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Latest comments made on this video:
By: KrispyKangaroo. on 02 Aug 10, 16:27:22
@Kaysersoze5 The insurance company doesn't have to lend any money in a CDS, so it can use its rating to get a lot more of them and accumulate a greater inflow of cash than they could by direct lending.
By: KrispyKangaroo. on 02 Aug 10, 16:24:19
@ZakBrownrigg123 You're betting that Corporation B is probably going to default soon when you buy the swap.
By: Kaysersoze5. on 29 Jul 10, 15:12:43
dear sal, i have one question. why is the insurance company happy with a fraction of the interest received, when the insurance company is fully liable when the borrower defaults. the insurance company could also lend the money, get 100% of the interest and have the same risk profile on the transaction. am i missing something?
By: ZakBrownrigg123. on 28 Jul 10, 23:42:07
6:00 How can you buy insurance on something if you haven't even invested in it? Isnt the whole point you lend Corporation B money, they pay you interest, and part of that interest goes into paying the Insurance entity? If your not paying Corporation B any money, and are only paying insurance, not only are you not getting a return, your LOSING MONEY. Am I wrong or is this video wrong?
By: theporksicle. on 04 Jul 10, 20:05:42
@RNelson144 I think the way it works is you buy a CDS on a reference entity (I.e. B in the case of the hedge fund example) and since CDS' are not bought on an exchange you and whoever you are making the deal with (i.e. the insurer) write out the terms. So you could buy $10 billion of insurance on B defaulting on their loan from P2 or you could buy it on all of the loans they have, or on them becoming insolvent etc
By: rscoville82. on 25 Jun 10, 14:33:18
Excellent explanations. Thanks.
By: RNelson144. on 20 Jun 10, 03:26:00
It's strange that you can buy insurance on debt that isn't owed to you, but in the video you state that you can buy insurance on debt that isn't owed to anyone ($10 billion when the company doesn't have $10 billion in debt). How do you identify the debt being insured except by reference to the amount and the person it is owed to?You owe $1 to each to two people for a total of $2.A third party insures $100 billion worth of your debt.Is payment conditional on the default of either debt? On both?
By: TRiLOGYGUiDES. on 17 Jun 10, 15:38:59
Awsome, make more videos!
By: OfficialiPAUL. on 17 Jun 10, 15:38:45
Dude, this is so beast!
By: thegoonist. on 15 Jun 10, 12:47:02
@notme222 @notme222 tbh there is no excuse to say that they "werent smart to understand the risk". the risk was fundamental to the whole business and i think they perfectly understood it but still persisted to play against the odds betting that this kind of a catastrophe would never occur. any rational, inquisitive person, children included, who want to know how insurance agencies operate or make a profit would ask fundamental questions that would inevitably reveal these flaws.
By: notme222. on 14 Jun 10, 16:36:38
@thegoonist Getting out of a loan generally means selling the loan to someone else, at lower value. You loan $100 to someone, then worry they won't pay you back. I say "OK I'll buy the loan, here's $85 for you and now they owe me the $100 instead." BTW, one smooth way to fight "too big to fail" is just by adjusting something the government ALREADY does. Khan has explained reserve requirements in other videos. So gov't simply has to say "bigger banks get higher reserve req." Thus less risk.
By: notme222. on 14 Jun 10, 16:31:12
@thegoonist Well ask this first: why would "I2" (the insurer, like AIG) let this happen? Gov't wants to stop bad choices. But I2 has *every* motivation, yet they _destroyed_ themselves. Not on purpose but because they weren't smart enough to understand the risk. So why govt let it happen? Well if AIG experts work 10hr/day on it and they don't know the risk, how's Congress going to? What politicians can do is wait til after and say "well I would know better." Then bail out the dumb guys.
By: vaughnstar. on 01 May 10, 23:24:24
Great job in explaining this god awful mess. I tried reading several definitions and could never understand the entire concept of CD swaps. All in the name of greed...
By: thegoonist. on 24 Apr 10, 06:59:04
one more question: how does one get out of a loan obligation as mentioned in 10:32? is it possible in the loan contract to include a clause that states that the lender can request his money from the borrower at any point in time? and if the borrower is unable to repay the money the lender is able to sue? im not sure about this because i mean most loans are for investments and these take time to bear fruit right? (in most cases at least) and wouldnt it be unreasonable to include this clause?
By: thegoonist. on 24 Apr 10, 06:54:39
@thegoonist because if they dont ensure the loan occurred, they are just perpetuating this cycle of risky betting that would implode either way! its destructive to the economy! (if insurance company wins, hedge fund probably would be in HUGE debt and may declare bankrupt; if hedge fund wins bet, insurance company goes bankrupt and starts off a huge chain reaction due to its heavy involvement in CDS!)
By: thegoonist. on 24 Apr 10, 06:51:55
@thegoonist ive asked my parents these same questions when i was a 9 yr old kid when i asked them about how car insurances work. they couldnt give me a straight answer as to the logic of these companies' business model. as to the side bet portion of the video, how can this even happen in the first place?! shouldnt the insurance company ENSURE (i.e. paperwork verification) that the hedge fund indeed loaned the money to corp B BEFORE selling them the insurance?!
By: thegoonist. on 24 Apr 10, 06:46:00
@thegoonist the only reason i can see so far as to why this mind numbingly stupid system is allowed to persist is because of the insatiable need for investment capital and loans and the excessive need to insure these loans (demand of $> supply of $) and that many economies depend on these capital injections annually to grow their GDP? is this the only reason? if it is i dont see how the govt or whatever worldwide body that regulates this crap system justifies itself.
By: thegoonist. on 24 Apr 10, 06:42:35
@thegoonist shouldnt there be more strict regulations regarding the insurance companies besides a probability of whether debt ridden companies will default?? because probability doesnt work in the real world due to business cycles! when theres a recession like now, the math goes out the window because like the video shows, there is a cascade of chain reactions due to the inability of insurance companies to repay their promised amounts!
By: thegoonist. on 24 Apr 10, 06:40:05
i have a few questions. firstly, how could the govt/legislature EVER ALLOW THIS TO HAPPEN? i think this is how insurance companies worldwide are operating but this system (insuring money they clearly dont have) is a fucking stupid business model! is the reason why theyre allowed to persist with this inane method because of the economy? i.e. they need more people to lend to others for investment, and these people lending need more insurances before they can lend?
By: andykala1000. on 13 Apr 10, 13:35:17
Again Khanacademy.. awesome videos :) you make something confusion to something totallly understandable :D
By: SIGN666. on 26 Mar 10, 00:05:23
This is all deeply rooted in the ideology of deregulated free market capitalism where we let financial institutions, banks & corporations dictate and everybody is at the mercy of big business & a tyrannical government willing to back them up at tax payers expense. The government knew what was going on but allowed it for the sake of profit. And AIG is too big to fail because of contracts & we're all just supposed to sit back & take the abuse. Why don't we just overthrow the government? (-A-)
By: SIGN666. on 26 Mar 10, 00:00:25
This is all deeply rooted in the ideology of deregulated free market capitalism where we let financial institutions, banks & corporations dictate and everybody is at the mercy of big business & a tyrannical government willing to back them up at tax payers expense. The government knew what was going on but allowed it for the sake of profit. And AIG is too big to fail because of contracts & we're all just supposed to sit back & take the abuse. Why don't we just overthrow the government? (-A-)
By: imbagogo. on 12 Mar 10, 12:20:27
@lilpenguinboy The point Sal is trying to illustrate is that these insurance companies and other entities who hand out swaps don't need to set aside money for the risk of default.[cos of loosely defined mandate (pre-crises)] Thus making them in Buffet's words "financial weapons of mass destruction".
By: theporksicle. on 05 Mar 10, 18:54:32
Absolutely, my thoughts exactly but there's no way to reconcile it other than perhaps the Pension fund accepting 6% and the insurer 4% because then the insurer could still have the $1 billion in the bank accruing say 6% a year and then if they need the cash out they can just withdraw it.
By: shofie222. on 05 Mar 10, 18:43:09
Jay..Many European banks are I2!! Thats why they are so nervous....... Sal Thanks!!!