A Credit Default Swap requires three companies. A Pension Fund with money to loan; a company that wants to borrow money but is a bad credit risk and an Insurer who “guarantees” the loan will be paid or they will pay the loan back to the pension fund.
Pension Rules prohibit loans unless they are made to a complany with a top credit rating. To get around the rule the Pension Fund goes to a company with a top credit rating and ask them to “insure” the loan in case the company that is getting the loan def.
starts when a Pension Plan wants to loan money to a bad credit risk company. The Pension Plan can only loan money to a good credit risk so they get a company with a good credit risk to “insure” the loan. The loan can be called a good risk because it is insured b a good compaln. Many “Credit Default Swaps” were just Insurance Fraud. Here’s how the scam worked. Pension money had to be invested in triple A securities so it was not permitted to be loaned to, lets say, Clipem Corp, a “B” rated company. To get around that Pension money was insured by say, AIG, a triple A rated company so the pension fund could claim the loan was a triple A rated asset. The insurance could could also be covered by any triple A rated Bank, Hedge Fund, Insurance Company or any triple A rated entity, even a plain old corporation, as long as it was rated high enough by Moody’s, which is another element in the scheme.
AIG did not put up any assets to sell the insurance. That’s Insurance Fraud, the inability to insure what the premiums covered. When the loans went into default, the pension plan asked for the insurance from AIG but AIG sold more insurance than the company was worth so it went bankrupt. That meant the pension plan could not collect from Clipem Corp or the insuring company so the pension funds were lost. When the Federal Government bailed out the Pension Plan or the Insurance Company it used citizen money to do it. Citizen… that’s you.
Instead of a federal bailout there should have been investigations and prosecutions by the state and federal Attorney’s General. The government became a co-conspiritor in covering up the frauds.
For a more detailed explanation check out KahnAcademy but remember it’s just Insurance Fraud that’s been covered up by the Federal Government and the media.
Bush, Obama, Pelosi, Reid and the Fed propped up the credit default insurers or the pension funds so the pensions did not take the loss.
And that’s why the people now have to pay for the bad loans.