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Economic Collapse - Boiled Down. Part 3: Credit Default Swaps

By John de Guzman on January 8, 2009 5:00 PM | | Comments (7) | | | |
Many months ago, I posted Writer's Strike - Boiled Down.  Looking back, I see a series there, where I boil down situations for you all to sip and digest with ease.  This Boiled Down post is a multi-part bonanza, studying our Economic Collapse.  Part 3?  Credit Default Swaps - Boiled Down.  Stay with the series to get all the way to the Fed's action to help.

Credit Default Swap.pngPart 1 of this series, Economic Collapse - Boiled Down.  Part 1: Housing, focused on the housing market and how a surplus of investors pushed standards lower for home mortgage approval.  It was so reckless and daring, it could be considered criminal.  Once the housing market started slipping, it set in motion a string of events that were compounded by non-existent (but much needed) government regulation.  Part 2, Economic Collapse - Boiled Down. Part 2: Leverage, explained how financial service companies "over-leveraged" themselves, borrowing too much money given the capital they had.  For every dollar some companies had, they were borrowing 20 to 30 dollars against it!  That's fine when the market is going well, but once it collapses, like it did, being over-leveraged can, quite simply, lead to bankruptcy.

Part 3 will cover a financial tool called the Credit Default Swap, a term practically unknown three months ago.  Now, millions include the term in their prayers.  If I prayed, I'd be one of those people.  That’s why I have a blog and you come to learn things.  So, read on.  And learn.

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