If the amount of $62 trillion is owed for credit default swaps, who or what entity eventually pays that?
Question/Comment: If the amount of 62 trillion dollars is owed for credit default swaps, who or what entity eventually pays that? Not even the U.S. government can make up for an amount which is 13 times our GDP.
Paul Solman: Okay, we’re back to $62 trillion, which makes me feel better, because that’s the number I spread out like a patient etherized upon a coffee table, a typically low-rent device that Jon Stewart mocked last night on The Daily Show.
To begin with, not every debt that’s been covered is going to default. Then, and only then, would the “insurers” be on the hook for the entire tab.
When a “credit event” triggers a credit default, and the holder of a credit default swap can at that point cash in on the “insurance,” the party that ISSUED the swap is responsible for the payoff.
Right now, since WE own AIG, we’re responsible for its debts. And the worry is that if more credit defaults occur, more firms that issued credit default swaps will be unable to pay, and go under.
But the government is NOT going to take over every financial entity that has written a credit default swap. Nor is every credit going to default. Not even close.