Friday, February 22, 2008
--They offered a supposedly safe stream of income to investors by selling default protection on all of the companies in either the iTraxx or the CDX, or in some cases on a basket of financial firms that included bond insurance companies. But they had a flaw: They used borrowed money, or leverage, to increase the returns they could provide to investors -- a strategy that also magnifies losses. They also contain triggers that force them to call off their bets if losses reach a certain level, a feature that can force them to rush into the market to buy insurance just when the market is falling. --it is similar to floating rate notes, a premium plus a floats.