60 Minutes explains what a Credit Default Swap is, and how it has affected our market. This includes the history of the practice, and other issues around it.
All this because of the Commodity Futures Modernization Act of 2000, creating a window for CDS again. Another win for deregulation.
Watch the video, it’s very informative.
(3 votes, average: 5.00 out of 5, rated)
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3 Comments 
60 Minutes, CBS, CDS, Credit Default Swap, deregulation
This video does not get to the problem of why Credit Default Swaps destroy value. These side bets are zero sum meaning the losers liability is matched by the asset appreciation of the person who is on the other side of the trade.
Where value is detroyed is in an example like this. Consider a $1 Billion company that trades at 2x book value and 10x earnings. As CDS pricing goes up, there is a greater fear of bankruptcy, causing the company’s bonds to sell off leading to a higher cost of capital on their debt. This leads to a lower valuation realtive to fundamentals. Now with no change in book value or earnings the company trades at 1x Book value and 5x Earnings and $500 Million in value is wiped out.
Paul Minasian
Thanks Paul — great point!
Good description of how CDSs are harmful
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October 27, 2008 
