Hey Larry,, read about CDS's.. $45 trillion .. and the things were invented
in 1995!
Isn't that special. JP Morgan comes up with a derivative

Do ya hear anyone in Washington talking about closing down the CDS market,
basically
saying NO MORE? Oh noooooo..

Twice the size of the stock market and I bet most of us [ I admit to not
totall understanding this stuff ]
have no clue what these things are.

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Credit default swaps (CDS) are the most widely used type of credit
derivative and a powerful force in the world markets. The first CDS contract
was introduced by JP Morgan in 1995 and by mid-2007, the value of the market
had ballooned to an estimated $45 trillion, according to the International
Swaps and Derivatives Association - over twice the size of the U.S. stock
market. Read on to find out how credit default swaps work and the main uses
for them.


How They Work
A CDS contract involves the transfer of the credit risk of municipal bonds,
emerging market bonds, mortgage-backed securities, or corporate debt between
two parties. It is similar to insurance because it provides the buyer of the
contract, who often owns the underlying credit, with protection against
default, a credit rating downgrade, or another negative "credit event." The
seller of the contract assumes the credit risk that the buyer does not wish
to shoulder in exchange for a periodic protection fee similar to an
insurance premium, and is obligated to pay only if a negative credit event
occurs. It is important to note that the CDS contract is not actually tied
to a bond, but instead references it. For this reason, the bond involved in
the transaction is called the "reference entity." A contract can reference a
single credit, or multiple credits. (To learn more about bonds, see our
tutorial Advanced Bond Concepts.)

As mentioned above, the buyer of a CDS will gain protection or earn a
profit, depending on the purpose of the transaction, when the reference
entity has a negative credit event. When such an event occurs, the party
that sold the credit protection and who has assumed the credit risk may
deliver either the current cash value of the referenced bonds or the actual
bonds to the protection buyer, depending on the terms agreed upon at the
onset of the contract. If there is no credit event, the seller of protection
receives the periodic fee from the buyer, and profits if the reference
entity's debt remains good through the life of the contract and no payoff
takes place. However, the contract seller is taking the risk of big losses
if a credit event occurs. (For related reading, see Corporate Bonds: