This is a credit default swap!
In fact, CDS is essentially a kind of insurance - Party A pays the premium, and if the underlying asset defaults, Party B compensates for the loss. However, if it is named "insurance", it will be subject to strict supervision for insurance products, so the name of "financial innovation" is changed to "swap".
The original intention of CDS was to share risks. Originally, the risk of default was borne only by the lender. Now, through the creation of financial products, various investors can share the risks while gaining returns.
The profit-seeking motive soon gave birth to the art of speculation. To meet the demand, Wall Street developed a series of financial derivatives such as CDX, CDXIG, etc., and the insurance subject became a package of CDS and indexes.
As housing prices have continued to rise, risks have not evolved into losses, premiums have become lower and lower, and the scale has become larger and larger...
Everyone knows that the speculators on Wall Street are the greediest guys in the world. When they can see huge profits, how can they resist?
Let’s use Zhang San and Li Si as an analogy.
For Zhang San, this is a guaranteed investment. But Li Si is not stupid either. Through statistical analysis, they found that the default rate in a prosperous market is less than 1%. Therefore, if I, Li Si, do 100 such insurances in a row, I can get a total of 50 billion US dollars in insurance money. If one of them defaults, the compensation amount is no more than 5 billion US dollars, and I can still make 45 billion US dollars!
What a good deal! So most of the "Zhang San" and "Li Si" on Wall Street and "Zhang San" and "Li Si" from all over the world - these Zhang San and Li Si are spread across Europe, America, Japan and many countries in Oceania! In the more than ten years of growth in US housing prices, they enjoy an unprecedented wealth carnival.
However, if the US real estate market continues to be so hot, then CDS or other CDX and CDXIG will be able to bring huge profits to these speculators. But everything will turn around when it reaches its extreme. Even the hottest market will eventually decline or adjust. Once the market declines, these speculators will inevitably pay a huge price for their madness.
No matter how hot the US real estate market is, the rise in housing prices is bound to be limited. Once housing prices reach a point where they can no longer rise, no one will take over these financial derivatives.
In particular, the Federal Reserve raised interest rates 17 times in a row between 2004 and June 2006, raising the federal funds rate from 1% to 5.25%.
The sharp rise in interest rates has increased the burden of mortgage repayments for homebuyers. The U.S. real estate market, which has been booming for more than a decade, has finally reached its peak...
As the lyrics of a song say, "If you eat what's mine, spit it out. If you take what's mine, give it back to me."
Thus, a major economic collapse triggered by subprime mortgages began, which was later called the "subprime mortgage crisis"!
PS: I bow to thank "First Kiss for the Hand" for the 500 reward. Here is a 4,200-word chapter!
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