Wed Jan 27 2010
Purchases of Credit Default Swaps CDS are on the rise against the spectre of defaults on foreign or sovereign debt. We mentioned the PIGS here recently Portugal, Italy, Greece, Spain. Those countries are struggling to meet their debt obligations amidst debt downgrades. So holders of that debt are buying insurance against the possibility of default. Hmm, if such a country actually defaulted, is it possible to actually insure against such a large amount? One wonders if this would be like insuring West Beach at Galveston against Katrina, suddenly the entire Beach is a loss and the re insurance would probably fall short of what is needed.
Insurance uses the law of large numbers to assess a premium for shared risk. The insurer then re insures by purchasing his won policy against just such a catastrophic it all happened in one place event. This is precisely what Congress will be asking Tsy Secy Geithner today in regard to AIG insuring Goldman losses in bond holdings.
Professor Elam 
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