00:00Here goes. A person buys a house. I know this is a barn, but again, creative license. So the
00:07homeowner gets a mortgage from the bank and uses it to buy the house. The homeowner pays the bank
00:14dutifully every month. A little principal, a little interest, a little principal, a little interest.
00:22Now the bank might start to get a little antsy because this homeowner's credit might not be so
00:28great. She might lose her job. She might stop paying on the loan at some point, and the bank
00:33wants to make sure they get their money. So here's where an insurance company or other large financial
00:39institution might step in and say, hey there, bank. How about if we sell you this credit default swap?
00:46If Susie homeowner defaults on her mortgage, we'll guarantee to pay it off ourselves. Well,
00:53that sounds great to the bank, so they make the deal. And now when the homeowner makes her mortgage,
00:58payment each month, the bank gives a little bit of the interest to the insurance company in payment
01:05for the credit default swaps guarantee. The bank's profit is a little bit lower, but that's okay
01:11because their risk is lower too. So what could possibly go wrong here? Well, what if there were
01:20trillions of dollars in credit default swap arrangements covering all kinds of bonds and other debt?
01:26And what if just a few giant financial firms were on the hook for all that money? What if they didn't
01:34have enough capital set aside to cover themselves if the economy fell apart? And then what if the
01:41economy fell apart? Of course, that's exactly what happened in 2008. And of course, the American
01:49taxpayer stepped in with trillions in cash to keep those giant financial firms afloat.
01:56And what of our intrepid homeowner? Millions of them did lose their jobs, got foreclosed on, lost their
02:05homes, and got accused of being irresponsible for buying a big house and taking on a big loan.
02:11This is a problem that still has not been fixed.
02:15This is a problem that still has not been fixed.
