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Originally Posted by striperman36
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Wow, you nearly need a finance degree to understand that.
Based on my understanding, basically what these are is like insurance for the lender. Someone else would agree to pay the loan if it went into default, and in return would get a monthly payment for the liability they were burdened with.
As the lender now had backup if the loan went bad, they could take the capital that government regulations said they needed to protect the loan, and invest it somewhere else.
The problem is, that the regulations are to ensure you can cover a % of loans if they go bad. The credit default swaps allowed a way around this, but the risk is now so obfuscated that nobody really knows where it is.
-spence