CDS question from a dummy.

In the credit default swaps a lot of people got really rich betting something would default. Who actually pays up when this happens? Where does the money come from?

because if say for example $100000 is insured 10 times it don't change the fact that only $100000 is payable i.e. 10% of each insured anount. I think that's what happens anyway.

That only a few of these financial instruments would ever need to be handled in terms of being paid off. (Someone should have explained to the "experts" what it means when you "ass you me")

I am assuming that the issuing agency would have to be the one holding the bag.
It is quite possible that those selling these instruments are long gone. And the issuing agency may well be belly up.

And that is partly why so many financial institutions are in trouble right now.

Of course the buyers holding the Credit Default Swaps as protection for their investments are facing seriously difficult times. In some cases, that is the banking institutions (I think last week the banks in Denmark were affected) And the pension funds in this country have ben hit for 20 Trillion dollars of their worth in the past six months.

In a normal insurance situation, there are giant umbrella insurance organizations that help out. So that say, if there is an earthquake in Oakland and one in Los Angeles, the over burdened earthquake insurance companies have a recourse that is one level higher to turn to. But the Credit Default Swap originaters didn't consider them to be "insurance" since they wanted to avoid the insurance regulations. So there probably ain't no umbrella organization.

These Credit Default Swaps were leveraged some thirty to forty times over - so when Michael Moore states that what was going on was akin to you or me simply "kiting" a check, well, that may be as good an explanation as any. Although when you and I kite a check for over five hundred bucks, we can face jail time or some serious community service. Whereas Congress just spent the last week listening to all the 'experts' behind these schemes moaning and groaning that none of them expected that this could happen. And none of the experts were given any jail time.

Anyway the whole derivative scheme will only cost the global economy some 500 to 999 Trillion bucks. Compare that to our Gross National Product of thirteen trillion a year. So maybe if we all cut back on non-essentiels like chewing gum, and pretzels...

and perhaps Lehman Bros. too. But I'm sure someone here knows exactly got stuck holding the empty payout bag.

http://www.youtube.com/watch?v=P2cUh-e_Qkc&feature=related

This guy has posted tons of vids on all these financial instruments.