn't have the capital necessary to pay out if loans go belly up, and the ratings companies have little to no integrity. Amazing!
You forgot to add another bracket, "Government ", and extend an arrow from Moody's giving % to political campaign's so the government would advice to trust in Moody's judgement, as in to direct pension funds and all others into taking their services. Because after all, there must be someone above Moody's who vouches for them, and gives them credit rating.
3:55 yes there is a limit on how much you can insure. You don't need a law, because the market imposes that limit. If they insure too much, they go bankrupt :)
Seems like I2 would simply buy the bonds of B2, for cents on the dollar, and continue to make payments to P1. Even if they paid par, it would save them $8B ($10B CDS - $2B Par).
@DiltonDalton no, it's freedom of contract...parties are free to make arrangements as long as it is not illegal; no one would complain if the "side bets" are worth say $100K...that would be nothing to these companies. The point is - govt should declare that a certain amount of collateral is needed for ANY insuring to take place, say 1000% (you need to have $10 to insure $1 debt).
Kaivalya Tetali that's literally how most of the economy in the modern world works. Most of the these company valuations are based on the hope that they pay off in the future.
Well, firstly how do you calculate the gearing of insurance companies because the 'borrowings' cannot be termed along with the 'insurance claim money' ...Wouldn't it become simpler if Moody's regularly estimated the gearing of the companies [which insured these billion dollar investments] and regulated its ratings accordingly?
I've been watching like 10 straight videos from this same person and I would just like to say the way he explains things and breaks things down is amazing and really worth watching I can learn very easy and quickly difficult topics when he teaches them
Agreed!
Who's this instructor??? someone knows his name? like how can we address him suggestions/questions??
@@amald9702 Sal Khan... as in Khan Academy
@@meinbherpieg4723 and now Khan Academy is one of the most famous online learning platform in the world
crazy when you realize this video was made in 2008..
why ?
@@jomango1929 2008 financial crisis
Even creepier when you realize that the series started with mortgage backed securities in late 2007.
@@katherinejohns9974 XCCVXCCXXXVXXXXXXCXZXXXXXVXXZXXXXXX
This should be taught in school.
Mister Chartreuse it really should
That's what Kyiosaki os trying to say.
It is
it is but I didn't understand so i watched this and now I do lol
Well here it is
I am watching this video to get a better grasp of the movie The Big Short 😅
Me too. I guess Murray would be H1 and I2 would be Goldman Sachs.
Same here bro
Wow 😃 same here dude
lol me too
🙋🏾♂️🙋🏾♂️🙋🏾♂️
Ok, so, I'm a beginner to this whole complex idea and I gotta say - your explanation totally nailed it. You are a really, really good teacher. I appreciate the simple explanations which include examples, not just more jargon I'm somehow magically expected to know.
The 7 dislikes were hedge fund managers...
Hahahahah i cry 😂
Hhaahahahha I‘m dying 😂
Nope he mixed up I2 and P2 ... P2 was insured by I1 not I2
Haha I cried laughing 😂
🤣
I was trying to understand movie called “the big short”. I have watched movie 3 times, I didn’t understood, watched 3 videos explaining big short in RUclips and still confused, all of sudden khan academy videos comes up, I was like ok.. but the way you described is very much easy to understand. I loved it
Me2
Man if you can’t understand a movie like big short, this stuff ain’t for you...
@@arnav4174 now I understood hehe
This finance products will be better called "Rating default swaps"
Why you removed finance and market from khan academy.?if possible restore these sections
3:57, that's what changed the world. Great video, sal.
i understood and liked the video, but you do make leaps in your vocabulary that one has to overcome and infer upon oneself.
Who’s here after “The big Short”?
Here dude!
lol me
Me 😂
I haven't watched this finance series..But I gotta say, you are the man..You harbor so much knowledge...
That's even better than what I learned from Master Degree. You are awesome, mate :)
Right? teaching has to be considered a difficult job already everywhere in the world. Better teachers, better understanding thus better educated society... ultimately a better world
I've been trying to figure out caused the 2008 crash. This man explains it very well. He's excellent.
By far, this is the best explanation of CDS I have seen, and it has clarified a great deal for me. Thank you.
Thank you for explaining that so well. This video will become popular again in the coming year.
Swaps 2? More like "Super information for you." Khan Academy being great as always. Thanks for sharing!
just saw the big short movie now I know from where did they wrote their script with perfect numbers
Micheal Lewis wrote a book and then a movie was shot
How did the guy make money though because with a swap your basically just insuring your loan so if it defaults you just don’t lose your money. I think maybe he took out a default swap on other companies loan. So company A loans B a billion and berry’s hedge fund take out a swap on company A’s loan even though he has nothing to do with it. Be like your friend taking out insurance on your house haha
Something about the sniff at 7:15 makes me feel like I'm live at a Hedge Fund board meeting.
you know what your video is more awesome than i thought. i completely understood fast money tonight. except for the part where they went into the g7 conference for injecting liquid cash directly to non-financials. whatever that means.
With the financial crisis in hindsight, its easy to criticize the CDS model.
To me it seems like this model of 'pooled risk' is very similar to any other insurance company, or similar to a bank which loans out its money. Corporations such as AIG that distribute risk, as far I can tell, seem to serve the useful purpose of increasing market liquidity, giving corporations access to the capital they may need to grow.
From Sal's explanation, the problem that I see with a corporation like AIG . . .
Amazing videos . That is so brilliant and you may replace many professors in my college !!!
8:03 if "b" collapses tomorrow.... and on september 29, literally the day after this video the dow fell 777 points
The timing of publishing this video is just amazing! 2008!
The king of vague explanations!
Your explanations are amazing and work on people 100% ! Thank you
Sat to watch the movie 'The Big Short'. Understood nothing. Watched this video. Now I'm going back feeling like I have a degree on this 😂. Thanks man, learned a lot❤
Amazing. All of your vids are coming true in 24 to 48 months. If not soones.
oh fuck now i understand what's happened in 2008
+Think Yourself Yep. But mortgages instead!
+Think Yourself And that's only very little of what happened in the rest of the world! But yeah, that was one of the biggest things that caused it all
Yup, but mostly because of CDO's
OMG, you have explained everything that I've been trying to do so in years. Thank you so much.
Khan Academy , you guys are wonderful
I am already a donor to your academy , just want to support your endeavours where i am learnign and you spread knowledge also
all the best
Atul
Thank you man, for the text.
FYI: B+ of Moody’s is B1 :)
Thanks Sal for Explaining the Credit Default Swap.
KhanAcademy has made my understanding of CDS soo much better! I thank you for these 2 videos. Keep on making more!
What other factors played into the huge bust? besides the housing market bubble where people failed to pay mortgages?
Thanks. A nice, understandable rundown on these insane transactions and how one domino falling brings down so many others.
Thank you Sal, you are awesome!
One day when I graduate college and get a job, I'm going to donate to you big time. No money right now lol
You are helping me so much :DD
Question: Do you guys(fellow commenters and business men) find CDS's to be on the more advanced side of finance? Or beginner stuff?
Thanks much for your explanations, makes it very easy to understand.
Khan academy is the real deal!
Great video. My only criticism of it is the assumption you make that the government will do a better job at evaluating those companies when the government is the institution that bailed them out. In a free market, those companies would all be out of business, so other companies wouldn't make the same mistakes in the future. Although, that would also mean a lot of people would have lost a lot of money in the process.
You are right, there's no need for a connection to Company B. Regarding your second question, the hedge fund is not insuring itself against anything, they are just betting that Company B will default and they will get 10 B just by paying 200 bp/year.
THE BEST FINANCIAL LECTURE EVER!!!
Hard topic explained in very simple and understandable language.
Asalaam brother Ramadankareem Mubarak amazing video 👌
Thank you this video has cleared my concept.
What happen to investor when it defaults ..is it something investors will be on risk of loss , When insurance companies downgrade with their ratings?
thanks, I'm well on my way to becoming a Synthetic CDO manager after this one
You lost me at H1 but I'm determined to stick with it. Your videos are excellent.
Very well explained, enjoyed this!
thanks, this helped my understanding greatly
Great explanation, fast forward to November 2015, are the insurers of the CDS NOW required to have the money set aside ?
LOL, this is a funny question. Of course not, why would they?
Otto, Are you a moron for asking that? This whole video just showed why they should be required to do that.
I am not sure you know how lobbying works in the U.S. and how large banks are able to avoid any kind of responsibility for screwing up the whole economy. And you also seem to confuse that what banks "should" do is not the same as what they do in practice. In addition, you are a rude person and you do not deserve an answer, so this comment is not meant for you.
No from what you first wrote, it's you that doesn't know that what they 'should do' isn't 'what they do'. That was the whole point of Sun Fun's question.
Because they DON"T have the money to pay their obligations they should be REQUIRED to.
When Sun Fun asked if they are now required to you laughed and chided him, which was by the way, extremely rude.
You are both ignorant and obnoxious.
somebody doesn't get sarcasm
Wonderful explanation. Thank you.
Can someone suggest a video to explain how the outside betting on certain payments works? Like how would the hedge fund in this example have been aware of the credit default swaps from the lenders in the first place? How are they able to rope in an insurer to bet against someone else's debt?
Best explanation ever.
loved it.. Thanks for explaining in a simple way!!!
Great job sir! You do what you do, very well.
Excellent reply! U just summarized the ENTIRE video. Hah. Kudos to you.
Again Khanacademy.. awesome videos :) you make something confusion to something totallly understandable :D
I am having trouble understanding how Hedge Fund 1 can get insurance for Company B without lending them money. What "insurance" are they buying?
Its not an insurance.. Its a legal 'bet'
@@sparshjain4736 so basically the hedge fund doesn't borrow any money but bets on whether company B will go bankrupt? How is that legal xD
@@babybeel8787 yes it is.. Just like people bet on football teams 😂
very well explained. !!! and was quite a fun to learn the complex things so easily by the way he explains things.
@lilpenguinboy The point Sal is trying to illustrate is that these insurance companies and other entities who hand out swaps don't need to set aside money for the risk of default.[cos of loosely defined mandate (pre-crises)]
Thus making them in Buffet's words "financial weapons of mass destruction".
I love you Sal thanks for this series! Making the complex simple.
great lecture!
Now, Goldman is using CDS to bet on Greece's default. Of course, Goldman would be H1 and Greece would be Corp B in the video. P1 and P2 is probably the EU countries, such as Germany. I am curious to know who plays the role of the insurer, I 2 in the video, in terms of the situation in Greece?
think about what your asking for. no company would pay 100% of their interest rate for a possibility of default. there is no reward for their share of the risk (the 1b dollars) What if the company doesn't default? Then they realize none of their investment. No company would do this. At rating BB as in his example, the risk of default is (supposed to be) relatively low.
This is incredibly helpful, thank you!
This video should now be considered outdated, not because the explanation of credit default swaps wasn't beautiful. It was, but there are portfolio margin algorithms that certainly can accurately manage the risk on a mark to market basis even in high leverage 100x or more within milliseconds. The highest leverage I ever saw a broker offer was 800x which I think is absolutely criminal.
thank you very much Khan, nice session I had
Have to give credit to these explain videos, simply get straight to the juice without the need to spend lot of time and effort .
great work explaining and sharing your knowledge
How do insurance companies decide if to insure a company's loan or default? Do they make an audit or just by looking at market data, such as stock market, etc?
Very good lecture. Very clear.
Alex Quartey-Papafio who are you. i have seen your round face before Alie.
This is wonderful. Thank you for the great work.
Yes, there is no connection between the H1 and I2, that's why their transaction is a just a bet, a simple bet. H1 bets that B is on brink of failure (maybe they have some information I2 does not).
The insurance H1 takes from I2 is, essentially, the bet.
Thank you for this great video! But what happens if insurance company doesn't have enough money to the pension fund in case the company A or B is bankrupt? Thanks
I think you made a mistake at 10:40. You said P2 was holding some of A's debt which they will have to unload because A was insured by I1. But I1's rating wasn't downgraded , it was I2 that was downgraded. So I think you meant to say P2 had to unload A's debt because it was insured by I2. That would make sense.
Great video. However, it should be emphasised that an insurer should not need to have enough capital to finance ALL the dept it insures. It should need to have enough to insure the amount that is likely to default. This is normal practice as far as I know. The problem here is that these insurers did not even do this.
It's easy to see how one little screwup could bring down the whole system
Superbbbbb explanation
. . . is not the CDS model, but the amount of risk that comes from the inputs to this particular insurance model.
When something like AIG becomes "too big to fail" and will be bailed out in a bad situation, it is no longer accountable for its failures.
To me, it seems that CDS are fine, even useful, but should be regulated, perhaps by implementing a investment cap (preventing "too big to fail"), or by requiring insurance corps to have more collateral.
We need to talk. How likely is this? If the US defalults what is the next step? When are the 2009 mortgages due, in what month?
Jeff
Great insight about CDS....
So why would a company need to borrow a certain amount of money from some sort of fund in the first place? They just need capital and it sort of works as a loan?
Great video
one of the problem is not about Moody's shadiness but more because Moody's isn't hold responsible/accountable if their rating is incorrect. I do believe there is value for company like Moody's, just have to make sure they work effectively and I think by holding them accoutable should help.
Agree, but maybe it is difficult to evaluate so many companies which cause them oversight?
At that time, their answer to such complains were that their ratings are only "recommendations" and no one has to take them serioualy if one doesn't believe in it. So they got away with it.
Seems to me there is hardly any accountability in most of the parties involved. The CDS seller doesn't have the capital necessary to pay out if loans go belly up, and the ratings companies have little to no integrity. Amazing!
I like how he calls it "Standard is Poor" before he corrects himself lmao
You forgot to add another bracket, "Government ", and extend an arrow from Moody's giving % to political campaign's so the government would advice
to trust in Moody's judgement, as in to direct pension funds and all others
into taking their services. Because after all, there must be someone above Moody's who vouches for them, and gives them credit rating.
nice explanation
Wow you explain so well.
Don't forget about I1. They are insuring P2. I1 pays P2 $1B (it should have been $2, though). P2's credit rating is still good.
3:55 yes there is a limit on how much you can insure. You don't need a law, because the market imposes that limit. If they insure too much, they go bankrupt :)
Seems like I2 would simply buy the bonds of B2, for cents on the dollar, and continue to make payments to P1. Even if they paid par, it would save them $8B ($10B CDS - $2B Par).
You're videos are great, props.
Given your explanation, wouldn't H1 actively conspire to undermine B2 in an attempt to put them out of business?
@DiltonDalton no, it's freedom of contract...parties are free to make arrangements as long as it is not illegal; no one would complain if the "side bets" are worth say $100K...that would be nothing to these companies. The point is - govt should declare that a certain amount of collateral is needed for ANY insuring to take place, say 1000% (you need to have $10 to insure $1 debt).
This is great stuff. Thanks a ton!!
Thank you for teaching us! well worth the time
Does this all just mean as long as Ppl r ready to buy ppl wil sell just abt anythg even things that dont exist?
Kaivalya Tetali that's literally how most of the economy in the modern world works. Most of the these company valuations are based on the hope that they pay off in the future.
Its all Big Short explanation here !!
Well, firstly how do you calculate the gearing of insurance companies because the 'borrowings' cannot be termed along with the 'insurance claim money'
...Wouldn't it become simpler if Moody's regularly estimated the gearing of the companies [which insured these billion dollar investments] and regulated its ratings accordingly?
Excellent