Credit Default Swaps explained

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Here's the best explanation yet I've heard of what a "credit default swap" is. These instruments are central to the current financial crisis. The explanation starts at about 4:30 into this 60 Minutes clip:


(HT: Balloon Juice) Basically, a credit default swap is an insurance policy that's supposed to pay you money if a certain security or institution becomes worthless. But because it's not called insurance, it isn't regulated, so there are no rules about how much money you have to have on hand to pay out. So it's no surprise that when things went sour and these credit default swaps were called in, there wasn't enough money to pay out and firms went under.

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