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Smith
Faculty Opinion Article
The 30
Seconds Outlook
November 1, 2008
“Housing bust x
credit-default swaps = meltdown.”
James R. Haslem, Santa Barbara
lawyer specializing in commercial
lending, real estate, and debt and
lease restructuring.
What are credit-swap swaps and
what can go wrong? Swaps are
financial instruments based on bonds
and loans used to speculate on a
company’s ability to repay debt. The
original idea was to protect
bondholders from default, and if
there is default, to pay the holder
face value in exchange for the
underlying securities. For example,
AIG sold credit-default swap
protection linked to domestic home
loans. Then the housing market
collapsed and the credit ratings of
the underlying home loans with it.
The bottom line for AIG was over $13
billion in collateral calls. Then
the Treasury stepped in.
John A. Haslem
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