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A financial instrument called credit default swaps (CDS) played a large role in
the financial problems that emerged in the United States during 2008. A credit
default swap is a form of insurance in which the seller of the swap insures the
bond or loan of the buyer. Should the bond or loan default or lose money, the
seller will pay the buyer the value of the insurance. CDSs have existed since the
1990s, but their popularity increased greatly starting in 2003. Because credit
default swaps were, until 2010, largely unregulated, there was no way to ensure
that the seller of the swap could repay a buyer who lost money on alone or bond.
When many mortgage loans failed in 2008, buyers who own CDSs on mortgage-
based funds turned to the seller for the money owed them, based on their
original agreement. But in some cases the sellers of the CDSs did not have the
funds on hand to make the payment. This had a huge, negative effect on the
economy.