Marketplace Whiteboard
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Untangling credit default swaps
When the analysts and experts talk about the current financial crisis, they often refer to "credit default swaps." So, what exactly is a credit default swap? Marketplace Senior Editor Paddy Hirsch goes to the whiteboard for this explanation.
Derivatives
Credit default swaps? They're complicated -- and scary! The receipt you get when you pre-order your Thanksgiving turkey? Not so much. But they have a lot in common: They're both derivatives. Senior Editor Paddy Hirsch explains.
Bonds, notes and bills
So much government debt! But what's the difference between the Treasury's bills, notes and bonds? Senior Editor Paddy Hirsch explains.
Inflation
Most economists agree that inflation of about 2% or 3% annually is a natural function of a growing economy. But people are worried government stimulus measures could spark much higher inflation. Senior Editor Paddy Hirsch explains
High-frequency trading
High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains what high-frequency trading is and why some people are up in arms about it.
Factoring
Many small businesses get the cash they need to operate and expand from so-called factors. One of the biggest factors in the business is CIT, and with CIT on the ropes, small businesses are worried. Senior Editor Paddy Hirsch explains what factoring is, and how it works.
Financial alchemy
Many asset-backed securities have been downgraded from AAA recently. But at least one issuer has miraculously repackaged a downgraded deal to make some of its bonds worth a AAA rating again. Senior Editor Paddy Hirsch explains.
Where's the toxic waste?
Banks are paying back TARP money and claiming they're the picture of health. So what happened to all those toxic assets that were clogging their arteries a few months back? Senior Editor Paddy Hirsch explains.
Dark pools
Dark pools are exchanges where people trade stocks anonymously. Senior Editor Paddy Hirsch explains how they work, and why the SEC is considering regulating them.
The 'repo' market
Senior Editor Paddy Hirsch explains why the repurchase (or repo) market is a vital part of the financial system, and why the government is considering changes to it.
Meet Cap 'n Trade
Cap and Trade is the linchpin of the government's effort to curb carbon emissions. Senior Editor Paddy Hirsch explains how the cap and trade model works.
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Comments
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From Lincoln, CA, 04/16/2009
I fully understand insuring something you own. I can insure my house against loss. The credit default swaps are like allowing anyone else to insure my house - make a bet that my house will suffer loss. I can understand taxpayer money being used to honor legitimate insurance. But is taxpayer money being used to make good on the bets? Do we bail out bookies?
From Merced, CA, 04/11/2009
I can not believe that credit default swaps are illegal.. it's legalized gambling, and why would AIG give these "sams" collateral.. it is foolish....
I'm sure this is not going to be solved very easily...
From Sunnyvale, CA, 03/21/2009
Excellent explanations of very complex situations. I am not a businesswoman or an economist. I have tried to find explanations of the terms being thrown about in this economic crisis, but this is the first time I have found any that made sense! Please continue with these white board sessions. Better yet, how 'bout an online class? Many thanks.
From birmingham, AL, 02/27/2009
i heard about this video on npr this morning during the interview with paddy hirsch. i've been trying to learn more about "swaps" because i'm following the jefferson county alabama sewer crisis which is being attributed to the county commission's use of credit default swaps related to auction notes. this is a good introduction to the process. although the term insurance contracts is a useful descriptor it may be helpful to readers to point out that these contracts are not considered formal insurance programs. in addition to pooling risks mentioned by a previous commentator formal insurance is regulated by states and insurers generally must meet solvency requirements through reserves.
From Minneapolis, MN, 02/25/2009
Why on earth would Jim (the insurance salesman) offer collateral to Sam for buying investment insurance? No other insurance (like health insurance, car insurance, flood insurance, earthquake insurance) offers collateral to the buyer of insurance; the buyer of insurance justs hopes/risks that the insurance company will remain solvent. I don't understand why any insurance company (AIG) would offer collateral in order to induce someone to buy insurance. That makes absolutely no sense. What were the people working at these insurance companies smoking? And if there is some legitimate reason for the insurance company to offer collateral just for buying investment insurance, then why don't they offer collateral for all other types of insurance like health insurance or flood insurance?
From FAIR OAKS, CA, 12/28/2008
Absolutely wonderful "ground level" explanation of a variety of current subjects, displayed in such manner as to be quite useful for all levels of the investment public. Highly recommended viewing.
From ON, 12/07/2008
Much thanks for the straight forward presentation, a couple questions though:
Why would Sam bet on GM's failure?, would seem about as beneficial as smashing up his Ferrari just to get... a Ferrari?
If organizations like AIG are in this much trouble just from having their credit downgraded prior to the recent market crash then how bad does it get when Sam finds out his GM bonds are worthless??? Did the 150+ Billion for AIG just kept the lights on and the real problems haven't even started yet?
12/07/2008
Nice presentation, but apart from collateral calls, there is another difference between a car insurance and a credit default swap:
Insurance companies play with probabilities. If they insure 100 cars and 10 of those crash, then they still make enough money from the 90 others to pay for these, and one crash does not the probabilities of the others to crash.
Compare that with an insurance against crashing stock: If the GM stock of one investor crashes, then the GM stock of all the other investors crash, and the company has big trouble. My guess: their mathematicians had one drink too much.
From Shreveport, LA, 12/05/2008
Why would Sam buy this insurance from Jim? Do the bond pay more interest than the cost of this insurance? If he buys this insurance, and the bonds go up in value, Sam wins. If the bonds go down in value, Sam breaks even less the cost of the insurance.
From Southfield, MI, 11/20/2008
Illustrations are most appreciated keep to the good work!
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