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credit default swap
(FINANCE) financial instrument in which buyer is someone who needs insurance against the possibility that a borrower will default on a loan. In that case, the counterparty is whoever receives the CDS premiums, and pays out in the event of default.
WHY IT'S BAD
Loans are usually made by either commercial banks (in which a loan officer is supposed to make a professional assessment of risk of default before handing over the money), or by investment banks (which underwrite securities like bonds). If the borrower has a high risk of default, then the loan should not be made--period.
Credit default swaps were a stupid method of supposedly turning a bad loan into a "risky" (and potentially high-yield) "investment"; they were in reality a strategy for fraud. Since portfolio managers knew they were bundling securitized loans that contained mostly crap, they would arrange credit default swaps and cash in when the borrowers defaulted.
WHY IT'S BAD
Loans are usually made by either commercial banks (in which a loan officer is supposed to make a professional assessment of risk of default before handing over the money), or by investment banks (which underwrite securities like bonds). If the borrower has a high risk of default, then the loan should not be made--period.
Credit default swaps were a stupid method of supposedly turning a bad loan into a "risky" (and potentially high-yield) "investment"; they were in reality a strategy for fraud. Since portfolio managers knew they were bundling securitized loans that contained mostly crap, they would arrange credit default swaps and cash in when the borrowers defaulted.
What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a "credit default swap," and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices.
{Newsweek, "The Monster That Ate Wall Street," 27 Sep 2008}
{Newsweek, "The Monster That Ate Wall Street," 27 Sep 2008}
credit default swap by Abu Yahya July 17, 2010
More from Urban Dictionary
Soul digger
A man who dates women with the sole purpose of exploiting their time, energy, and labor while he sucks the joy and happiness from their lives.
"That guy's a soul digger. He'll expect you to work full time, but you'll be doing all the cooking, cleaning, laundry, shopping, and childcare while he plays video games or watches TV."
Soul digger by anonymous November 11, 2026
Word of the Day on November 11, 2026
pod person
A person pretending to be something they aren't, or an impostor. This is inferred because of the old alien movies where alien pods appear on earth and the "pod people" dispose of the humans and slowly reproduce the bodies, pretending to be humans.
The pod person was pretending to be my father, but I knew that he was an alien when he acted differently than my father ever would have.
pod person by Christopher M. May 9, 2005
Word of the Day on November 10, 2026
dead drop
A dead drop is a location used to secretly pass items between two people, without requiring them to meet.
Spies have been known to use dead drops, using various techniques to hide the items and to signal that the drop has been made. Drug dealers use this as well.
A common place is to duct tape the item to the underside of a toilet cover in a public restroom.
A signal is sometimes used as well to indicate there is something to pickup, like a pile of stones in a certain formation. After checking the drop the signal is removed.
Spies have been known to use dead drops, using various techniques to hide the items and to signal that the drop has been made. Drug dealers use this as well.
A common place is to duct tape the item to the underside of a toilet cover in a public restroom.
A signal is sometimes used as well to indicate there is something to pickup, like a pile of stones in a certain formation. After checking the drop the signal is removed.
"The dead drop is the restroom toilet at the Gulf station at the corner of Commercial Ave. and Georges Rd."
dead drop by rubberroom July 23, 2008
Word of the Day on November 9, 2026