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Trump’s Economic Era

The whiz kids of JP Morgan Bank met in Boca
Raton, Florida, in the early 1990s, and barnstormed
ways to convince the Fed to reduce the bank’s reserve
requirement. Thus, the credit default swap (CDS) was
born. A credit default swap occurs when one party pays
another party to assume the risk of default. It is sort of
like a written insurance policy, a legal agreement,
against loan losses whereby the purchaser of the swap
transfers defaults risk to the seller. In the event of a
default, the seller makes payment to the buyer of the
swap.
Credit default swaps convinced the Fed that
banks’ loss exposure had diminished and agreed to
lower the bank’s reserve requirement. Thus, the CDS
succeeded in its original intent. The bad news came
later when buyers and the sellers of swaps abused this
sound business practice. A closer look at these swaps,
and how they were instrumental in exasperating the
financial collapse of 2007-2008, will enlighten your
understanding of the economic collapse.

Credit Default Swaps and Real Insurance

The buyer of a credit default swap pays the seller
quarterly, semiannually or annually. Credit default
swaps have value because investors can buy and sell
them. Whoever owns the CDS receives payments from
the purchaser, just as an insurance company receives
payments from customers. Economists consider a CDS
a derivative because the underlying bonds determine its
value.

Insurance policies guard against irresponsibility
and fraud. Unlike credit default swaps, insurance

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