Credit Default Swap explained - in one short, but brilliant comic-strip
And now you know everything you need to know. And are the sadder for it :-(
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Credit Default Swaps are Insurance Products (Barry Ritholz is understandably upset.)
Barry Ritholz wigs out - understandably - about Credit Default Swaps , and how they should not be treated as Yet Another Tradeable Asset, but should instead be regulated as insurance products. Whats the difference? A Tradeable Asset , usually, doesnt require you to reserve any money against future claims - I sold you the apple, you bought the apple and that is that. Insurance products , by definition, do require you to reserve money - you're basically betting against an event happening, but you need to reserve some money in the off-chance that it does occur and you need to shell out cash. But, thanks to Phil Gramm (responsible for almost as much financial chaos as Greenspan), CDS are now treated as Tradeable assets. Take it away Barry... Our story thus far : The Commodity Futures Modernization Act of 2000 , sponsored by Texas Senator Phil Gramm as a favor to his wife Wendy (who sat on the Board of Directors of Enron, which wanted to tr...