What is a Credit Default Swap?

ByPrimary Researcher

Executive Summary

  • The CDO is unregulated insurance for mortgage backed securities.

Introduction

CDOs are a type of unregulated insurance on mortgage backed securities. They were deliberately not called “insurance” so that they could bypass regulation. AIG kept no reserves to cover losses and hence when the mortgage-backed securities that were not what they were rated by Moodys and Standard and Poor’s went bad in 2007 to 2008, AIG had to be bailed out as it could not pay on the insurance it had written.