Credit Default Swaps (CDS)?

Another one to be understood properly in this sort of mindset in the world.

Credit Default Swaps


63 Trillion Dollars worth of insuarence contracts (CDS) were in existance in the world in 2003 but falling to $26.3 trillion by mid-year 2010. And at the end of 2011 the amount is $ 32,409 billion according to the Bank of International Settlements.

Some people have made fortunes out of CDS's. CDS originated from the idea of someone taking an insuarence policy with the bank, to make the money he lent, to someone, is safe. When the economy is boomimg the banks made a lot of money, but now lots of companies are going bust the banks are losing money in a rabid state.

Simplify further, if a company "C" wants to enlarge, "C" goes to an investor "I" and gives "I" corporate bonds or IOU's to get the money. Then "I" wants to be sure that his money is safe, "I" goes to a bank "B" and takes a CDS as insuarence. "B" promise "I" to pay the amount in IOU's if the company goes bust. Nice and easy way the financial markets to go on their jobs. Hang on there is a catch, as usual, and incomes the speculator who do not as "B"  involve in the "C"'s stock, but buys the CDS's waiting for the"C"to go bust. When "C" goes upsy downsy the bankcrupcy costs go through the roof. So lots of people can take the CDS's for the same event like in the bookies.

THe biggest players in UK for this cds's were RBS and Barclays to the tune of 2.4 trillion each. That is if all cds's are called at the same time, which is unlikely one might say but when the credit crunch hapened, is that exactly what happened. The media said at that time the UK gov is worried about people taking their money out en masse and there won't be any money. Hmmmmm.
 
 
 
 
 

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