What do we guess the next financial disaster will be coming soon to a hedge fund or bank near you? Probably Credit Default Swaps. Suffice to say that investment banks saw an opportunity, hedge funds jumped on board and everyone is making a lot of money. Sound familiar? Yeah, you’ve heard it before and it was called Mortgage Backed Securities. My favorite revelation from the article:
So what started out as a vehicle for hedging ended up giving investors a cheap, easy way to wager on almost any event in the credit markets. In effect, credit default swaps became the world’s largest casino.
Yep. You got it. It’s just a big casino making financial bets. Oh, one difference between a casino and CDS. Casinos are regulated by the government. CDS are not.