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credit default swaps
say a bank has a loan with greece.
financial institution offer a contract to cover the potentially bad debt in case of default, price depends on the risk.
bundle a bunch of these in a package and sell as investments.
these were leveraged, which basically means you "invest" say $5M at an out of pocket cost of only $500K but if it goes bad you are on the hook for the $5M.
above can go wrong in so many ways..
btw, it is my understanding that the french guy works for JP morgan, so he didnt take down several hedge funds, most likely he is looking at the door though (from the outside).
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"Obscenity is whatever gives the Judge an erection." -- Author Unknown
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