Credit default swaps | Finance & Capital Markets | Khan Academy

Aged like fine wine

Me watching this video after the US Bonds Treasury deranks from AAA to AA+

Clearly understandable, very clear & precise! Love it! Just realized it was posted 15 yrs ago... truly an heritage!

What did Dr.Michael Burry buy here? I mean, what part of the diagram did he buy?

If that is the structure, if I am Corp A or B with a low rating, I would just default entirely because I know that someone’s backing me up in case I default lol. If that’s the case, does it shift the liability from Pension fund to AIG?

the fact that the insurance entities are not putting up any collateral from their own assets is crazy if they no longer honour the contractual obligations

Simplest way to think it is buying a credit default swap is like insurance and you pay a monthly premium to the bank. In return the bank promises a payout if something happens, in this case thousands of mortgage backed securities failing and the banks payed out big time to the 3 big shorts.

So what if insurance companies are heavily regulated to check their solvency in daily bases

Will that be a relieving to this business model (or the charter ecosystem)?

I mean isurance companies have reserves for each underwrited risk and each insurance policy/coverage. Also, they have reinsurance treaties from A+ reinsurers.

allowing you to "bet" money that someone else has to default on his debts, creates a very dubious (immoral? destructive?) incentive for you to do everything in your "power" to cause that default. A lot of powerful people (or funds) have quite enough leverage to accomplish this.
This doesn't sound healthy for an economy and society.

Nice explanation! It was easy to understand.

If you get caught selling drugs you do 10 years, but these guys don't do time mmm they get taxpayer bailouts... I think that bank regulators and bank insurance agents should do 20.

thanks, now I can get back to watching The Big Short and actually understand it.

AIG will guarantee the money lol

Wish these old videos can be enhanced of Quality. 14 years later still helping everyone. Thank you guys.

Good to know

Credit Suisse CDS situation has me watching this.

Thx khan, now I know who to donate of my billions in future :) work hard for ya good ppl. peace lol

I like how you convey the context without exploiting their nastiness

There sure were lots of people and institutions with incentives to help Moody's by installing moles there.

Came here after watching series called Devils ssn2 ep 8...Dominic Morgan was buying NYL investment bank's default credit swaps...

This dude saved me in college for chemistry, Microbio etc. Is there no limits to his brain!?

imf/nato wealth theft taxation currency is an amazing subject! Article 1 Section 10

outstanding!!!

Thanks Sal!!!

You think the government is less biased? Ooook

Came here after saw Credit Suisse thing.

I'm always learning new terms in Wallstreetbets.

Credit Sussy

Who paid you to make this video?

I was surprised this video was made 13 years ago. My curiosity started to be solved thanks to that video

2022.. Came here right after watching Big Shorts 😂

Wow 14 years later almost. I am here because Michael Burry is shorting the market again and using this credit default swaps again. 7/26/2022. Let see if he is correct again.

Watching this just makes me laugh, tbh... this is all just such a clown show lmao.

Came here after watching the documentary - "Inside Job".

@VladTV is a great tutor

Impressive, now let Paul Allen explain credit default swaps

The only part I don't understand is the word "swap". It's not swapping one debt for another, it's getting insurance on a riskier investment

You are one of the best teachers in the world

Credit default swaps? More like "C'mon, this video rocks!" Thanks for another banger.

What I want to know is that what if AIG default or one of the insured default on their interest payment? Now AIG have to pay back the full price they promised to insure?

Who else here after the big short

Thanks Sal for your work, but i have a question

Why don’t AIG buy way out of the money put options with the premium that they collect it to insure the transaction, then the debt (in theory) secured.

Thanks dude much appreciated

Truthfully CDS's really are just Insurance contracts that are worded in such a way that cleverly allows them to avoid all the regulatory and legal handcuffs that governs "Regulated Insurance Business" that can be bought and sold like a commodity but OTC between private parties largely off the books and thus are not regulated like a Security as well. Also, unlike regulated Insurance that has Indemnity rules; buyers of CDS's do not need to have a direct Insurable financial interest in what they are purchasing to protect against. Also, CDS's can basically cover any Credit Event or what the Regulated Insurance industry would term Perils and Exposures.

Basis points is the most needless unit of measure since the metric foot.

I love and hate how complicated the financial world is

So does the AIG type firm just assume that the lower rated corporation won’t default in 10 years assuming a 1% interest rate? Cause if they do then they’d have to insure the full $1b. I don’t see how the risk is less for AIG compared to the pension fund, it’s more

AAA rating has a very low chance of default? Let's see how many of the 41 Million College borrowers start paying back their student loans in May this year. Student Loans are AAA rated and have a very strong likelihood of default.

"Pension fund.. Pension Fund.." love it!