R. Richard Schweitzer

Why AIG Was in the CDS Business

Though it has been touched on obliquely elsewhere, there has been a "multiplier effect" in the impact of CDS that were essentially "insurance." That is, that much of the exposure came about by selling to parties who had "no insurable interest;" particularly when the "premiums" were low.

Sellers of latter day forms of CDS (where actually there was no true "swap" of "my risk for your risk," resulting in a comparative risk exchange) were "betting" with a third party against the "death" of a specific party with no requirement that the insured had any relation that might result in a loss from that "death."

When epidemics began, the costs of "deaths" went far beyond the losses payable to those who incurred actual losses.