Swapping Great Debt?

[Ursa major]

I wasn't sure whether to put this thread here or in the Horror forum.

The link below takes you to the BBC Newsnight website. (For those who don't know, Newsnight is a current affairs programme on BBC2 in the UK that runs on weekday evenings from 10:30 to 11:20, with a slightly different schedule on Fridays.)

The item that caught my attention was about Credit Default Swaps (CDCs). To paraphrase (the item is 12 minutes long and is only - as far as I can tell - available in its TV form, i.e. there's no transcript), a CDC is a financial derivative that was developed to allow you to insure you against a company going bust where you'd bought a corporate bond from them; if the company went bust, your insurer would pay you (and not the company).

As you might expect, an ability to take an insurance policy on something you don't own (remember, you're insuring against the company going bust, NOT that they're defaulting on the bond you bought) brought this financial instrument to the attention of our friends the speculators. They take out these insurances, even though they may have no stake in the company whose bankrupcy (or whatever) they're insuring against. In fact, given that a financial institution may have many CDCs riding on its non-viability, the resulting sums may far exceeding the value of the company.

As you might expect (again - you must be very bright!), this can lead to problems.








I won't ask you to enjoy watching the Newsnight item; you won't (unless you're a beneficiary of ones of these dubious instruments).

BBC NEWS | Programmes | Newsnight | US economy's next bad thing?

For an explanantion of CDCs, here's the Wiki article:

Credit default swap - Wikipedia, the free encyclopedia

[Dave]

And I, in my naivety, thought that Short Selling was fairly unethical.

Short (finance - Wikipedia, the free encyclopedia)