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credit default swap

(FINANCE) financial instrument in which buyer is someone who needs insurance against the possibility that a borrower will default on a loan. In that case, the counterparty is whoever receives the CDS premiums, and pays out in the event of default.

WHY IT'S BAD
Loans are usually made by either commercial banks (in which a loan officer is supposed to make a professional assessment of risk of default before handing over the money), or by investment banks (which underwrite securities like bonds). If the borrower has a high risk of default, then the loan should not be made--period.

Credit default swaps were a stupid method of supposedly turning a bad loan into a "risky" (and potentially high-yield) "investment"; they were in reality a strategy for fraud. Since portfolio managers knew they were bundling securitized loans that contained mostly crap, they would arrange credit default swaps and cash in when the borrowers defaulted.
What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a "credit default swap," and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices.

{Newsweek, "The Monster That Ate Wall Street," 27 Sep 2008}
Related Words

Lynch swap 

a strategy in algebra in which if x/y=z, then y and z can be quickly "swapped" so that x/z=y. Very helpful for quickly solving for a variable.

Named after Mr. Lynch, a Floridian calculus teacher.
Student θ: Ugh... solving 3/x=4 for x is going to take me like a bajillion steps.
Mr. Lynch: lol just Lynch swap 4 and the denominator x.
Lynch swap by peculiargoldfish October 3, 2019

Gravy Swap 

The best crypto platform developed where you are able to swap $GRAVY for other cryptocurrencies
I just cashed out a million dollars because of Gravy Swap
Gravy Swap by GravyBoiii December 20, 2021
Bro did you see that sick video of Austin plop swapping Nicole, Jared was pissed.
Plop Swap by UnicornFarmer12 September 2, 2019

Mens Tear Spit Swap 

Mens Tear Spit Swap is when two men are receiving separate blojobs whilst together. After both men ejaculate into their female companions mouths, the two women then French kiss and swap the spit’n cum, followed by a second blowjob.
Jake went on a double date with his girlfriend, Kaidyn, and his friend along with his date. Little did jake know that the girls were going to Mens Tear Spit Swap on him later that night - it only cost him a $54 Lobster Bisk.
Mens Tear Spit Swap by EggCombo December 28, 2017
The act of installing a chevrolet LS series V8 engine into a car, normally Mazda RX-7s and Ford Mustangs. Usually frowned on by internet "car guys", despite the fact they make lots of power and are cheap.
"Oh my God, an LS swap??? That's so unoriginal, you've ruined that RX-7! You've utterly destroyed the spirit of the car!!!" 12 year old, who doesn't own a car, on a forum.
ls swap by ItsNotABloodyCooper September 19, 2017