Brought to you by the reinvented two thousand twelve Camray. It's ready. Are you welcome to Stuff you should know from house Stuff Works dot com? Hey, and welcome to the podcast. I'm Josh Clark and guess who's with me? M Ronald McDonald? Yes, I met Ronald McDonald. That my cousin's ride tame birthday already? Really? Yeah, it's pretty cool. No, weird, that's the first thing that came into my head. I guess it means I'm hungry. I guess, so are you hungry? Did you eat today? This is gonna be a fun one. Shock you're talking about credit to fault swaps. I know we're gonna try to make it sexy. Yes? Should I go ahead and get the caveat here? If you want? Go ahead? I just want folks to know we usually Josh and I do a lot of prep work and both have a pretty good understanding. But I'm not ashamed to admit that I didn't quite understand this one, and so it's pretty thick. Yeah, it might be a little different today Josh is going to be teaching me along with you. So, okay, are you prepared as prepared as I? Can I appreciate you dressing like a little school girl today to really kind of complete everything round it out? Um? Okay, so well, let me give you an analogy, all right, Okay, So, Chuck, Imagine if I went to your health insurance provider, right and said, hey, I want to buy Chuck policy okay, and they said okay, and they sold it to me, and you would be in charge of that policy. I would own the policy, so I'd be I'd be accepting monthly payments from you. Everything would be fine. I'd be probably running around trying to keep you out of accidents that kind of thing. But if you did get into an accident, I would be on the hook to pay your medical expenses, right, you bet you would be. You and I are both fully aware that I don't have the money to pay your medical expenses. So basically what would happen is I'd pay as much as I could until I bankrupted myself, and then you'd be on the hook to pay your medical expenses. Right, I get that. So you'd be in trouble, it bankrupt you and we'd both be up the creek, I understand. So are you with me? So? Are that makes sense now? Imagine if you owned two other people's life or health insurance policies just like I owned yours. Okay, sure, Now let's say you that accident you got into was a three car pile up, just in a mind boggling coincidence with the other two people whose health insurance policies you owned with you. So now all of a sudden, you guys are all in an accident, all need healthcare, and nobody has the money to pay out. I can't pay yours, and you have your own problems, so you can't pay the other two peoples. So imagine if this just keeps going on and on and on and on in this infinite car pile up, and everybody owns everybody else's insurance policy but nobody can pay. Okay, seems it does. It is awful. It's kind of nightmares. Right. So the good thing is that this can't happen because health insurance is a heavily regulated industry. So you've got um you have federal inspectors who can go to a health inst and say, let me see your books. I want to make sure you can cover every policy that you have. Right, did they do that? Yeah? And what's more, they can't sell your insurance policy to anybody, right, okay. Right, with credit default swaps, all the all the good things that keep health insurance from going pear shapes are not present, although they are pretty much insurance policies on debt. Okay, okay, this is where I start to get a little fuzzy. I understand it does get a little fuzzy at this point. It's a bit of an abstract. Um, it's a bit abstract for me. It is, it's insane. You have to be a a genuinely savvy person and possibly a bit evil to be able to really accurately trade or make money in credit default swaps. But you don't have to be evil to describe them to people in podcast land. No, No, you just have to read them, read the article several times, and write it too. It doesn't hurt to write it several times, and it was still a little bit maybe you have to write it writing it out. Um, okay, So let me give you a little bit background credit default swaps for these financial instruments that came out of the late nineties. Right, it's a derivative. It is a derivative, and a derivative is a derivative. I do know this. It's a financial instrument, UH that has a value based on the value of another financial instrument. Right. So let's say you're trading in oil futures, right, UM that actually the value of that future is based on the value of oil. It has an actual value, right. UM. With this, this would be based on UH future and oil future. Right. So it doesn't have its own value. Its values based on the value of something else. So let's say you bought a bunch of oil futures and you were worried that the price of oil was going to go down, right, and so you'd be getting the oil cheaper oil for than what you paid for it. You would you would lose money. You could I'm not sure if you could or not, But let's say theoretically you could buy a credit default swap to cover that eventuality. So it's like insurance. That's exactly what it is. So in the nineties, UM, they started issuing these things on municipal bonds, which are or about as safe as it gets. UM. Almost every city except for probably Detroit, has a triple a UM credit rating. Right. So a municipal bond is a loan made to a city to finance a project. That's why it's a little more stable than your average situation. Right, And the city can tax its citizens to pay off its debts, which is one of the reasons why they're so stable and reliable and credit worthy. Right, gotcha. So the thing is, like all these banks that are issuing these policies are saying, you know what, we're making just tons of extra income because they're they're um selling these credit default swaps to people who are loaning money to cities. The cities are definitely paying it back, so there's no there's no um default on the loan, and so the banks are just can inect your money. So these things started to take off like a rocket. Who's the day, That's what I'm confused about. That's the bank they actually issue these. Okay, so let's say let's say that, um, I have a bunch of money and Atlanta needs to repay four hundred so I buy a bunch of city bonds, a bunch of municipal bonds, which are basically it's a city issuing debt. I give them a bunch of money and then give me a bond and return to hang on too, and I'll earn like slow, steady, small interest. Right, I would buy a credit default swap from a bank, right to say, if this city doesn't pay me back, then I can cash in this credit default swap, this insurance policy against the against the the the loan I gave the city, Okay, and then I'll actually make more money because like a life insurance policy, it has it's worth more than say the actual loan. Okay, se coming into focus, Okay, is it? Is it? Okay, we should we should talk together before we do these ruin everything. Yeah, I guess you're right. Yeah, so um okay, so the so the It made a huge source of extra income for the banks that were issuing these these insurance policies because no municipality was defaulting on their loans, right, Um, So they started to look for other places where they could sell these things or people they could sell them to, of course, and essentially you can cover any debt whatsoever, um with a credit default swap. Well, that's amazing to me. And I think one of the reasons why it was able to take to take off like this is because they're unregulated. It seems like, you know, greed as always kind of takes hold they're like, hey, if we do it for this, we can do it for this is how it worked. They're wholly and completely to this day unregulated. It's amazing. So, which is why that that scenario that I gave you at the beginning about your health insurance policy, that's dead on with credit default swaps. So think about this. Say a bank issues, um, a credit default obligation to somebody who has um created debt. Right Um. That that guy who loaned money to the city for that road project. Okay, so he buys a credit default sat. Now there's two players in this one. Really, as far as the insurance policy goes. You've got the bank who has the issuers side of it, and then you've got me, uh, the guy who made the loan to the city, who has the buyer's side of it. And you pay a premium like right um, And then both of the sides of this policy can be sold to anybody at any time who wants to buy them, and neither side needs to notify the other person. Really, what's more, because it's unregulated, Um, if the bank sells it to you, right, so, now you own the issuer portion of my credit default swap. So I'm now making payments to you. You don't have to prove to them at all whether you have the money to cover it. If that, if the city defaults on the loan. This sounds two things. This strikes me. It sounds like la la land, and it sounds like a really bad idea. It is because, Chuck, here's the problem, right if you if we haven't come up with enough problems yet. Um, since it's also since it's unregulated, the way that a credit default swap can be called in if I'm the buyer is through a credit event, and there's certain credit events, one of the big ones bankruptcy. One of them is if the city just says we're not repaying your loan, that would be a credit event, right right, and then that triggers payment problem is since they're unregulated, anybody can dispute whether or not a credit event actually took place, whether the event that the buyer is saying, give me my money over actually was a credit event. So there's mediation, there's lawsuits. Well who did they dispute it to? Though, since there's nobody they take the other person to course, they just start seeing each other. Yes, more litigation, that's exactly what we need. Right. Um. The thing is, it's it's still, like I said, to this day, unregulated. There's actually an independent body of banks and investment houses and other other investors uh and securities analysts I believe, who have come together to form an arbitrating panel for credit default swaps. That's a good thing, right, it is a good thing. But again, it exists outside of the government. So everybody who's involved in the credit default market had to agree, Yes, we'll listen to these people. Their decision is binding. But is that I mean, existing outside the government, and it isn't necessarily a bad thing. No, it isn't. But I think to me, it's just kind of one more point, like where's the SEC. And I actually read that the SEC and the Treasury Department we're encouraging this panel to form, like please go handle this for us because we don't have any teeth whatsoever. Um. So yeah, so that's the problem with being unregulated, right, Well, it sounds like it's right for a nightmare scenario to like, first we're talking about let me let me set the stage for you, okay, okay. In July two thousand seven, you remember the good, heady days of the bubble before at first, okay, the um the subprime mortgage market was valued at. Uh, let's see, I think seven trillion dollars in the US and them in the US. But the US is I think the biggest player in the subprime mortgage market, right, And this is when the subprime mortgage market was still valuable. So seven trillion. Do you know in July two thousand seven, what the credit default swaps market was valued at? I do, but I'm gonna let you say it. Are you ready? Sixty two trillion dollars? That's unbelievable. Do you know what the global g d P was for two thousand and eight? I do, but I'm gonna let you say it. You're ready? Sixty nine trillion dollars? Wow, So it's short of the globe of the global GDP. So basically, if every country in the entire world could suddenly sell off everything, every good in service that produced any year to say some aliens, right, we'd still just we'd have like five trillion dollars left over for the year. It sounds like this is the biggest market of anything in the world. Almost, Yes, yeah, it's I think, So I can't I can't think of anything that that's valued up more than that and it just think about it. This is the the late nineties, So in a decade, this unregulated market went from zero to sixty two trillion. Well, what's amazing is like your references the mortgage crisis, and that's a scenario you can you can track it down to a house eventually, like a physical property. But this is sort of like exist in the ether, So where there's no end of the line, it seems like no, there isn't um, which is why you can say no credit credit event didn't occure, or no, I'm not gonna pay up, or I don't have the money to pay up. I'm sorry. I was enjoying the monthly payments you're paying me and I really thought you were gonna be okay. But now that you've gone under, I can't. I can't pay you. You know, I can't pay you um the money that I owe you, Right, so what does this us? Well, hold on, let me say one more thing. The whole reason this this market blew up was because it's actually a way to bet on the health of a company. Right, So if you have a bunch of investors who have buyers shares of credit default swaps. Then they're saying, uh, they think that that company is gonna go under because they're paying monthly premiums. But it's on the premise that you um that that company is gonna go under, and there will be a much bigger payout, yes, even more. Um, you can actually short sell a company, driving its value down if you if you own enough shares, or you can borrow enough shares and sell them on a margin. Um. If you have credit default swaps, it'll actually be a bigger payout if you can drive that company into bankruptcy because you've just created a credit event that seeing is unbelievable. Okay, So this is where the world was teetering right now. And in two thousand seven eight um Lehman Brothers actually went down not because of subprime mortgage securities, but because of all the credit default swaps. This huge domino effect was triggered. A bunch of people had credit default swaps on the subprime mortgage securities that they owned, right oops. Indeed, so when the subprime mortgage securities went south, everybody turned to their credit default swaps. I'm like, well, I'm I'm glad I have these. Now, wait a minute, who owns my policy? Because there's no paper trail whatsoever you have, you track down who owns it and then hope that they have the money to pay you. All these banks were finding out the people that own their their um their insurers policy, uh, didn't have the money to pay them. The problem is is when you're writing your balance sheet. If you have a major loss, but you have a credit default swap that covers it and it pays out, you're fine and you're staying in the red and you probably actually made a little bit of money. If you have a major loss and there's no credit default swap to cover it can't be covered, then that's when your balance she goes into I'm sorry, into the red, right, which is the bad one? Right right? Yeah, I get that. Okay, so um, that's what happened with Lehman Brothers. That's why A I G got all of that bail out money because they had a bunch of credit to fault swaps. And now there's this panel that I talked about, the independent panel that's actually gotten the value of the market down to about twenty trillion. I wonder, however, dependent Well, yeah, I think it's probably all revolving door and stuff like they if they haven't held public office in the last couple of years, they will work for Goldman Sax. I think Goldmen Sex is a major player in that panel. Yeah, well this sounds like I get it now, do you really? Yeah? Yeah? Yeah, alright, so thanks for that, but thank you. Where does this lead? I mean, is this uh, something's got to happen at some point. It seems like or else it's setting us up for even more failure economically, right, No, no, no, no, most definitely. I think it's just um, it seems like the credit of fault swaps market is being tamed. Like I said, we've gone from sixty two trillion to twenty trillion in just like two years. But I think it's symptomatic of the lack of regulation and oversight that that we've had. We have the SEC, but they don't have any teeth in the teeth that they do have or dole and and can basically just gum butter, you know. Um. And then the fact that there's a whole over the counter markets that are allowed to get this big without any regulation whatsoever. I think it seems there seems to be a pattern, Chuck, like the Great Depression was the result of complete and total lack of oversight and regulation mixed with unbridled Greek. Right, So then we come up with things like the SEC, the FDA, all these things that all these regulatory bodies that came out of the Great Depression in the in the crash to prevent it from happening again. Then we got lazy, so then this happened again. There's going to be more regulation. The problem is people always say, you know, pro business people always a you know, regulation strangles business. I disagree. I think the whole point to um capitalism is to make as much money as you can as fast as you can write, which means that no matter how many roadblocks the government throws up, all it's doing is presenting challenges for very clever, greedy people, and they'll always find a loophole always. Yeah. So I think that's where it's leading us to more regulation. But I don't think there's ever going to be a saving grace where nothing like this ever happens again. Well, when you're talking now trillion dollars, that's still such a massive amount that it's it's kind of frightening to think about it is, but it's doable. I think if the US, Japan, and the UK got together and sold everything off in a fire cell, we could cover it. Yeah all right, well I get it. Thanks good, I'm feeling pretty good about myself. Were default swaps? Ahoy? Yeah, this this was sort of like some math kind of just goes so far above my head. I can read it and read it and read it and it still just doesn't sink in. I'm like that with the algebra. I get geometry, but not algebra. We should do a podcast on it and fumble our way through that so we could. Yeah, yeah, so there you have. It's awesome. All right, Are we still plugging things anymore? Sure? Josh. We'll just give a quickie plug to the blog. Alright, blog and stuff you should know blog that we write um once a day each and it's on the right side of the homepage. Very nice and it's been enjoyable and that's all we need to say. Yes, that is it? So then what does that mean? Chuck's listener mail time? It is indeed, And Josh, this one I'm really looking forward to reading. Which one is it? This is the I ME incident? We get a lot of these uh for those of you. Obviously you don't know because you don't get a listener mail. We have a lot of people that take us to task on the use of I and me, Josh and I, Josh and me and me and josh I and Josh I seem to get it a lot more than you, though we both do. We Yeah, So if people take us to task and tell us that we're not being a responsible uh with our grammar. And I got this email from Keith and Alton, Illinois, and Keith says, I just want to let you know that as a student of linguistics, I'd like to tell you that in a compound object e g. Send listener mail to Chuck and I slash me, it is totally fine to use whichever pronoun you think sounds better. I've read a link the explanation that justifies the use of eye in a compound object, but I won't bore you with it. My main point is this talk in whatever way it sounds right to you, while keeping in mind that certain non standard usage of words might put off some snooty pedants. Awesome, Keith, and he did actually send a link. I'm not gonna bore you either. But there was a book by Steven Pinker called The Language Instinct, and uh, I mean he sent me a whole page where the guy basically breaks it down and in the end, I'll just read the one sentence Stephen Pinker. Really yeah, Ok, do you know him? I just heard of him last night for the first time. Really yeah, it's odd. How about that? So? Uh, The last sentence of his thing says, by the logic of grammar, the pronoun is free to have any case it wants. I agree. I think the point of communication is to get your get your idea across to somebody exactly. And I think interchanging iron me so gets the point across. Yeah. I think if you can get your point across with grunts and hand gestures or if that's proper communication. Right. And when it comes down to it, the name of this show is not grammar. You should know, right. And we are always the first ones to say we're not you know, we're not perfect, so uh layoff. Yeah a matter of fact, Keith, go ahead and send us your your address because we're gonna send you a T shirt. My man, that was cool, Thanks for coming to the rescue. Yeah, Keith, shirt size and address, and well, thank you for having our backs on this. So if you want to have our backs, if you want to take us the task, if you're a grammar Nazi or a well whatever, how about we re record that part ready. So if you want to have our backs or you want to take us to task like the grammar Nazis that rode in Um, just go ahead and send us an email to stuff podcast at how stuff works dot com for more on this and thousands of other topics. Does it how stuff works dot com m brought to you by the reinvented two thousand twelve camera. It's ready, are you

Brought to you by the reinvented two thousand twelve Camray. It's ready. Are you welcome to Stuff you should know from house Stuff Works dot com? Hey, and welcome to the podcast. I'm Josh Clark and guess who's with me? M Ronald McDonald? Yes, I met Ronald McDonald. That my cousin's ride tame birthday already? Really? Yeah, it's pretty cool. No, weird, that's the first thing that came into my head. I guess it means I'm hungry. I guess, so are you hungry? Did you eat today? This is gonna be a fun one. Shock you're talking about credit to fault swaps. I know we're gonna try to make it sexy. Yes? Should I go ahead and get the caveat here? If you want? Go ahead? I just want folks to know we usually Josh and I do a lot of prep work and both have a pretty good understanding. But I'm not ashamed to admit that I didn't quite understand this one, and so it's pretty thick. Yeah, it might be a little different today Josh is going to be teaching me along with you. So, okay, are you prepared as prepared as I? Can I appreciate you dressing like a little school girl today to really kind of complete everything round it out? Um? Okay, so well, let me give you an analogy, all right, Okay, So, Chuck, Imagine if I went to your health insurance provider, right and said, hey, I want to buy Chuck policy okay, and they said okay, and they sold it to me, and you would be in charge of that policy. I would own the policy, so I'd be I'd be accepting monthly payments from you. Everything would be fine. I'd be probably running around trying to keep you out of accidents that kind of thing. But if you did get into an accident, I would be on the hook to pay your medical expenses, right, you bet you would be. You and I are both fully aware that I don't have the money to pay your medical expenses. So basically what would happen is I'd pay as much as I could until I bankrupted myself, and then you'd be on the hook to pay your medical expenses. Right, I get that. So you'd be in trouble, it bankrupt you and we'd both be up the creek, I understand. So are you with me? So? Are that makes sense now? Imagine if you owned two other people's life or health insurance policies just like I owned yours. Okay, sure, Now let's say you that accident you got into was a three car pile up, just in a mind boggling coincidence with the other two people whose health insurance policies you owned with you. So now all of a sudden, you guys are all in an accident, all need healthcare, and nobody has the money to pay out. I can't pay yours, and you have your own problems, so you can't pay the other two peoples. So imagine if this just keeps going on and on and on and on in this infinite car pile up, and everybody owns everybody else's insurance policy but nobody can pay. Okay, seems it does. It is awful. It's kind of nightmares. Right. So the good thing is that this can't happen because health insurance is a heavily regulated industry. So you've got um you have federal inspectors who can go to a health inst and say, let me see your books. I want to make sure you can cover every policy that you have. Right, did they do that? Yeah? And what's more, they can't sell your insurance policy to anybody, right, okay. Right, with credit default swaps, all the all the good things that keep health insurance from going pear shapes are not present, although they are pretty much insurance policies on debt. Okay, okay, this is where I start to get a little fuzzy. I understand it does get a little fuzzy at this point. It's a bit of an abstract. Um, it's a bit abstract for me. It is, it's insane. You have to be a a genuinely savvy person and possibly a bit evil to be able to really accurately trade or make money in credit default swaps. But you don't have to be evil to describe them to people in podcast land. No, No, you just have to read them, read the article several times, and write it too. It doesn't hurt to write it several times, and it was still a little bit maybe you have to write it writing it out. Um, okay, So let me give you a little bit background credit default swaps for these financial instruments that came out of the late nineties. Right, it's a derivative. It is a derivative, and a derivative is a derivative. I do know this. It's a financial instrument, UH that has a value based on the value of another financial instrument. Right. So let's say you're trading in oil futures, right, UM that actually the value of that future is based on the value of oil. It has an actual value, right. UM. With this, this would be based on UH future and oil future. Right. So it doesn't have its own value. Its values based on the value of something else. So let's say you bought a bunch of oil futures and you were worried that the price of oil was going to go down, right, and so you'd be getting the oil cheaper oil for than what you paid for it. You would you would lose money. You could I'm not sure if you could or not, But let's say theoretically you could buy a credit default swap to cover that eventuality. So it's like insurance. That's exactly what it is. So in the nineties, UM, they started issuing these things on municipal bonds, which are or about as safe as it gets. UM. Almost every city except for probably Detroit, has a triple a UM credit rating. Right. So a municipal bond is a loan made to a city to finance a project. That's why it's a little more stable than your average situation. Right, And the city can tax its citizens to pay off its debts, which is one of the reasons why they're so stable and reliable and credit worthy. Right, gotcha. So the thing is, like all these banks that are issuing these policies are saying, you know what, we're making just tons of extra income because they're they're um selling these credit default swaps to people who are loaning money to cities. The cities are definitely paying it back, so there's no there's no um default on the loan, and so the banks are just can inect your money. So these things started to take off like a rocket. Who's the day, That's what I'm confused about. That's the bank they actually issue these. Okay, so let's say let's say that, um, I have a bunch of money and Atlanta needs to repay four hundred so I buy a bunch of city bonds, a bunch of municipal bonds, which are basically it's a city issuing debt. I give them a bunch of money and then give me a bond and return to hang on too, and I'll earn like slow, steady, small interest. Right, I would buy a credit default swap from a bank, right to say, if this city doesn't pay me back, then I can cash in this credit default swap, this insurance policy against the against the the the loan I gave the city, Okay, and then I'll actually make more money because like a life insurance policy, it has it's worth more than say the actual loan. Okay, se coming into focus, Okay, is it? Is it? Okay, we should we should talk together before we do these ruin everything. Yeah, I guess you're right. Yeah, so um okay, so the so the It made a huge source of extra income for the banks that were issuing these these insurance policies because no municipality was defaulting on their loans, right, Um, So they started to look for other places where they could sell these things or people they could sell them to, of course, and essentially you can cover any debt whatsoever, um with a credit default swap. Well, that's amazing to me. And I think one of the reasons why it was able to take to take off like this is because they're unregulated. It seems like, you know, greed as always kind of takes hold they're like, hey, if we do it for this, we can do it for this is how it worked. They're wholly and completely to this day unregulated. It's amazing. So, which is why that that scenario that I gave you at the beginning about your health insurance policy, that's dead on with credit default swaps. So think about this. Say a bank issues, um, a credit default obligation to somebody who has um created debt. Right Um. That that guy who loaned money to the city for that road project. Okay, so he buys a credit default sat. Now there's two players in this one. Really, as far as the insurance policy goes. You've got the bank who has the issuers side of it, and then you've got me, uh, the guy who made the loan to the city, who has the buyer's side of it. And you pay a premium like right um, And then both of the sides of this policy can be sold to anybody at any time who wants to buy them, and neither side needs to notify the other person. Really, what's more, because it's unregulated, Um, if the bank sells it to you, right, so, now you own the issuer portion of my credit default swap. So I'm now making payments to you. You don't have to prove to them at all whether you have the money to cover it. If that, if the city defaults on the loan. This sounds two things. This strikes me. It sounds like la la land, and it sounds like a really bad idea. It is because, Chuck, here's the problem, right if you if we haven't come up with enough problems yet. Um, since it's also since it's unregulated, the way that a credit default swap can be called in if I'm the buyer is through a credit event, and there's certain credit events, one of the big ones bankruptcy. One of them is if the city just says we're not repaying your loan, that would be a credit event, right right, and then that triggers payment problem is since they're unregulated, anybody can dispute whether or not a credit event actually took place, whether the event that the buyer is saying, give me my money over actually was a credit event. So there's mediation, there's lawsuits. Well who did they dispute it to? Though, since there's nobody they take the other person to course, they just start seeing each other. Yes, more litigation, that's exactly what we need. Right. Um. The thing is, it's it's still, like I said, to this day, unregulated. There's actually an independent body of banks and investment houses and other other investors uh and securities analysts I believe, who have come together to form an arbitrating panel for credit default swaps. That's a good thing, right, it is a good thing. But again, it exists outside of the government. So everybody who's involved in the credit default market had to agree, Yes, we'll listen to these people. Their decision is binding. But is that I mean, existing outside the government, and it isn't necessarily a bad thing. No, it isn't. But I think to me, it's just kind of one more point, like where's the SEC. And I actually read that the SEC and the Treasury Department we're encouraging this panel to form, like please go handle this for us because we don't have any teeth whatsoever. Um. So yeah, so that's the problem with being unregulated, right, Well, it sounds like it's right for a nightmare scenario to like, first we're talking about let me let me set the stage for you, okay, okay. In July two thousand seven, you remember the good, heady days of the bubble before at first, okay, the um the subprime mortgage market was valued at. Uh, let's see, I think seven trillion dollars in the US and them in the US. But the US is I think the biggest player in the subprime mortgage market, right, And this is when the subprime mortgage market was still valuable. So seven trillion. Do you know in July two thousand seven, what the credit default swaps market was valued at? I do, but I'm gonna let you say it. Are you ready? Sixty two trillion dollars? That's unbelievable. Do you know what the global g d P was for two thousand and eight? I do, but I'm gonna let you say it. You're ready? Sixty nine trillion dollars? Wow, So it's short of the globe of the global GDP. So basically, if every country in the entire world could suddenly sell off everything, every good in service that produced any year to say some aliens, right, we'd still just we'd have like five trillion dollars left over for the year. It sounds like this is the biggest market of anything in the world. Almost, Yes, yeah, it's I think, So I can't I can't think of anything that that's valued up more than that and it just think about it. This is the the late nineties, So in a decade, this unregulated market went from zero to sixty two trillion. Well, what's amazing is like your references the mortgage crisis, and that's a scenario you can you can track it down to a house eventually, like a physical property. But this is sort of like exist in the ether, So where there's no end of the line, it seems like no, there isn't um, which is why you can say no credit credit event didn't occure, or no, I'm not gonna pay up, or I don't have the money to pay up. I'm sorry. I was enjoying the monthly payments you're paying me and I really thought you were gonna be okay. But now that you've gone under, I can't. I can't pay you. You know, I can't pay you um the money that I owe you, Right, so what does this us? Well, hold on, let me say one more thing. The whole reason this this market blew up was because it's actually a way to bet on the health of a company. Right, So if you have a bunch of investors who have buyers shares of credit default swaps. Then they're saying, uh, they think that that company is gonna go under because they're paying monthly premiums. But it's on the premise that you um that that company is gonna go under, and there will be a much bigger payout, yes, even more. Um, you can actually short sell a company, driving its value down if you if you own enough shares, or you can borrow enough shares and sell them on a margin. Um. If you have credit default swaps, it'll actually be a bigger payout if you can drive that company into bankruptcy because you've just created a credit event that seeing is unbelievable. Okay, So this is where the world was teetering right now. And in two thousand seven eight um Lehman Brothers actually went down not because of subprime mortgage securities, but because of all the credit default swaps. This huge domino effect was triggered. A bunch of people had credit default swaps on the subprime mortgage securities that they owned, right oops. Indeed, so when the subprime mortgage securities went south, everybody turned to their credit default swaps. I'm like, well, I'm I'm glad I have these. Now, wait a minute, who owns my policy? Because there's no paper trail whatsoever you have, you track down who owns it and then hope that they have the money to pay you. All these banks were finding out the people that own their their um their insurers policy, uh, didn't have the money to pay them. The problem is is when you're writing your balance sheet. If you have a major loss, but you have a credit default swap that covers it and it pays out, you're fine and you're staying in the red and you probably actually made a little bit of money. If you have a major loss and there's no credit default swap to cover it can't be covered, then that's when your balance she goes into I'm sorry, into the red, right, which is the bad one? Right right? Yeah, I get that. Okay, so um, that's what happened with Lehman Brothers. That's why A I G got all of that bail out money because they had a bunch of credit to fault swaps. And now there's this panel that I talked about, the independent panel that's actually gotten the value of the market down to about twenty trillion. I wonder, however, dependent Well, yeah, I think it's probably all revolving door and stuff like they if they haven't held public office in the last couple of years, they will work for Goldman Sax. I think Goldmen Sex is a major player in that panel. Yeah, well this sounds like I get it now, do you really? Yeah? Yeah? Yeah, alright, so thanks for that, but thank you. Where does this lead? I mean, is this uh, something's got to happen at some point. It seems like or else it's setting us up for even more failure economically, right, No, no, no, no, most definitely. I think it's just um, it seems like the credit of fault swaps market is being tamed. Like I said, we've gone from sixty two trillion to twenty trillion in just like two years. But I think it's symptomatic of the lack of regulation and oversight that that we've had. We have the SEC, but they don't have any teeth in the teeth that they do have or dole and and can basically just gum butter, you know. Um. And then the fact that there's a whole over the counter markets that are allowed to get this big without any regulation whatsoever. I think it seems there seems to be a pattern, Chuck, like the Great Depression was the result of complete and total lack of oversight and regulation mixed with unbridled Greek. Right, So then we come up with things like the SEC, the FDA, all these things that all these regulatory bodies that came out of the Great Depression in the in the crash to prevent it from happening again. Then we got lazy, so then this happened again. There's going to be more regulation. The problem is people always say, you know, pro business people always a you know, regulation strangles business. I disagree. I think the whole point to um capitalism is to make as much money as you can as fast as you can write, which means that no matter how many roadblocks the government throws up, all it's doing is presenting challenges for very clever, greedy people, and they'll always find a loophole always. Yeah. So I think that's where it's leading us to more regulation. But I don't think there's ever going to be a saving grace where nothing like this ever happens again. Well, when you're talking now trillion dollars, that's still such a massive amount that it's it's kind of frightening to think about it is, but it's doable. I think if the US, Japan, and the UK got together and sold everything off in a fire cell, we could cover it. Yeah all right, well I get it. Thanks good, I'm feeling pretty good about myself. Were default swaps? Ahoy? Yeah, this this was sort of like some math kind of just goes so far above my head. I can read it and read it and read it and it still just doesn't sink in. I'm like that with the algebra. I get geometry, but not algebra. We should do a podcast on it and fumble our way through that so we could. Yeah, yeah, so there you have. It's awesome. All right, Are we still plugging things anymore? Sure? Josh. We'll just give a quickie plug to the blog. Alright, blog and stuff you should know blog that we write um once a day each and it's on the right side of the homepage. Very nice and it's been enjoyable and that's all we need to say. Yes, that is it? So then what does that mean? Chuck's listener mail time? It is indeed, And Josh, this one I'm really looking forward to reading. Which one is it? This is the I ME incident? We get a lot of these uh for those of you. Obviously you don't know because you don't get a listener mail. We have a lot of people that take us to task on the use of I and me, Josh and I, Josh and me and me and josh I and Josh I seem to get it a lot more than you, though we both do. We Yeah, So if people take us to task and tell us that we're not being a responsible uh with our grammar. And I got this email from Keith and Alton, Illinois, and Keith says, I just want to let you know that as a student of linguistics, I'd like to tell you that in a compound object e g. Send listener mail to Chuck and I slash me, it is totally fine to use whichever pronoun you think sounds better. I've read a link the explanation that justifies the use of eye in a compound object, but I won't bore you with it. My main point is this talk in whatever way it sounds right to you, while keeping in mind that certain non standard usage of words might put off some snooty pedants. Awesome, Keith, and he did actually send a link. I'm not gonna bore you either. But there was a book by Steven Pinker called The Language Instinct, and uh, I mean he sent me a whole page where the guy basically breaks it down and in the end, I'll just read the one sentence Stephen Pinker. Really yeah, Ok, do you know him? I just heard of him last night for the first time. Really yeah, it's odd. How about that? So? Uh, The last sentence of his thing says, by the logic of grammar, the pronoun is free to have any case it wants. I agree. I think the point of communication is to get your get your idea across to somebody exactly. And I think interchanging iron me so gets the point across. Yeah. I think if you can get your point across with grunts and hand gestures or if that's proper communication. Right. And when it comes down to it, the name of this show is not grammar. You should know, right. And we are always the first ones to say we're not you know, we're not perfect, so uh layoff. Yeah a matter of fact, Keith, go ahead and send us your your address because we're gonna send you a T shirt. My man, that was cool, Thanks for coming to the rescue. Yeah, Keith, shirt size and address, and well, thank you for having our backs on this. So if you want to have our backs, if you want to take us the task, if you're a grammar Nazi or a well whatever, how about we re record that part ready. So if you want to have our backs or you want to take us to task like the grammar Nazis that rode in Um, just go ahead and send us an email to stuff podcast at how stuff works dot com for more on this and thousands of other topics. Does it how stuff works dot com m brought to you by the reinvented two thousand twelve camera. It's ready, are you