What is Credit default swap?
{{Orphan|date=December 2010}} A '''credit default swap''' (or '''CDS''' for short) is a kind of investment where you pay someone so they will pay you if a certain company gives up on paying its [[bond (finance)|bonds]], or '''defaults'''. A credit default swap is like [[insurance]] on bonds, but different from insurance in important ways: * Insurance companies make sure you own the thing you're insuring, but you can buy credit default swaps for bonds you don't own. * The government makes rules (called '''regulations''') for insurance, but they don't make any yet for credit default swaps. * Insurance companies have to have enough money in case lots of people need to collect insurance at the same time. Because there aren't many rules for CDS sellers, they don't have to be as careful. Because nobody makes sure you have the bonds you get credit default swaps for, people can [[speculation|speculate]] on them by buying credit default swaps on companies they think will get in trouble. == Role in Financial Crisis of 2008 == When [[Lehman Brothers]] went bankrupt on September 15, 2008, it defaulted on its bonds. The insurance company [[AIG]] had sold lots of credit default swaps for Lehman, but they didn't have enough money to pay all the people they had sold them to. This is because the way lots of companies speculated was by [[hedging]] on credit default swaps. They bought credit default swaps for a company, and then sold credit default swaps for the same company when the CDSes got more expensive. For example, if you bought some Lehman Brothers CDSes from AIG where you had to pay $500,000, and you sold the same number of CDSes on Lehman a year later for $600,000, you made $100,000 profit. If Lehman defaulted, you're supposed to pay the people you sold the CDSes to, but that should be OK because now AIG is supposed to pay you for the CDSes you bought. So many companies bought and subsequently sold CDSes that when Lehman collapsed, no one had enough money to pay the people they sold the CDSes to. They tried getting it