Credit Default Swaps explained clearly in five minutes

[LamboSpyder99]

CDS is not a bad idea. Its a helpful tool in modern finance as long as the underlying asset or security is stable and productive. This wasn't the case in 2008 mortgage crisis so CDSes have a bad name from it.

[virginiatechfanx]

so let me get this right i get an iou from a company right and i don't want to lose that money ok so i get a cds to protect that money which is basically insurance on the iou so if the company goes under or something then the cds basically gives me the money i lost?

[jal00n]

@virginiatechfanx Yes, but you can also buy a CDS for a company or loan that you have no stake in. So essentially, people (including bankers) were making bets that certain mortgage loans and such would fail. That's why they started offering those loans to people who for sure couldn't pay them. The banks would make more money if borrower defaulted than if they paid.

[winstonchurchil1945]

this is intresting, i sell options once a month and collect a premium for the risk obligation of a index falling, basically i insure investors against there losses after 20% fall, cds sound almost the same but different markets....

[AbuJaffer24]

@spirish57 This video is about the United Kingdom... so it's not "Only in America."

Idiotic comments that have obviously not watched the video making up the majority of comments? Only on YouTube!

[58robbo]

instead of adding another activity to the ban list, how about removing the liability of the taxpayer? i have absolutely no objection to any form of gambling. what i object to is the gambler coming to the taxpayer because the bookmaker can't pay

[58robbo]

precisely why there shouldn't be a deposit guarantee! without it i can assure you that

a) people would only deposit if the rate was worth the risk

b) depositors would keep a closer eye on the banks lending

c) many would depsit in money warehousing/safety deposit/non lending banks for a fee

d) spread their money around including the mattress

we'd thus have to make do with organic econmic growth not the economic steroids!

[nathansensation5]

easy. you erase the speculative debt and jail the bankers

[MrBigEnchilada]

by the way these are outdated, prepare for derivatives on greece debt and interest-bearing bonds aka our treasury bills...

[MrBigEnchilada]

i have heard there are like 700 Trillion dollar derivatives contracts.

[MrBigEnchilada]

it's just an insurance policy, but this policy can be bought by ANYONE even without the consideration/aka the company, the asset or the deriving contract itself.

[TheFaisal381]

it all comes down eventually to the mortgage buyer; the mortgage buyer pays the investment bank. The bank then has loads of mortgages--some of which are riskier in terms of delinquency (i.e default). Therefore, the bank divides these mortgages using derivatives. They sell the safest stack of mortgages to investors,and insures the riskier ones using CDS(credit default swaps)--in case the mortgage buyer defaults on payment. Everybody's happy at the point since they're making an awful lot of money

[ukusapillage]

these bail outs are the banks skeezing money from from the ppl to pay the so called cds investments

[TheFaisal381]

@ukusapillage what happened was that treasury gave $700B of bailout cash to the banks since the overall mortgages value was $14 trillion, and the default rate was 5%, which sums up to $700B. The problem lied in lack of regulation since the banks didn't spend the bailouts unfreezing credit like they were supposed to.

[sirloin869]

"spirit of the age": i like that...

still waiting on the zombie apokolypse

[razrrlazrr]

@drummetalheavy- speculators provide liquidity to the market and calling for their complete elimination is very shortsighted. Smart regulations, breaking the big banks up, preventing retail banks from massive gambles like this one makes far more sense.

[oldereb38]

The Fed handled $8.4 TRILLION from the auctions of the Treasury securities and hid the money from Congress. The law, Title 12, section 247, requires the Fed to make a “full report” to congress. Hiding that profit from Congress sounds like embezzlement. Ref. 3w scribd dot com message 49040689

CDS were insurance without complying with the asset reserves of Insurance companies. There was no financial backing.

[ibislee]

No one is too big to fail. If you create the bets then you better eat your own bad medicine!

[CapoeiraPiper]

@ibislee too big to fail in the sense, of they are such a big part of the economy that if they go down, they pull every other big player, to whom they are in tight financial "links" or mutual investments with, and that results in economic catastrophes. That is why the bailouts happened. Now the restrictions put on the Bush bailouts were beyond questionable, but by the time Obama released the second bailouts, they were regulated and have more or less payed for themselves.

[JXjohn]

isn't this the beauty of capitalism system? if banks take risks seriously and not lend money to credit-worthless there will be no CDS to start with.

[WoodSugars]

So this like taking out an insurance policy on a building and burning it down to collect. Financial arson....

[Jonchess]

How much of cds do the bankers still own?

Or how much is still in the system waiting to explode?

[drumsmetalheavy11]

End Credit Default Swaps and make derivative trading illegal. The speculators have done enough damage to the country and world economy.  Enough is enough.

[Joelfwilson2]

more like only on earth.

[970blues]

Greed makes me sick...

[Orical001]

@970blues makes me rich... oh hang on... im poor again...

[seth917]

@970blues

Everyone is by nature greedy

[970blues]

@seth917 Yes we are... But some are much, much, much, much, much, much, much, much, more greedy than others. To do this to people is MOST foul... This nation needed a hell of a lot more more Teddy Roosevelts elected and far less Ronald Reagans in my opinion...

[3heiniken]

@970blues I believe the american people are the oens who brought it amonst themselves. Americans tend to live with the attitude : "i want it now and ill pay later". banks are fine with it, but people forget to read the fineprint of the contracts they buy.

[JoeTube27]

kill bankers

[chartrand]

Won't be long before a new derivatives market emerges for whether or not banks will be able to pay back Credit Default Swaps

[pocoapoco2]

4:33 Brian, you friggin idiot. That's the EXACT solution needed. How could it possibly be such an "extreme step" when there was a point in time in the not too distant past when CDS's didn't even exist? Just like commodities futures trading, the main reason non vested CDS trading was allowed was because of...greed.

[GunsNRosesbitches]

@pocoapoco2 You make it sound like greed is a bad thing, when it really isn't. I mean greed is both good and bad. However, the main issue here is the huge amount of speculation in CDS market. While it may reap profits, it can backfire and all hell breaks loose.

[tothemax01]

Government should never had bailed any one out. If I fail at anything, I don't get no government bailout. Of course, bailout is a weasel word, cloaking the source of the money. The correct phrase is 'loot stolen from the public, given to bankers because they were making too much profits through risky practices, which finally came back and bit them'. Any politician responsible for any bailout should spend many years in jail. Existing corruption law should suffice to provide this justice.

[GunsNRosesbitches]

@tothemax01 You are right in the sense that government should not bail out failing corporations...I mean this is capitalism. However, if government did not bail corporations out...and the fact that these corporations are so intimately tied to each other by CDS contracts, one failure can start a domino effect and a worldwide financial disaster of unforeseen magnitude can arise. The CDS market was what...$62 trillion? You can liquidate the entire global economy, and u would still not pay it off.

[tothemax01]

@GunsNRosesbitches It is not an issue; if the sellers of the CDS can't pay, they bankrupt and disappear, and the buyer of the CDS looses money. What would the nature of this disaster you speak of be? A recession, in which unproductive financial garbage evaporates, and in which capital and jobs can be freed up for productive uses. The government created this problem with central-planning of the interest rate of money and the issue of debt; less government damage is the solution.

[GunsNRosesbitches]

@tothemax01 The global CDS market was valued at $62 trillion. THAT, my friend, is the issue. When companies fail, billions if not trillions must be covered, or else many many bankruptcies will occur. The reality is that it wouldn't be such a big problem if it only the buyer and seller fo the swap are affected. But the reality is, so many big corporations have CDS contracts with each other on a global scale. One failure can lead to a domino effect and it will destroy many economies.

[tothemax01]

@GunsNRosesbitches Thats still fine; when a bankrupcy occurs, the company is liquidated, and assets are sold off to pay off (to the extent that they can) the companies debts. But these assets are of course bought (cheaply) by the many companies that survived (due to *prudent* risk-taking). These companies are then in charge, and the problem is solved (and the economy rebounds). What do you mean by 'destroy many economies', economies don't explode like some kind of bomb - they are not objects.

[GunsNRosesbitches]

@tothemax01 What you are saying is true if CDS market wasn't so big. But when it does get so huge, it becomes a big problem since financial companies all over the world are linked to each other. The huge amount of debt obligations becomes a potential disaster.

[tothemax01]

@GunsNRosesbitches What is the nature of the disaster, you keep talking as though 'thats it', as though 'this this and this happens, then the world ends'. What happens after the fallout?

[GunsNRosesbitches]

@tothemax01 Once companies fail, selling their assets is not nearly enough to pay their debt obligations, and the other company has to rewrite its balance sheet and realizes its in trouble too...and the cycle continues to more companies until the market just freaks out and panics beyond imagination. Lehman failed, Dow fell 18%. That's just one failure...imagine a few more on top of that.

[tothemax01]

@GunsNRosesbitches What is 'the market freaks out'? A stock market crash would have been the ideal situation. Why do you think the economy is not rebounding? All of the financial garbage has remained intact because the government prevented it from dying by bailing them out. If they had been destroyed, the economy receeded, and the government removed the interventions that caused the problem, the economy would be rebounding vigorously by now. The US is in trouble.

[GunsNRosesbitches]

@tothemax01 Simple scenario. 10 companies make big investments in A Corporation. AIG insures these 10 companies by selling them swap contracts. However, the amount of debt AIG owns is already greater than what it can pay off. AIG is confident nothing bad will happen. A Corporation goes bankrupt and now AIG has to pay these enormous debt that it cant pay. Guess what? AIG goes bankrupt, the 10 companies go bankrupt too. However, AIG goes to its insurer to cover its debt and that company has no $..

[GunsNRosesbitches]

@tothemax01 And the cycle continues and it becomes a disaster. For this very reason, Warren Buffet called credit default swaps "Financial weapons of mass destruction"

[tothemax01]

@GunsNRosesbitches And now that companies like this know that they will get bailed out, they will do it again. The cycle truly will continue.

[GunsNRosesbitches]

@tothemax01 Exactly. That's the major issue today facing the Fed and gov't. The Too Big To Fail problem as its called

[tothemax01]

@GunsNRosesbitches And the solution is of course, don't bail them out, there is no such thing as too big to fail (politicians have made that stuff up). The fed should loose the right to control interest rates, have its ability to modify the money supply drastically reduced, and allow the economy to proceed naturally, rather than causing ridiculous booms and recessions.

[funboy517]

CDS only seems to be a problem when banks and corporations loose, oh no that can not possibly happen. They just go pay off government to make laws for the people to pay for their failure. With these huge bailouts, So either way we the people are the only ones obligated to pay for losses cause you know this is now a world of the corporations by the corporations and for the corporations!!!!!!!!!!!!!!!!!!­!!!!!!!!!!!

[ericfontainejazz]

Good video explaining Credit Default Swaps for the layman.

[theporksicle]

Its funny they refer to Anglo-Saxon, what they actually mean is either English law (which has been added to a great deal by Normans over the past 1000 years as well as continental Europeans since we joined the EU) or they mean the general free market laws in the Anglosphere.

[Thamsite]

Mit Hilfe von CDS lassen sich auch Arbitragem glichkeiten gegenber dem Anleihemarkt ausnutzen, da eine risikobehaftete Anleihe im Prinzip durch eine risikolose Anlage sowie einen CDS-Kontrakt auf den entsprechenden Referenzschuldner nachgebildet werden kann. Allerdings beschrnkt sich der CDSHandel in der Regel auf liquide Kreditpositionen, so dass ein Engagement auf dem CDSMarkt nur fr eine begrenzte Anzahl von Titeln mglich ist. Quelle Bundesbank: hahaha

[maskedphrogg]

@SIGN666

Read through your own comment once again. You have demonstrated some serious cognitive disconnect.

It was the direct result of *regulation* that created and enabled the market in derivatives based on home loan mortgages. Governments around the world removed risk for lenders that made loans for the purchase of residential homes. It was not a lack in regulation that pumped up the RE market. RE values were artificially inflated as a direct result of regulation.

[theslimeylimey]

@SIGN666 There is no free market capitalism, and that's the problem. An example of this is Fanny and Freddy (they are socialist not capitalist) which removed all risk of mortgage lending from banks with the government guaranteeing the loans. This fueled lending fraud on a massive scale because there was no risk of loss to the banks anymore. This enabled the AAA rating on bad debts which were then sold as investments around the world. This would not happen in a free market system.

[farmboycarl]

The biggest story not being told is the one about MORTGAGE-BACKED Credit Default Swaps. With 40 swaps written against every mortgage in America, do you think the Wall Street buyers of these instruments might have an interest in seeing your mortgage fail? -Think about it.

[spiderwebb33]

damn it feels good to be a gangster... oops i meant banker

[EnsignSmith]

lol

[bearstearn3]

@spiderwebb33

yes it does.

[catrock123]

@spiderwebb33 lol

[crodrigo]

@spiderwebb33 bankster.

[spirish57]

Cr. Default Swaps is like the bank robbing Peter to pay Paul, but the bank forgot to pay Paul. Must be nice to generate funds with nothing down. Only in America!

[mmontes15]

@spirish57 well if you watch the video you'll see that the biggest banks involved in the credit default swaps were RBS (thats the Royal Bank of Scotland) and Barclays, a UK based bank. So its a bit disingenuous to say that this is unique to American banks.

[martin231181]

@spirish57 And Europe and the rest of the world

[Chief6569]

@spirish57 yeah cuz only american banks are using them.....

[whatrugonnadocrazy]

@spirish57 well you have to look at both sides. people are trying to buy houses without actually having money to do so. thus the bankers actually helped these people get homes. however, it was a failing strategy cause we all knew the people would default on their payments. the bankers were just looking out for themselves by creating such strategies. the question is, we know how it started, but once it did, what to do, and who is it right for? the bankers or the lower class people?

[whatrugonnadocrazy]

@spirish57 trust me, most people in the bankers position would choose to let themselves profit from this as oppose to lose all your money because these people can't make their payments. right or wrong?

[yozzaful]

their all crooks.

[Smegma007]

Hi all Maggoire folks! ;)

[zartosht06]

WTF? it still doesn't explain how insurance companies can benefit from others defaulting on a loan?

[EdwardsNH]

The insurance company doesn't benefit from others defaulting on a loan. They benefit from someone else taking insurance out on others defaulting on a loan.

Problem is, they did this on an average multiple of 35. Meaning for every bond issued, it was insured 35 times!

[bubba5000]

The foundation of America is GREED.

Credit Default Swaps are one form of that greed. The rest of the world is being taught that lesson the hard way.

[H20candies]

AMEN!!! You are Sooooo right!

[TheBeav30]

And what system is not run by greed? The question is how much greed runs a system. Oh, but I am sure you are never greedy just the other guy is. I think CDS are a bad idea. But banks and insurers don't care because they know if they can't get paid by the other guy the Gov. will step in. America has become a country were no matter what risk you take to make a profit you will never take a loss. This is not Capitalism. It pseudocapitalism it is more along the lines of corporatism and socialism.

[jbspires]

These are like buying insurance on the Titanic from someone who is on the Titanic!

[LoneOarman]

Betting is for smalltimers & losers... CDSs are for the real high rollers!

[benjaben525]

haha truth.

[robrown1]

Google UNIFIEDMARKETS

[stopHAARP]

Google" HAARP China banks"

[dreubencr]

Gracias José, una razón más para desconfiar de CNN En español...

[stonerj0e]

first !!!