MGSC12H3 Lecture Notes - Lecture 6: Credit Default Swap, French Ministry For The Economy And Finance, Stock Footage
Are bundles of mortgages or other loans, assumed to be high quality debt because large number of mortgages should reduce risk. No longer a direct relationship between homeowner and lender. Cds - credit default swaps insurance on cdos or bonds you own against the possibility of a default (your house); Can also ensure against default of cdos you don"t own (someone else"s house); Ppl willing to write insurance that can be bought for other ppl"s debt: ex: fire insurance for your home. If you had insurance on someone elses, you want the house to burn down facilitates betting. Some companies (goldman sachs) bought cdss against cdos they sold (fraud in betting against a product they sold). Credit default swaps that will pay off if the underlying bond fails. Bonds fail if thousands don"t pay their mortgage. Banks playing on both sides: selling cdos & buying cdss. Lack of transparency, no public exchanges or markets.