Quote:
Originally Posted by chiefzilla1501
Yes, you're right on that. But there have been 45.5 trillion dollars of these sidebets made. And they were done poorly and the government did nothing to regulate them.
I wouldn't call it a "side bet." Think of it as insurance. To insure against a loss from damaging your car, you pay a premium to protect yourself. That's not really a side bet as much as it is a protection for assuming the risk... of driving. A credit default swap protects banks who loan risky debt to investors. By putting down a certain amount of collateral, these swaps combine all these to create a giant pool that can be drawn from in the event of a default.
Well, we all know that when stuff like this gets unregulated, there are always going to be people that find creative ways to make stupid investments and assume way too much risk, but make a handsome profit doing so. That's what happened. In addition, because there was an underestimation of the rate of default (and a lot of that is probably because they underestimated how much risk these "insurers" would take on), suddenly, you don't have enough money in the pool to pay out.
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It's not insurance. An insurance player (AIG) thought it was wise to dive in. It's "party, counter party." Is your neighbor solvent when I want my money? Nope, for the most part. That's all it is. Most aren't solvent and need phony baloney printed digits (dollars).