The bankruptcy of Lehman Brothers was a credit event which triggered a massive liability to participants in the large and potentially dangerous Credit Default Swaps (CDS) market. This is a market that represents the "weapons of financial mass destruction" label which Warren Buffett gave to the derivatives.
Below, I will attempt to explain, with much help from Wikipedia, what Credit Default Swaps are, how the market functions and why it is THE derivatives market that needs to be regulated before systemic risk threatens the global financial system.This is how Wikipedia describes a Credit Default Swap:
A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" makes periodic payments to the "seller" in exchange for the right to a payoff if ...
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.