Not those credit default swaps again…

Credit swaps and the Credit Suisse drama, explained in brief.

Singdhi Sokpo

Shares in the Swiss banking giant Credit Suisse have gone on a wild ride, following rumors about liquidity challenges that sent its credit default swaps surging.

What are credit default swaps?

Glad you asked. They’re financial contracts that work kinda like insurance:

  • Party A lends money to Party B, and then pays Party C for insurance in case Party B defaults, thus “swapping” the risk.
  • Speculators can trade them like cards, buying swaps on companies they think are in trouble.

The Big Short examined the role of these swaps in the 2008 financial crisis when sellers were undercapitalized, borrowers defaulted, and the market collapsed.

Is this happening with Suisse?

It appears not. (At least for now.) The bank reassured its finances, citing $100B to cover losses and ~$238B in liquid assets.

“I trust that you are not confusing our day-to-day stock price performance with… the liquidity position of the bank,” the CEO said in a staff memo.

The stock closed up 2.3% yesterday.

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