Business Pundit

Businesspedia Entry #1: Credit Default Swap Market

The credit default swap market is a $45 trillion dollar market in which each vendor sells special I.O.U. notes instead of family heirlooms and T-shirts from China. The special I.O.U.s, also known as credit default swaps (CDSs) aren’t actually good for any money. Instead, they make sure that you don’t lose any money when other people don’t pay out their I.O.U.s.

When you buy a CDS, you pay the person who sold it to you a regular maintenance cost, or premium. If someone who owes you money runs up to you and says they can’t pay up on their I.O.U., no problem. The person who sold you the CDS will hand you money to cover the loss. The CDS is smart, because it stops you from losing too much from peoples’ bad I.O.U. slips.

Not sure who to buy a CDS from? Don’t worry. You can buy or sell CDSs to and from invisible people, too. There’s no need to identify the person who will actually pay you when someone defaults on a loan. The money always appear from somewhere when your I.O.U.s default.

If you get unlucky and someone tells you they can’t pay their I.O.U. slip, look for the person who issued the CDS. If you can’t track them down, simply stand in place and start screaming really loudly. Someone wearing a government tie will run up and hand you a suitcase full of money. Hold onto the money a while–don’t loan it to those schmucks who couldn’t pay back their I.O.U.s–and you’ll be fine.

If the man with the government tie looks busy, and you get scared that maybe he’ll forget about you, there’s an easy workaround. Pack all of your CDSs in a suitcase and write the word “Assets” on the outside with a Sharpie pen.

Find other people around you who look worried. You can identify them by their wide-eyed expressions and the stacks of CDSs they’re clutching in their fists.

Offer to buy them out with your suitcase labeled “Assets.” The more people you buy out with your “Assets,” the more likely you are to have the man in the government tie run your way when it’s your turn to stand in place and scream. For more details on how to accomplish this, please refer to Bank of America and Citicorp.

Coming up next time: The Financial Bailout Plan.