[OCC]

Under a CDS, a bank originates loan to a company. A second bank (or other financial institution) can agree to cover the credit risk for the loan, by agreeing to make payment to originating bank if the company defaults on the original loan. The originating bank pays a small insurance premium to the second bank for assuming the risk of the loan.

Sooo... what happened to the insurance they paid a small premium on?

[21twelve]

“Sooo... what happened to the insurance they paid a small premium on?”

I imagine it is like car insurance. Allstate probably has figured that 1 out of 1000 cars gets totaled every year or something. And they make money by getting $40 from all the 1000 to cover the $30,000 car of the one. (And “keep” $10k).

Same thing here I suppose. Except imagine one of those huge dust-storms in California and 800 cars pile up and wreck.....x10000.