Credit Default Swaps Overview

BBC Newsnight feature by Alex Ritson on Credit Default Swaps which is until recently a little-known financial product (or uncontrollable monster) that affected Lehmans Brothers, AIG, Bear Stearns, many other financial institutions as well as the Icelandic banks. Size of Credit Default Swaps is approx. $60 Trillion.

Additional video clips on Credit Default Swaps:

Unfortunately the Credit Default Swaps market right now are more a purely speculative phantom market without true collaterals. This is a disaster waiting to explode. Warren Buffett famously described derivatives (which includes Credit Default Swaps) bought speculatively as "financial weapons of mass destruction." In Berkshire Hathaway's annual report to shareholders back in 2002, he said, "Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses—often huge in amount—in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)."

As usual, Mr Buffett is right on the money on the danger of derivatives.