Naked Credit Default Swaps

Credit Default Swaps 

BBC Newsnight feature by Alex Ritson on Credit Default Swaps - until recently a little-known financial product that Lehmans Brothers, AIG and the Icelandic banks were up to their necks in. Could this be the black hole at the centre of the financial crisis?

YouTube Video

A credit default swap (CDS) is a swap contract in which the protection buyer of the CDS makes a series of payments to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default.
For more details see Swaps

Seemingly Royal Bank of Scotland and Barclays each cover 2.4bn in potential losses.

Clearly because one can buy CDS protection against a bond default without actually holding the bonds one can find ones self with a real incentive to promote bond failure. CDSs bought in this way are called Naked Credit Default Swaps.