Wikipedia defines a credit default swap like this:
Former staff member of the Commodity Futures Trading Commission, Michael Greenberger describes a credit swap in brief: "A credit default swap is a contract between two people, one of whom is giving insurance to the other that he will be paid in the event that a financial institution, or a financial instrument, fails. It is an insurance contract, but they've been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a 'swap,' which by virtue of federal law is deregulated."
Some argue that these instruments, the fact that they have led to the development of an unregulated $50 trillion market, are the reason why a handful of mortgage foreclosures spun into a financial meltdown.
- Q and A from the AP.
