Credit default swaps (CDSs) are essentially insurance policies issued by banks (sellers) and taken out by investors (buyers) to protect against failure among their investments. The distinct difference between the health insurance scenario on the last page and credit default swaps is that the health insurance industry is heavily regulated. Insurers are forced to open their books to regulators to show that they have the collateral to pay out on every one of their policies. The credit default swap market is not regulated by anyone -- at all.
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