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One Liner: DOJ Calls for Regulation of Credit Default Swaps

December 29, 2010

Saw a one line banner news alert on Bloomberg tv: DOJ requesting regulation of credit default swaps. This is good news if they can make it happen. CDS were at the crux of the meltdown in 2008. Read NY Times, NPR, and previous Asheham posts.

The multi-trillion dollar hanky-panky large banks (all the largest banks), were involved in prior to the economic collapse in 2008 is revealed in the documentary, Inside Job. Saw this film and it is a must see to help you understand all the risky behavior that has been going on and still persists today due to its lucrative returns, secret nature of the players, and lack of regulation.

What are Credit Default Swaps (CDS)?
“Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small. As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized.”

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