I ABSOLUTELY LOVE IT when the real world brings an example for my students (deja vu?  Haven't I just said this recently before I went on Spring Festival holiday?!!?).  I will be teaching Swaps and Derivatives the next two weeks!


Source and article: New York Times, February 17, 2008

The explanation here reminds me a little of the Daisy Chain in the Savings & Loan Problems of the 1980s.  I hope that is just an appearance rather than reality or America has another issue to deal with in the Credit Market too!  In case you don't have any idea how large the Credit Default Market is, I also reproduce from the same NY Times article the size of the market compared to a few other markets you may recognize. 



TWICE the size of the U.S. Stock Market and much larger than the Mortgage Security Market!