“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.
The Credit Default Swap (Derivitives) are backed up by only 1 thing.....the promise to pay for the losses, if certain default criteria are met. It is backed by a piece of paper, and I do not mean Federal Reserve Notes. When called upon to perform according to their agreement with distressed banks, they simply say, they can not pay. Then every other entity who wrote "insurance derivitives" with that company scramble to get liquied, but news moves faster than sales....so.........the system starts crumbling.....That is why AIG was bought (79.9%) by the government. This cannot be stopped now. Our government has alreadby spent $700 billion, and is asking for another $700 billion.....it will be to no avail. This country just spent its way out of existence.