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By Mastophales on Oct 31, 2009 | Reply

Nice job, this is …
Nice job, this is what happens when there are no checks & balances. Any “credit default insurer” should be required to have the ample assets to cover every transcation. Which shows another problem, the bond rating companies and or S&P, how much are they influenced as to their ratings. Similar problem with our currency, it is backed by nothing, no longer gold. Federal Reserve System, i.e their backing is us, the Taxpayer. We already well into the trip of “Finacial trainwreck of the Millenium”.

By gcat4u on Oct 31, 2009 | Reply

Bravo
Bravo

By cringo123 on Oct 31, 2009 | Reply

we need to get rid …
we need to get rid of the fed.we cannot keep depending on making money out of money.the engine we need to drive on is pushing new inventions like cars that runs on gas s and etc.we need a lot of inventions to create a domino effect on the economy.

By cringo123 on Oct 31, 2009 | Reply

its all about …
its all about gambling ppl money back up by notin.we need some new inventions for this economy to kick back up again.otherwise we R fuck

By hbjon on Oct 31, 2009 | Reply

I used to think …
I used to think this form of fraud was very complicated. In fact, it is very obvious. Given there are no regulations and transparency. Take a close look at what needs to happen to defraud the Insurance company. Who is being wronged and who will ultimately be responsible for the financial obligations. How is it that when this thing unwinds, they can exchange their poker chips with greenbacks? And where are those greenbacks taken from?

By raybonent on Oct 31, 2009 | Reply

THe bank charges me …
THe bank charges me $20 in monthly fees, I take money out of my 401k and I get penalized and we have this kind of betting going on!!!!!!! Give me a break. Great explanation. Thank you

By KarlaJesi on Oct 31, 2009 | Reply

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By atultiwari1000 on Oct 31, 2009 | Reply

Khan Academy , you …
Khan Academy , you guys are wonderful
I am already a donor to your academy , just want to support your endeavours where i am learnign and you spread knowledge also
all the best
Atul

By jvdesensi on Oct 31, 2009 | Reply

legend!
legend!

By VigilanteNighthawk on Oct 31, 2009 | Reply

By far, this is the …
By far, this is the best explanation of CDS I have seen, and it has clarified a great deal for me. Thank you.

By Smokr on Oct 31, 2009 | Reply

Thanks. A nice, …
Thanks. A nice, understandable rundown on these insane transactions and how one domino falling brings down so many others.

By 3waybar on Oct 31, 2009 | Reply

The Ceo of CDS …
The Ceo of CDS creating firms, stand nothing to lose but his/her job and have everything to gain in stock options and bonuses, if the company gets bancrupt they just move on to the next job opportunity, there is generally no penalty or retroactive imbursement of bonuses.

By megatrazor on Oct 31, 2009 | Reply

CDS is good as long …
CDS is good as long as it is regulated by Fed.The fall of AIG was due to their greedy obtaining more money on guaranteed a loan. This system make the lender exposed to risk compared to the borrowers.They need to check the background of the company they Insured thoroughly before give the CDS.

By CONGKAMAEL on Oct 31, 2009 | Reply

I think, the …
I think, the insurance company just wants to make money and that’s it!!! As long as they think there is very small chance that the company, which hedge funder thought might fail, goes default, then the insurance company gets lovely 1% or 2% money which generates lovely bonus… this is all like gambling… insurance company thinks the risk is low, they agree the deal, the hedge funder think the chance is big, then they also willing to make the deal.

By stitlskin on Oct 31, 2009 | Reply

well, here in spain …
well, here in spain we’re having a big time problem since many of these CDS have been commercialized as “true insurance” to the “lay people”, I mean individuals with mortgages, small credits, … and they are making our life IMPOSSIBLE!! How could it be possible that small banks can commercialize this stuff to individuals like us, that have a really hard time just surviving to get to the end of the month. They are RUINING US!!!!! Pls be careful with this product, it is very dangerous!!!!!!!!

By archelonprime on Oct 31, 2009 | Reply

I don’t know what’s …
I don’t know what’s more laughable, the very concept of credit default swaps/derivatives or the people that defend them.

By ObsessiveDetailer on Oct 31, 2009 | Reply

So notional values …
So notional values aside, what is the real sum of the CDS market worth? A lot less?

By DiltonDalton on Oct 31, 2009 | Reply

Yes it is indeed …
Yes it is indeed mind boggling. What is even more mind boggling is that the federal government under George the 3rd actually passed laws to prevent this practice from being regulated. An industry that was bigger than all the banks and all the mortgage companies and in fact larger than the entire economy of the USA was allowed to run wild with nobody watching. Good old George said, in jest, “Why did this have to happen on my watch?” Of course the answer is that he & his crew weren’t watching.

By JoshuaSethComposer on Oct 31, 2009 | Reply

“The CDS allows the …
“The CDS allows the equivalent of buying fire insurance on your neighbor’s house. In fact it is like insuring your neighbor’s house N times. This situation is not legal for several reasons. First it is insuring where there is no risk. Second it makes it tempting to set your neighbor’s house on fire.”

Agreed. But are we sure this is what was going on? The magnitude of the absurdity is so mind-boggling that it’s really hard to believe. The tooth fairy has more credibility.

By eswarifcai on Oct 31, 2009 | Reply

Hey Khan,
…
Hey Khan,
Absolutely love your vids on swaps. There is a currency swap deal struck by the Fed recently. Any videos on that?

By efh0888 on Oct 31, 2009 | Reply

See the whole point …
See the whole point of finance and risk management is to make as much potential return without taking on additional risk. AIG (among many others) seems to have missed the boat on that concept.

These CDS’s were so mispriced because of certain assumptions made by those pricing them (i.e. that correlation among different credit default risks is always constant when in fact it is not, especially in times like these).

If actuaries had done the pricing, we might not be in this situation

By drobberbaron on Oct 31, 2009 | Reply

But why would the …
But why would the insurer give insurance to people who hadn’t made a loan on companies that some hedge funder thought migfht fail? Are they stupid?

By bobbyv364 on Oct 31, 2009 | Reply

You can thank Phil …
You can thank Phil Gramm who on December 15, 2000, rushed through the Commodity Futures Modernization Act of 2000, which Because of the swap-related provisions of Gramm’s bill, a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

By IndyFlick on Oct 31, 2009 | Reply

Seems like I2 would …
Seems like I2 would simply buy the bonds of B2, for cents on the dollar, and continue to make payments to P1. Even if they paid par, it would save them $8B ($10B CDS – $2B Par).

By johnny1436 on Oct 31, 2009 | Reply

excellent
excellent