Tuesday, October 28, 2008

Credit Default Swaps in 11 Minutes

Untangling credit default swaps

"Marketplace Senior Editor Paddy Hirsch is back with the second of his Crisis Explainer videos. This time he goes to the whiteboard to make the complicated world of credit default swaps easier to understand."

5 comments:

Anonymous said...

Nice explanation. One nit: he makes a convincing case that CDSs are insurance. But he fails to mention that had they been called insurance they would have been regulated and for the most part illegal.

Howard said...

Can you point me at or tell me more about it being illegal?

Anonymous said...

See Should CDS be regulated like insurance?
. The illegal aspect is that if CDS were insurance they wouldn't necessarily meet the following requirements:

1) having an interest in the insured item (insured-interest doctrine) and

2) not be able to insure an item for more than it is worth (indemnity doctrine).

Howard said...

Thanks, that was a really good read.

Howard said...

This week's Economist has an article The Great Untangling that was good, though it went a little beyond me. "Some of the criticism heaped on credit-default swaps is misguided. The market needs sorting out nonetheless."