Ask the Bond Insurers.
Credit default swaps are "financial instruments" of a special nature. They "are privately traded insurance contracts that let people bet on companies' financial health." Gretchen Morgenson & Vikas Bajaj, "MBIA Debt is Setting Up a Quandary" p. C1, col. 5 "Business Day" Section (New York Times Nat'l Ed., Wed., June 18, 2008).
According to the Wikipedia Online Encyclopedia, "Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against credit events such as a default on a debt obligation. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes." Wikipedia Encyclopedia entry for "Credit Default Swap".
The workings of credit default swaps are illustrated by what many had assumed is the precarious financial condition, and the apparently glaring need for an infusion of capital, at the Bond Insurance Company MBIA. MBIA reportedly wrote $137,000,000,000.00 or $137 Billion of credit default swaps which provide that their purchasers can demand immediate payment if the Bond Insurance Company either (1) becomes insolvent or (2) is taken over by state regulators. Morgenson & Bajaj, supra. This is reportedly a huge hammer for MBIA in the face of calls by such as the New York State Insurance Superintendent to raise some $900,000,000.00 or $900 Million for the Bond Insurance Company; if MBIA defaults on the credit default swaps, in basic and simple terms, MBIA arguably does not need the additional capital if all its money is going to pay off the credit default swaps.
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