Episode 67: What are Credit Default Swaps and how did they contribute to the GFC?

This week Joel and Louis introduces Huw Davies the new Lead Investment Analyst and Trader at United Global Capital, formally of HSBC London, Deutsche Bank London and Morgan Stanley. In this episode we delve into Huw’s experience working within the Over-The-Counter (OTC) derivatives team at the pinnacle of the Credit Default Swaps (CDS) market right before the GFC in 2008. Joel discusses the latest Labour Party dissection of it’s loss in the election this year. Louis gives us a run down of how to identify differences in personalities and mindsets and the reasons we should utilise it to achieve more effective outcomes especially in a team environment.

A definition: Credit Default Swaps

Most securities are traded on an exchange, however OTC securities are traded between two parties (banks) rather than a broker. CDS is a type of credit derivative that provides the buyer with protection against default and other risks. The buyer of the CDS makes periodic payments to the seller until the credit maturity debt. In that agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.

This Week’s Investor Exchange Round Table Covered:

Have you ever wondered about how the Global Financial Crisis (GFC) in 2008 came about? Huw gives us a crash course on Credit Default Swaps (CDS’s), how it operated, the parties involved and what life was like from an insider’s point of view before, during and after the GFC. Huw, Louis and Joel expands on the topic using examples from the Oscar-nominated film and bestseller novel “The Big Short” to describe the relationship between investment banks, mortgage issuers, credit rating agencies as well as interest rate rises that lead to the notional value of CDS’s in 2007 ($62.2 trillion) to rise above the total Gross Domestic Product (GDP) of all countries in the world in 2008 ($60 trillion). This means that much of the value traded in this market was not in providing insurance against defaults and other risks but in the speculation of the CDS within the market and the consequences are discussed further within this episode.

Joel discusses the dissection of the Labour Party loss in the election this year. Labour has now complete their review and according to Labour itself it must cull it’s policies, embrace an economic growth agenda, rebuildĀ  bridges with business and reconnect with blue collar workers if it has any chance of winning in the next election. He discusses the “fear factors” within the election and explained how Liberal utilised it to their advantage. In a general market update, Joel opens with progress that is taking place for the US and China trade tariffs and the potential it holds for the stock markets.

Louis continues his discussion on the psychology of managing outcomes. He compares the mindset of a big picture person and a detail-oriented person and how you can use their strengths to work effectively within a team. He explains the theory that recognition and utilisation of individual strengths can create a complementary relationship between diverse individuals that can lead to highly effective outcomes.

You Cannot Be Serious:

  • A British tradesman who won almost $1.78m AUD had to thank an anonymous shopper who let him jump the queue before he won the lucky dip.
  • A University in Alaska allows for people to pay their parking fines with peanut butter and jelly sandwiches to combat student hunger.
  • Several attendees of a funeral in Germany experienced nausea and required medical treatment as an employee accidentally served a marijuana laced cake baked by their 18 year old daughter.

Listener Questions:

Write in to get your investment and wealth management questions answered by Joel, Brett and Louis.

Ask a Question: https://theinvestorexchange.com.au/ask/

Join the Conversation: fb.me/theinvestorexchange