So what exactly is a credit default swap? Well, put simply, it's a side bet on something happening, in this case, that the housing market is going to collapse. Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis on 60 Minutes.
60 trillion dollars in credit default swaps, that's just an amazing total. Banks saw themselves losing money and doubled down time and time again. Then the bottom fell out and they couldn't pay for these insurance swaps on toxic mortgages.
Since these contracts were called 'swaps' instead of insurance contracts they weren't regulated. So there was no capital reserve on the side to pay for these swaps. Here's the YouTube video from the 60 Minutes piece that explains how credit default swaps, essentially bets people wouldn't be able to pay their mortgages, made the housing crisis much worse:
