Saturday, November 08, 2008

Credit Default Swaps

Anyone fully understand a Credit Default Swap?

"A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. CDS contracts have been compared to insurance, because the buyer pays a premium, and in return receives a sum of money if a specified event occurs. However, this is a slightly misleading comparison because the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event" - Wikipedia

I'm convinced the 700 billion bailout we just went through had much to do regarding Credit Default Swaps. They were illegal on Wall Street for almost 100 years and became legal in 2000. Is it just me or does that definition from Wikipedia sound like gambling? 60 Minutes aired this piece on October 26:

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