How do Hedge funds profit from Credit Default Swaps?
The idea of a credit default swap was something like insurance. If you as a business owned bonds or stock in a company and you thought it was likely to fail, you could purchase a credit default swap for a certain percentage of the stake you had annually. If the company did indeed fail, the company you paid would buy your now worthless stocks/bonds for the value they were worth when you entered into the arrangement. The problem arose when people like AIG would agree to protect someone who didn’t actually own any stake in the company at all. AIG would get some money from these less-than-ethical hedge fund managers to protect an investment they didn’t own. At this point it stopped being insurance and became more like gambling with better odds. Imagine someone taking out a life insurance policy on a complete stranger (or company in this case) and then having four other people take out life insurance policies on that same person. Should the person die (or the company collapse), the insuranc
