Credit Default Swaps - or I'm betting you lose your house...

[vfrride]

Back in the 90's a new type of "derivative" became available called the Credit Default Swap. I'm not sure why it was originally invented, but at the time it wasn't used that much. The idea is that you take out an insurance policy on someone else's debt. Now this is a great and all if you're the one paying that is being paid back for the doubt, but what if the rules change, what if ANYONE can take out an insurance policy on your house? Huh? What's that you say? Why would I want to take out an insurance policy on someone else's house? Why, because if the lose it you win! You get paid for their mortgage default as does everyone else who set up a CDS. So what's the problem with this? It's called gambling, it's not an investment, people are betting that other people will lose their houses! And actually it can get even worse, because lets say there are 10 people that have CDS on my house, it's really in their best interests for me to lose my house isn't it? They'll get a nice insurance payout for something that they don't own or have any downside on (except the premium they pay for the insurance. So how does this work with the whole subprime mortgage meltdown? Create a bond that is backed by both prime and subprime mortgages so that you have a piece of paper that someone wants to buy since the risk of the subprime loan is evened out by the prime loans, then take out a CDS on it. Throw in no documentation loans, no downpayment loans, unrealistic house prices and voila! Meltdown which somebody has made a lot of money on.

Who the hell comes up with this shit? This is positively evil and greedy. Argh.