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A Primer on Credit Default Swaps

February 16, 2009
The recent financial crisis and resulting government bailouts have led many people to search for someone, or something, to blame. Some people have even decided to cast as villain credit default swaps—a kind of derivative financial instrument of which virtually no one outside Wall Street had heard this time last year. But are credit default swaps really “financial weapons of mass destruction,” as Warren Buffet alleges? Or are they efficient contracts that in fact reduce risk and contribute to the stability and flexibility of the American economy, as Alan Greenspan argued when he was Chairman of the Federal Reserve?