What Are Credit Default Swaps?
Credit default swaps (CDS) are designer-made financial derivative vehicles, in the form of contracts, which have been used for decades by the world’s largest insurance and other financial institutions as a form of investment insurance . More recently, such “swaps” contracts have greatly expanded into mega-trillions of dollars of “counter party” contracts between all types of investers covering all types of “bets” on future events. While some CDS’s simply cover the small risk of default of the highest grade of debt instruments, others are tied to such investments as super-risky subprime mortgage-backed debt obligations. As well, even the potentially safest of CDS’s have been converted into dangerous investments through leverage and/or “tranching”.