The Problem with Credit Default Swaps

While the mortgage desaster and the credit crunch keep to take their toll, there is another financial crisis building that will one day inevitably explode. Credit-default-swaps (CDS) were developed to insure banks who gave loans against the risk of the borrower's default. Bank A lends 100 million to company B and bank C lends a 100 million to company D. Bank A then sells Bank C an insurance for the case of a default by D and Bank C sells bank A an insurance against default of company B. Both