Credit default swaps are, in effect, insurance on bonds. The seller pays the buyer a fee, the buyer agrees to pay if a default happens. However, this market is so unregulated and CDS get re-sold so often that the original seller may have trouble determining who owns it if they have a claim. Or they may find the current owner can’t possibly pay.

It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim.

Oh, the market for CDS is now $45 trillion, twice the size of the US stock market. Which should give some idea of the magnitude of the problems in this wobbling and unstable market.

One comment

  1. Soon all of this will be just a memory and Hillary can go back and finish her Senate term. Bill Clinton’s legacy is at stake, though. He might not be “America’s first Black president” for very much longer.

    I have always thought that we could thank Bill Clinton for George W. Bush. How ironic that we might be able to thank GWB for Barack Obama.

    Interesting times.

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