Chapter 16 - CDS on Commercial Mortgages and Subprime Residential Mortgages

Abstract

The advent of credit default swap (CDS) contracts focused on asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) was initially generally seen as a positive development that could lead to a further expansion in the already-growing markets for commercial mortgages and subprime residential mortgages. Later on, however, CMBS CDS and, especially, ABS CDS came to be seen by some in a different light. Indeed, in the United States, exposure to CDS written on AAA-rated tranches of securities backed by subprime residential mortgages played a significant role in one of the defining moments of the 2008 financial crisis: the near collapse of insurance giant AIG.