As you know, under the Bush administration unregulated credit default swaps--which billionaire Warren Buffet describes as "financial weapons of mass destruction"--now exceed $40 trillion. Can you explain to the American taxpayer
a. What a credit default swap is;
b. Why credit default swaps are currently unregulated;
c. How a company with $1 billion of outstanding debt can have $10 billion of outstanding CDS contracts and;
d. How a default on $1 billion in corporate debt, assuming debt recovery at 40 cents on the dollar, becomes a $6 billion loss to credit default swap sellers.
Oh, and a follow-up if I may: What are your plans, if any, to regulate the CDS market in the future? Please be as specific as possible in your responses.
Thank you.
p.s. This is a closed book test, but candidates may refer to the Wikipedia article and this diagram.
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