Credit default swaps (CDS) provide insurance for loans by guaranteeing repayment if a borrower defaults. However, CDS only work well in good economies when defaults are rare. As the recession hit, many loans began defaulting, leaving insurance companies on the hook. But CDS had changed hands so often between companies that no one knew who ultimately insured which loans, similar to a house fire where the homeowner doesn't know their insurance provider.

1. Hot PotatoThe Basics of Credit Default Swaps

2. What is a Credit Default Swap?A credit default swap (CDS) is essentially loan insurance.It provides security for someone who is making a loan. They are guaranteed to get their money back if the person they make a loan to does not pay them back.

4. ProblemsCredit Default Swaps, like most insurance only work when the economy is doing well and people aren’t defaulting.Companies were selling these credit default swaps to other companies who did not have the money to honor these swaps.

5. When it hits the fan!!!

6. When it hitsMore and more loans started to default as the recession hit.Insurance companies were on the hook for all of these loans they insured.Banks had been lending out more and more money to people who were not qualified to receive loans.

7. When it Hits…These credit default swaps had been passed along so much that people didn’t know where to collect the money from.Imagine your house burning down and being unable to find out which insurance company you had to collect from.

8. Amount of Money insured in CDS’S