Matt Levine, Columnist

Hovnanian's Weird CDS Trade Gets Weirder

Also securities fraud, subprime lending, beef, chants, blockchain and volatility.

April 10, 2018 at 2:24 PM UTC

Matt Levine is a Bloomberg Opinion columnist. A former investment banker at Goldman Sachs, he was a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz; a clerk for the U.S. Court of Appeals for the 3rd Circuit; and an editor of Dealbreaker.

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The way bonds work is, I give you $100, and in exchange you give me (say) $6 every year, and then at the end of (say) five years, you give me back the $100. That's if everything goes right. If things go wrong, then after (say) three years, you stop making those $6 payments, and you come to me and say "I know I was supposed to pay you back $100 but here's $40 instead, sorry." This is called "default." The $40 -- an arbitrary number, but traditional in these illustrations -- is called the "recovery."