Last week, Scott Lewis SLOP’d about the San Diego County pension system’s sizable investment in D.E. Shaw, a hedge fund that is heavily involved in so-called "credit default swaps."
If you’re like most people, you probably started to lose consciousness by the end of that last sentence. But stay awake if you can. Because it turns out that San Diego’s fortunes are very much tied to these arcane financial instruments
Credit default swaps, or CDSs, are basically a form of insurance that lenders of money purchase in order to ensure that they will be paid back. That, at least, is the idea. Let’s examine a hypothetical, certainly oversimplified, but hopefully illustrative day in the life of a CDS.