credit default swap

Definition

An insurance contract against a borrower defaulting on debt, except it's called a 'swap' instead of insurance to avoid pesky insurance regulations. The financial instrument that nearly destroyed the global economy in 2008.

Example Usage

Investors bought credit default swaps on Greek government bonds, essentially betting that the country would fail to pay its debts.

Origin

Created by JPMorgan bankers in 1994 over an offsite dinner in Boca Raton, proving that history's worst ideas often happen at corporate retreats

Fun Fact

Warren Buffett famously called derivatives like credit default swaps 'financial weapons of mass destruction' in 2002, six years before he was proven spectacularly correct.

Source: Derivatives market terminology

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