Credit Default Swaps

This graphic told me all I needed to know about credit default swaps and why the financial system is in the shitter. An investor buys the credit default swaps as insurance that certain debt instruments won't default (or as a speculator), and the insuring party promises to pay the debts if they go bad. The original insurer then sells the contract to somebody else and so on until nobody knows whom they're dealing with any longer. Because you can buy the insurance, you feel better about crappier bonds, and because you can assign the contract to somebody else as an insurer and get off the hook, you don't have to have good underwriting standards. Money sloshes around like crazy with no meaningful controls or grounding in reality. Whee!

$45 trillion of these credit default swaps are floating around. They're not all going to get cashed in, but more are than you'd expect if the parties to the transactions had been paying attention to the underlying securities and employing sound underwriting practices. Then again, what was the incentive? Be too prudent and lose out on a lot of business. Besides, Uncle Sam will rescue you if it goes bad. Whee!