Sub prime....credit default swaps.....short selling....and other fine words
Words which until recently most of us non banker types (and even some banker types) had never heard of, much less knew the meaning of or understood the concepts. I have read a number of articles in recent days particularly on credit default swaps (CDS) which appear linked to our latest financial market turmoil. The bottom line: greed. I will attempt to give you a layman's version...
"A credit default swap (CDS) is a swap contract in which a buyer makes a series of payments to a seller, and in exchange receives the right to a payoff if a credit instrument goes into default" from wikipedia.org
This has been used as in instrument - like a guarantee or suretyship - to reduce the risk of loss from the 3rd party not honouring its debts, and in doing so increase the value of the asset (or reduce the cost of the debt).
The problem that has arisen, is that firstly these contracts are totally unregulated and secondly there need not be any asset to back the "guarantee" by the person issuing the swap...In other words - Joe Blogs with no assets, could in theory have issued a CDS to guarantee the debts of Eskom - clearly if Eskom defaulted, there would be little point in calling in the contract, as Joe would be unlikely to be able to pay!!
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