Reply To: Ways to raise capital for real estate investing…..

[Lance Thompson]

Oh by the way good people,

Anybody who “deeply understands” the movie The Big Short, please don’t hesitate to call me and explain exactly what a credit default swap is & how it works. Don’t get me wrong, I’ve watched that movie dozens of times and I get the general gist of it…..the official definition of a CDS according to Investopedia is as follows:

A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between 2 or more parties…..A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds. A credit default swap is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event.

 

Okay so the big banks created & sold these CDS’s to Dr. Mike Burry, Mike Baum’s group, Charlie Geller & Jamie Shipley in the movie expecting those investors who bought them from them to pay them premiums for the rest of the time they owned them right? I get that. They sold those CDS’s back in 2004 – 2006 thinking there was no way they could ever lose simply because the nation & the world had never ever experienced a real estate crash. But once we had mortgage delinquencies skyrocketing on us in 2007 & 2008, why were the investors who held those CDS’s willing to sell them back to the big banks? If the agreement was that the big banks would pay the buyers of those CDS’s in the event of mass mortgage defaults, why sell them?? Can’t you just collect premiums from the big banks for, I don’t know…..maybe not into perpetuity but maybe for a much longer period of time??

Somebody who understands, please educate me on them when you get a chance.

LT