The Global Economic Crisis Insuring with Credit Default Swaps: Let the Buyer Bew

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The Global Economic Crisis Insuring with Credit Default Swaps: Let the Buyer Beware! A credit default swap (CDS) is like an insurance policy. The purchaser of the CDS agrees to make annual payments to a counterparty that agrees to pay if a particular bond defaults. During the 2000s, investment banks often would purchase CDS for the mortgage-backed securities (MBS) they were creating in order to make the securities more attractive to investors. But how good was this type of insurance? As it turned out, not very. For example, Lehman Brothers might have bought a CDS from AIG in order to sell a Lehman-created MBS to an investor. But when the MBS began defaulting, neither Lehman nor AIG was capable of making full restitution to the investor.

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The Global Economic Crisis Insuring with Credit Default Swaps: Let the Buyer Bew

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