No UCGal, that’s an ABS, a securitized bundle of subprime personal loans. Very different than a CDS, credit default swap.
It’s a different bundle of junk (probably car loans) but the exact same concept of securitization of mortgage loans that has been occuring for 30+ years.
The CDS were a problem, when the ABSes were bundled into CDOs putting 100lbs rotten apples in a barrel and selling rights to each 1lb, with top tranches being promise the ‘best’ pound. The CDS is the insurance against you getting rotten apples. Much like a a barrel of apples, rot spreads.
And the best part, you could bundle your CDS obligations into a CDO and sell CDS on your CDO of CDSes. Which is what AIG was buying, err, selling? Oh well, they where insuring the CDOs of CDSes.
Now why do that? Simple, make mo’ money! Podunk Casualty could sell $100 Billion of ‘insurance’. Then bundle it, tranche it and buy ‘insurance’ to cover the tranches cheaper than it cost to ‘sell’ the original insurance. Sounds nutz in retrospect, but in reality, requires a bit of a psuedo-black swan to go bad.
Why would AIG do that? Mo’ Money!
How good the apple were alluded to be or how declared the apples were of not being examined at all. And the farmers producing the apples are claiming “US Extra Fancy Grade” when the reality is they aren’t even the lowest Utility grade.
And ironically, I suspect the CDOs or the original mortgages didn’t actually perform that bad. The CDOs of CDSes did once the market realized someone missed the rotten apples in the barrel.
