These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.
Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability — which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability.
This is what your humble servant, moi, missed. This is what all of the big investment banks and banks and insurance companies missed. This is what the federal government totally and utterly missed. This is what the truly brilliant speculators in these instruments did not miss. They could insure a liability they could also create and control. It is as if they could insure a Cadillac for its value upon theft — but they could control what the value the insurer had to pay off was. The insurer thought it might be fifty thousand dollars — but it was manipulated into being two million.
This is the whirlpool sucking down finance.