Credit Default Swaps

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Summary:
What happened was that people (even those with subprime mortgages) were rated AAA. AAA rating carries little risk because it assumed everyone could pay. Banks gave away loans without even checking people's files, they want interests and rating companies want money as well, so they ensure that people will pay. Few individuals including Dr. Michael Burry realized how volatile this was and decided to buy Credit Default Swaps. Credit Default Swaps are similar to insurance in case people can't pay (in case they default). Banks sell these Credit Default Swaps thinking the market is solid and that everyone can pay them, when in reality they can't. When you buy the Credit Default Swaps you pay the bank an amount of money like Dr. Michael Burry’s

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