Credit Default Swaps 2
Universal risks of confidence default swaps. Financial weapons of mass destruction.
Categories: What about Credit? Tags: Credit, Default, Swaps
Universal risks of confidence default swaps. Financial weapons of mass destruction.
Categories: What about Credit? Tags: Credit, Default, Swaps
@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”.
Absolutely, my thoughts exactly but there’s no way to reconcile it other than perhaps the Pension fund accepting 6% and the insurer 4% because then the insurer could still have the $1 billion in the bank accruing say 6% a year and then if they need the cash out they can just withdraw it.
Jay..Many European banks are I2!! Thats why they are so nervous…….
Sal Thanks!!!
I reckon the ‘lessons’ we’re supposed to learn from this crisis are fake ones, the fact is that nearly each business relies on confidence and gives confidence, and the world’s better for it.
fantastic 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 stipulations of the situation in Greece?
This is so poorly clarified! I shudder to reckon of the number of people who believe that this is how it works.
Just ample text for one point. If the CDS (Insurer) issuer had to hold the billion dollars for the insurance why would they EVER offer it? They could get 8% return on the same amount of money by investing the company directly instead of the paltry 1%.
Wonderful explanation. Thank you.
@Hudson4351 That is right. Insurance rates are based on actuarial tables that predict the probability of various events happening ie. car crash, age of death, etc. CDS are different though because it is as though 1000 people could get insurance for one car. Even if the probability of this car crashing and the insurance having to be paid out is the same as all other cars, in the event that this car really does crash (the company defaults) then the insurance company is screwed.
There is no mention of increased Collateral Calls when the ratings are downgraded whereby depletion of capital happens, sort of like run on banks
I wonder how many H1′s bet on All-purpose Motors 10 years ago?
fantastic job sir. i really take pleasure in the way you lecture.
At around 3:55, you said that the companies issuing the CDS only have to keep ample money aside to cover the probabilistic amount of debt defaults rather than the entire amount of CDS issued. You imply that this is one of the major problems with CDS, but don’t car/house/life insurance companies work the same way? They don’t really have to set aside $1 for each dollar of insurance they issue, right?
It is probably debateable whether a financial instrument ‘CDS’ would be a weapon of mass destruction in the financial market or the confidence rating companies themselves whom rated those insurance companies as excellent ample to insure those financial institutions like pension assets and hedge assets
Brilliant video!
hey just clarify the relationship with corporation B and Insurance 2 in that explanation
Thank you for this fantastic video! But what happens if insurance company doesn’t have ample money to the pension fund in case the company A or B is bankrupt? Thanks
Fantastic video. Very informative, thanks.
Derivatives are WMD! so right!
so why can’t this be resolved like this: temperamental’s should be very strict and verify all those insurance companies or banks before each insurance/loan is being set?or if not for each transaction, then periodically try out ups.. so in that way, insurers wouldn’t be so overrated…why isn’t the blame place on temperamental’s?
faaaantastic
kudos guys, your work is very vital. the more I know this, the less chance I have of becoming a victim of the financial system. keep it up! perhaps a video on the huge carry trade?
the dollar is propped up by being the currency oil is priced in.
Nice job, this is what happens when there are no checks & balances. Any “confidence default insurer” should be vital to have the ample assets to cover each transcation. Which shows another problem, the bond rating companies and or S&P, how much are they influenced as to their ratings. Similar problem with our currency, it is backed by nothing, no longer gold. Federal Reserve System, i.e their backing is us, the Taxpayer. We already well into the trip of “Finacial trainwreck of the Millenium”.
Bravo
we need to get rid of the fed.we cannot keep depending on making money out of money.the engine we need to drive on is pushing new inventions like cars that runs on gas s and etc.we need a lot of inventions to make a domino effect on the economy.