The SEC announced yesterday that they would launch an investigation into the highly unregulated and sketchy use of credit default swaps. Wrote WSJ today:
"These swaps are insurance-like contracts that allow dealers, hedge funds and others to transfer the risk of corporate defaults to others. Sellers charge buyers fees to insure bonds and loans from default, and buyers can benefit if the cost of protection subsequently rises. "
So, let's say that Institution A owns lots of bonds and Fund XYZ own lots of bonds, both pools of bonds bought using leverage. If Institution A insures Fund XYZ's bonds, and Fund XYZ insures Institution A's bonds, both can take on more leverage and buy more bonds. What could possibly go wrong?
No comments:
Post a Comment