Untangling credit default swaps

[shawnaldinho19]

why do credit default swaps not end is us all desperately needing a drink?

[MrGino714]

Jim should not accept the deal if he had to put collaterals. Do insurance company gives us collateral when we contract an insurance?

[pafoley]

@MrGino714 hes getting 100k each year to do it.......in the good ol days the colalteral gets put up...insurnace lapses unclaimed..and our buddy jim takes his colalteral of the table...along with his 100k

[atreides822]

excellent video, thank you for the concise explanation

[vanskiid]

I see why this is legal, But it' shouldn't be.

[nty2398mhfa]

what if you insure your GM bonds twice with different companies. then you can make money on the bonds losing value. is there any regulatory mechanism that can stop that from happening?

[chamaflauge]

So informative thank you

[ppingpoong]

thanks for that! helped me grasp this concept a lot better

[DontTakeCrack]

ok, so im reading a popular book my friend recommended to me for fun. so this guy making hedge fund buys cds's. but why would you be able to buy cds? isnt the point of cds to protect your own company in the first place? or is it just that a company bought cds, knows they wont default, and just wants to sell for more money.

[ecke70]

@DontTakeCrack Think of it like derivatives. It's a way of distributing risk. The hedgefund will typically buy cds for the same reason the will sell options - they expect them to expire worthless and meanwhile they have collected the premium for taking on these risks.

[B1K1N1B1K1N1]

I like your explanation but I cannot see how the people further down the chain benefit by insuring someones risk, if they are just going to turn around and give the fee that they just got to another person to insure them against a default. Could you please send me a message and tell me what I am not getting? Thx

[AscottW]

THANK YOU!!! You have explained this very very very well. I'm not a money person at all (luckily my boyfriend holds the purse strings! lol) and you've helped me understand more of this than I could have imagined! Thank you again!

[BoogieWithStew]

Nice explanation. When one looks at these convoluted financial machinations, combined with rating agencies that are less than honest, an "investor" has better odds in Las Vegas.

[kelvin0yt]

exceptionally well documented!

[oletty]

Thanks for this. Much clearer and better than most of what I have read on the internet about credit default swaps.

[densix]

thank you so much!

[bgregg55]

Good except you did not mention that the ratings agencies themselves were in on the grift by over-rating everything with AAA which ensured them a continuous stream of new ratings business.

[UTubePressOnline]

HOW ABOUT THIS WE GO TO THE BANK YES WE AND THE BANK CREATE NEW MONEY WE GET £10.000.Say AND THE BANK GETS £10.000 SAY .ALL AT THE SAME TIME ON THE SAME DAY..NO ONE OWES..NO ONE..WE ALL GOT OUR MONEY..AS WE CREATED IT.SO THE old WAYS OF BANKING OUT OF Dated.ALL BANKS AM going uder.UK GOVERNMENTS AT TO BUY ALL THERES AND EU AND USA ....AM LIKE GREASE BANKRUPT NEARLY..ITS GOING TO BE A BIG WW3 THATS Y THERE WARS SOMETIMES TO START NEW WORLD ORDERS AND THE ANWER HERE WITH US

[maungarakei]

Thank you for posting this.

[tinumin]

Awesome ,, explains everything about the financial mess

[tairanotomomori]

Great explanation!! Thanks!!!

[VarialProductions]

i think he is confusing free markets to mean "free from government regulation" markets.. the lack of regulation can lead to the undermining of healthy competition in order for a market to be in any sense "free"... is that close?

[cheesebone82]

@VarialProductions

The real issue is not that there was a lack of regulation, but that there was an excess of "insurance" here that was not mentioned, that "insurance" being the existence of the Federal Reserve that not only provided nearly interest-free credit to these banks allowing them to fund these transactions, but that they have openly stood behind these banks in the event that there is a failure, and essentially removed the "risk" of dealing with failure because they can be bailed-out.

[trumpetuk111]

@SIGN666 - what you describe is corporatism - not free markets. Free markets are exactly that - they involve NO govt interference, be it govts "willing to back them up at tax payers expense.." or any bail outs for companies like AIG.

Caveat Emptor.

[psynema]

Public BANKING!

[ThePolka]

Thank you. You made the concept very easy to understand.

[aishkarbeta]

Awesome video, i did a search on wiki and other investor sites but was still confused. You explained it well. Thank You

[mediblue9]

very easy to understand

[farmboycarl]

Why do "teachers" have to make simple things so complicated? A credit default swap is a bet against the failure of whatever it's written against. $50 Trillion dollars worth of these things were written against American Home Mortgages. -Now, do you think the men on Wall Street who invented these things, and spent billions of dollars buying them have an interest in seeing you default on your mortgage? -THINK about it, because this guy will do nothing but lead you in circles.

[GermanStraight1]

well ...

the real problem of that system has not been tackled in my opinion !

The Rating company also has a intrest in these deals ... who is watching the rating companys ?

No major changes have been implemented !

WHY NOT ???

Brgds

GSO

[mediblue9]

W. Buffett owns 20% of Moody's

[Ataraxian13]

I want to pull off the biggest CDS scam in history.

WHO WANTS TO JOIN ME AND BECOME RICH?!?

p.s. great teaching, great vid,

5/5

[avster95]

impressive!

[majesticteam12]

simple solution - no insurable interest on the respective financial instrument means you cannot buy a credit default swap on that instrument

[teffy91]

is it also possible that jim could have bought a cds without owning any bonds from gm?

[mrsnail445]

yep - you don't have to own the underlying bonds to trade the CDS

[teffy91]

would someone please explain the purpose of the collateral. also, what is the gain of jim buying bonds in gm motors with the expectation it will fail?

[chetansingh2006]

America has turned away from Thomas Jafferson ideals to a Hamiltonian head that the price u have all paid kissing the english mercantile asses

[klipsch21]

collateral exists to reimburse the creditor / customer in the event institution is unable to honor its commitments, i.e. it defaults. In other words it guarantees you will be paid back in any situation. As for sam expecting gm to fail, i suppose in that case he can effectively rip off jim, but in the end theyll both loose money unless maybe sam was in a bet and being paid by someone else.

[hbjon]

Lame. this doesn't really explain the fraud. We want to know who is the real victim. We want to know who is being wronged by this practice. Is there anyone with common sense any more?

[jerseyjack]

cds IS insuring the entire risk 500k is just the collateral. The entire amount is supposed to be paid back in order to make the insured "whole". Companies like AIG were taking on more than they could handle. When large corps like GM go south they may or may not be able to cover everyone's losses. When they are forced to go public no one knows if they'll be made whole or not...thus causing a panic. I'm not an expert...but that seems to be the case to me.

[oesterle6]

Thank you, Thank you! I finally get what happened. Even CNBC didn't explain it so clearly in their layperson specials.

[FA9082]

Very comprehensive video, thank you for the service.

[fukinh0t]

I need someone to help clarify a part. In the example, Jim has to put 500k collateral. So if the 5 million investment goes down to 4 million, will Jim have to pay the 1 million difference or will it only pay 500k?

[lateralexrex]

500k. The collateral is still Jim's, it's just to demonstrate that he will be able to cover his debts.

[fukinh0t]

So then the credit default swap is only insuring up to the collateral and not the full amount os the loss?

[Eyunbin]

what I think is... Jim needs to pay the difference to Sam. the collateral is only an protection for Sam when Jim is down rated or even default. I'm not quite sure... do varify me :)

[learnanddeliver]

Thank you, excellent analogy and explanation

[rdnavarre]

Absolutely EXCELLENT video!!!

[utewb11]

Best explanation so far....thank you

[26gudia77]

beautiful

[ottosen]

Can anyone explain why other banks etc. are being drawn down with fx. Lehman Brothers? What's their involvement?

[shalterman]

a cds is the same thing economically has buying a bond

[DarthKazi]

Sort of. Except you can't sell your CDs anytime you want, whereas you can sell bonds at any time.

Bonds are evil. The very inception of bond-based money creation is what has caused the problems we have today. The initial issuance of Lincoln Greenbacks, was done so interest-free and debt-free. After the NBA was passed a year later, all notes had to be issued with bonds attached. This caused a debt-based system of money.

Bonds are bets against prosperity, for the most part.

[inohioab]

Excellent

[scudder91]

bloody hell! that's truly terrifying.

[SayNoToGMO]

I don't like the narrator downplaying Credit Default Swaps as only "part of the cause" of the meltdown, "not the main cause"

Normal CDS involve tangible assets with measurable risks and gains

Synthetic CDS contracts bet on a "credit event". Simply gambling

S-CDS are irresponsible unregulated unnaccountable $60 trillion in bets collateralized with cash only, no securities

CLEARLY the cause of our meltdown as exposures are exposed and ratings tank, increasing cash collateral demands.

[Barack0to0the0future]

What about CDO's? They have absolutely no transparency, it like a big box of finical fun!!! You don't know what types of shit loan ndebts you get.

[hsfbunny]

Good information, although it does not bring up the root of the problem: credit expansion.

Where did all the credit come? Where did the insurance "collateral" originate from?

GSE's such as Fannie Mae expanded the credit that went far and wide into the system.

[monkinator66]

our own illustrious private industry government

[rpendse]

3) Financial Analysts and Economists normally avoid the term "Insurance" to describe CDS although they are indeed a type of insurance. Insurance business operates in a very tight regulatory environment. CDS despite being extremely risky credit derivatives are not controlled, overseen and policed by SEC or any other authority.

[ananiasacts]

Exactly how I see it and perfectly explained I think! Thanks.

[rpendse]

Here's my 2 cents. There are 3 main differences between a regular insurance policy and a CDS:

1) The insurer (in this case AIG) normally assigns an amount called "collateral" and this amount maybe increased or decreased depending upon the swings in credit ratings decided by Moody's/ S & P/ Fitch.

2) The counter-party (in this case Sam) doesn't have to own any bonds (unlike a car or home insurance where you can't insure something you don't have).

[rtybeams]

Excellent explanation. Thank you!

[amplovely007]

thank you , you made it easy to understand the hard issue as this one.

[rajeshk]

excellent!

[LoneOarman]

The 60 minutes television series explains it differently, that Sam is not required to own any GM bonds.

[setherini]

He does say that at the very end.

[MrFrankBullitt]

How can you insure what is unknowable?

Investments aren't like car insurance where you can just pool risk together.

[archelonprime]

Has anyone noticed why these "financial instruments" are called credit default swaps/derivatives and are NEVER named with the word insurance? Because the companies that sell these things would be legally required to have THE MONEY that's required to back up the monetary value of such a contract.

AIG treated this stuff like insurance when they're getting the money, but it was a different story when they had to pay the contract holders.

Might as well go to a casino because I KNOW it's a gamble!

[iamgabrielf]

Thank you. You make complicated things easy to understand. I'm sure that is not easy. Thank you.

[afurrypanda]

This is the reason why the markets are messed up. Think of it like this. A potato is worth $20, but i say to millions of people i beat that it will be worth $20000 in ten years time. People buy people bet and people do crazy financial things which i cant even understand. But then as we see now the potato is only worth $10 people are thinking now hmmm wheres my money gone.

[goldenponderbob]

I resented his use of "Insurance" as a euphamism. Later he referred to the reciprical contract as a "bet." But, that speaks ill of bookies who usually have at least some kind of ethics. The fellows I saw on those hearings on C-SPAN had the look of thugs. I was glad to see the point made by a commenter that the main collateral used for this scam is nothing more that a promise. When the mob uses baseball bats to enforce their contracts they're just encouraging that promises are kept.

[WizzRacing]

See, 58 Trillion in default swaps that we know of "Knowbody Knows For Sure" . Three times the size of the stockmarket before the bottom fellout. Who\What the hell were they insuring with that much money. The total worth of the United States is around 60 Trillion!

[WizzRacing]

What the hell is talking about. Just because they call it insurance in the news, doesn't make it insurance. The fact is, They removed the Glass\Stegall Act in 1999 and the hedge fund managers went out and sold this junk rolled up with good loans to hide the debt. then they drove the price of energy up "Food\Gas\Heating Oil with there profits.

They passed the bailout bill, Only to have the banks loan the money back to the Fed with a nice interest, that we will pay for!!!

[Chainedorlo]

Via your income tax. :(

[jaymantis]

excellent video. this has become very clear to me. thank you

[epa9975]

Thank you for explaining. I feel enlightened!

[Serge808]

yeah it's happening, except the paulson and bernanke demons aren't letting them fail on their bets.this is the depression coming, the greatest depression

[MichaelLokey]

Your part of the problem, CDS is not insurance. One they are undercollateralized, not disclosed or regulated, and the guy who "bought" the "Car" doesn't own the car. If this is insurance product then roulette with less panels should be insurance too...

[MyFreeCredit]

Nice vid. Thanks for sharing.

[luckyamrit123]

very nice...you are explaining things very nicely..I watched your oder videos as well...They are excellent..

[chicadicto]

wow, really good explanation! thx

[nutsbutdum]

Man, that was a pretty clear explanation.

Now at least I can follow when those guys are talking at cnbc!

Thanks man!

[murraydan885]

You forgot the part when Henry's helicopter crashes into the abyss because he took on more weight than any clear-thinking hiker would carry (or any group of hikers).

[eatandtravel]

So it was the additional collateral that nearly dragged AIG down not the bad bets by AIG? I thought it was bad bets by AIG?

[Serge808]

it's the fact that the fed and treasury are colluding to not let the bets fail.

[yuk2k]

brilliant! i will share this with my friends, but please get more than 8000 people to watch these videos. 95% of the american people have no clue what is going on in the financial system, and the media does an abysmal job of explaining it to them. the only thing that the public takes away are hot words like "recession," "depression," and "crisis." The bottom line is a fearful reluctance for consumers to spend, and a great discern for bailouts. please keep up the good work.

[wiiman8888]

I've had instances where I read news online and it take a week or two before it's actually on the news.

[checkmatebtch]

It's all so clear now... Thanks man you should moonlight as a university professor at some point.

[yupyupnopenope]

ultimate !!

[TENNISCHAMP98]

nice video

[robrown1]

Google UNIFIEDMARKETS

[marky1333]

Pyramid Scheme!

,a fancy one, but a pyramid scheme all the same.

and we all know what happens to those.

Too bad this a $62 Trillion one.

[dolfree1]

thank you.

[waverly2468]

Really scary how the risk from CDS has spread exponentially throughout the financial system, like a mathematical progression that doubles with each step.

[mouljran7]

i m now addicted to your videos... great job

[killyertv0]

Thus, a secondary promise (CDS) made AGAINST an ALREADY levergaged ORIGINAL promise/contract (bank loan) is merely a secondary BET against a originating BET that was leveraged 10:1 before anyone issued a CDS.

The CDS has NO underlying assets of it's own.

The CDS has NO underlying assets of it's own.

The CDS has NO underlying assets of it's own.

[killyertv0]

So, a CONTRACT (CDS) is created, and used as a negotiable instrument in it's own right. Where is the REAL VALUE of ANY CDS? There is none. It's a PROMISE that has NO UNDERLYING ASSET other than the impossible BELIEF that the FIAT SYSTEM is somehow "solvent".

For example, if an insurance co. pays out too much in claims, they go BANKRUPT. How would a CONTRACT (CDS) prevent such an occurence?

It doesn't.

[LiftedX]

Bingo. Ultimately these complex financial instruments are without commonsensical provisions that are inherent in non-marketable contracts such as car insurance. The collateral call provision was substitute the non-value of the CDS in the first place - and it was enough to make the CDS a bankrupt instrument.

[averageworkinggal]

CDSs are used for risk management insurance and for options trading.

The investor in a mortgage backed bond buys a CDS to set risk of default to known value instead of an unknown probability.

Hedge Funds use CDSs to bet on the likelihood of a credit default on various given MBSs and CDOs or on a finacial institution.

[Guvnor33]

Make more of these please! Great stuff!!!

[province65]

Best explanation of CDS's I've seen. Thanks.

[Zottl1234]

The financial institution who signs the swap knows how much they in depth, but there is no reglementation so they haven´t say it.

And that´s why a bank don´t borrow money to annother bank at the moment, cause they cannot see how many corpses lying in their cellar.

He mentioned that people bet.

YES - nearly 63 trillion dollar - that´s greed

[averageworkinggal]

It's not greed, it's options trading.

It's trying to make money by guessing right on the future.

[soularimus]

Cheers _b

[amiller320]

Awesome. Thank you!

[starzine]

thanks for explaining that in laymens terms.

[70road]

Well done.

[acerplatanoides89]

I've been waiting for credit default swaps to be explained. As usual, you're as helpful as ever marketplace. Keep it up!!! Public radio is always the best.