re: #595 Obdicut

The trigger on the CDS’s was the decline in the value of the underlying securities. If a swap is insuring a RBMS, and that RBMS declines in value, the holder of the swap is generally entitled to the posting of cash collateral. That collateral requirement is quite independent from the default rate on the underlying security. And the collateral requirement of the swap can also be triggered by financial events at the swap’s issuer.

As the mortgage bubble began to burst, RBMS’s became toxic: they had no ascertainable market value because there was no market for them: there were no buyers. That triggered collateral requirements on the swaps insuring them, which is a short way of describing what happened to AIG.

But what happened to Bear, Lehman, Merrill and Citi was more about the RMBS’s, not swaps.