One of the things Wall Street does best is confuse people. They are brilliant at it, making simple things seem complex. So today we’re going to go over one of the things they’re trying to make obscure and make them simple—‘credit default swaps.’ A credit default swap is nothing more complex than insurance. I pay an insurance company roughly $600 every six months and if I crash my car they have to pay for it. I’m paying them a certain premium to assume the risk of me crashing my car. CDS is the same thing, but for bonds. I’m paying someone to assume the risk of my bonds not being paid off. I strike a deal with Party X and they agree that if Company Y goes busto and defaults on their debt Party X will pay me the face value of the bonds that Company Y issued. Simplest fucking thing in the world, it’s bond insurance. Why does Wall Street bother to make up a weird name? (more…)
March 12th, 2009 | Comments (23)
