OK here's something I think it's going to take me a good amount of time to understand. This damnable lattice is something that describes the cascading math used to predict a default over several iterative periods. I think. Now if you want the official legal definition of a Credit Default Swap, then you have to go to this website and pay 300 bucks.
The 2003 ISDA Credit Derivatives Definitions (the "2003 Definitions") are intended for use in confirmations of individual transactions governed by agreements such as the 2002 ISDA Master Agreement or the 1992 ISDA Master Agreements published by ISDA. The 2003 Definitions update the 1999 ISDA Credit Derivatives Definitions and offer the basic framework for the documentation of privately negotiated credit derivative transactions. The 2003 Definitions update provisions in the 1999 ISDA Credit Derivatives Definitions relating to Successor and several Credit Events. In addition, the 2003 Definitions offer new provisions relating to guarantees, Sovereign credit default swaps, novation of credit derivative transactions and alternative procedures in the event the Bond or Loan specified in the Notice of Physical Settlement is not Delivered.
Now you have an idea of what we don't understand. But I can understand this: In 2001 the market for these things was 900 billion. Last year it was 62 trillion. Somewhere along the lines somebody made a killing. Why? Because its clear that the guys who were running these things believed that they could mathematically define risk away. I mean that has to be the bottom line. If somebody sold you on this kind of insurance, why wouldn't you make loans?
Recent Comments