Big Payments Are Expected in Credit Default Swaps

New York Times (09/09/08) P. C5
Analysts note that the federal government's takeover of Fannie Mae and Freddie Mac may trigger one of the biggest ever payments in the credit default swap market. However, losses to protection sellers are expected to be minimal due to the high trading levels of the $1.6 trillion of outstanding Fannie Mae and Freddie Mac debt. Credit default swaps are typically utilized to either speculate on a company's credit quality or hedge against the risk of borrowers defaulting on their debt. Under terms of the credit default swaps contracts, the payments are initiated by the government's intervention, meaning that protection sellers are required to pay buyers the full insured amount.