Question=> How are the mortgages related to “credit default swaps”?
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“All investors ... are paying a price today for the lack of oversight” of credit default swaps, which Cox describes as being “like insurance contracts on bonds and any other assets that are meant to pay off if those assets default,” he stated.
CDS are credit default/debt default insurance, but they can’t call it “insurance” for legal reasons.
Related to mortgages, (maybe someone in the industry can weigh in on this) but as i understand it, CDS were added onto alt-a and subprime mortgage backed securities (MBS) to raise their credit rating to investment grade - so they would have a larger market.
Many of the CDS including those insuring MBS were written without any loss reserves (remember, not called “insurance” so not regulated like an insurance company). When they all went bad at once, the counterparties (AIG etc) didn’t have the money to make good the losses.