FIN 401- CDS notes - Credit Default Swaps were created in...

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Credit Default Swaps were created in the mid-1990s as a means to transfer credit exposure for commercial loans and to free up regulatory capital in commercial banks. When parties entered into CDS, a commercial bank shifted the risk of default to a third- party and this shifted risk did not count against their regulatory capital requirements (Credit Default Swaps: From Protection To Speculation par 5). In the mid 1990’s, there were about $100 billion worth of CDS in the market being sold for corporate and municipal bonds, in 2000 the CDS market was a roughly $900 billion, and by 2008 the market worth of CDS was estimated to be $50 trillion. The reason for such an enormous growth in a short period of time was because Swaps don’t have any regulatory control. They don’t go though clearing-house or central exchange such as the Securities Exchange Commission to keep track of how many bets or being placed and for how much. Not to mention how any of these transactions were going to be paid off. Back in the early 1900’s, there were Bucket Shops, which were essentially gambling rings where you could place side bet on stocks and commodities.
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