From Will Hutton’s Them and Us (2010); Chapter 6 ‘Blind Capital’
“The new credit default swap (CDS) was meant to insure the holder of a security against default, but in fact it did little more than provide the means to speculate on the price of bonds, rather as currency options could be used to speculate on currencies. Again, there was no insurable interest: the CDS was not an insurable premium but a gambling chip. Buy a CDS in a bank or country debt, and as soon as there was concern about the credit-worthiness of the loan the price of the CDS would rise.
Hedge funds buying CDSs in incredible volume would be key destabalisers during the banking crisis – the trigger for both Bear Stearns’ and Lehman’s demise – and later triggers of the sovereign debt crisis in Europe. It was massive buying of CDSs on Greek government debt in April 2010 that forced the massive EU and IMF bail-out.”