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$45.5 trillion worth of belief

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By Bill Sharon February 18, 2008

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The New York Times reported Feb. 17 that there are $45.5 trillion of credit default swaps currently outstanding in the marketplace. For starters, that number is twice the value of the U.S. stock market. As most of us don’t have much of an idea of what these financial instruments are, the following example may help to illustrate:

Let’s say that you are 50 pounds overweight and your company wants to help you get in shape. They tell you that they will pay you $100 a pound at the end of 10 months, $5,000 if you can lose all the weight by then. You accept the challenge, but you want your money now to invest in a treadmill, weights and the added supplements and organic food that you need to achieve the goal. You go to the bank and take out a 10 month loan at 10 percent interest and off you go on your weight loss program. The bank, being less sure that you will actually lose the weight, buys a credit default swap (an insurance policy) for the face value of your loan from a third party â€" Investor A.

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