Credit default swap Quote by Michael Lewis
““A credit default swap was confusing mainly because it wasn’t really a swap at all. It was an insurance policy, typically on a corporate bond, with semiannual premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a ten-year credit default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for ten years. The most you could make was $100 million, if General Electric defaulted on its debt any time in the next ten years and bondholders recovered nothing. It was a zero-sum bet: If you made $100 million, the guy who had sold you the credit default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table; but if your number came up you made thirty, forty, even fifty times your money.””
About This Quote
Source Book: Liar's Poker by Michael Lewis, 1989
A credit default swap functions like insurance on a bond, with limited loss but potentially huge gain, making it a zero‑sum, asymmetric bet.
In simple terms: CDS are like insurance on bonds with big upside, limited downside.
Key Takeaway
Understand risk/reward asymmetry before trading.
Themes
finance
risk
derivatives
asymmetry
zero‑sum
Mood
cautious
analytical
Type
educational
technical
When to use this quote
- investment banking
- risk management
- trading strategies
- portfolio construction
Key Concepts
insurance
leveraging
betting
financial engineering
Questions to Reflect On
- How does asymmetry affect decision‑making?
- What safeguards mitigate hidden risks?
A Different Perspective
Complexity can obscure true risk; model assumptions may fail.
![“Crucial decisions are made, today as thousands of years ago, in terms of the intuitive guesses and preferences of a few men in positions of authority...[it is] quite likely that the fate of entire societies may be sealed by a series of avoidable mistakes committed by their leaders.” quote by Michael Lewis](https://sms4smile.com/quotes/img-quotes/a59/michael-lewis-705_decision-making_crucial-decisions-are-made-today-as-thou_16888.jpg)
