Can someone explain Credit Default Swaps / derivatives to me?

[thoughtomator]

Some derivatives are inherently bad as they exist exclusively for the purpose of pretending counterparty risk is zero. That's what blew up AIG - they really did think that they didn't have to have ANY capital to pay out on all those derivatives they wrote.

 

[Paul Or Nothing II]

Some derivatives are inherently bad as they exist exclusively for the purpose of pretending counterparty risk is zero. That's what blew up AIG - they really did think that they didn't have to have ANY capital to pay out on all those derivatives they wrote.

Again, under a free market, the people running it would be personally liable to pay the obligations with their personal property so they'll be unlikely to take the kind of risks they have taken

Again, the problem isn't with derivatives but with the government protections that government offers to these entities, if that's stripped away then it's a different story altogether

 

[Jordan]

Some derivatives are inherently bad as they exist exclusively for the purpose of pretending counterparty risk is zero. That's what blew up AIG - they really did think that they didn't have to have ANY capital to pay out on all those derivatives they wrote.

No. They didn't NEED to have any capital because they didn't have any competition. What's the alternative? One broke bank or another - it doesn't really matter. There is no choice, there is no free market, hence why the blame should rest in government, not the derivatives market.