Naked Shorts & Swaps

It's the naked short selling and the naked credit default swaps that caused the problem. This is gambling, no more, but less because the bond failures credit default swaps cover (insure) are not random as a roll of the dice or automobile accidents since the bonds were aggregates of mortgages where the failures are related to increasing interest rates or impending balloon payments. Naked in this sense means that you are buying insurance (default swaps) or shorting something you don't even own. Easy solution: if you make a claim for a bond failure, you should have to surrender the bond. AIG sold more credit default swaps than they could afford--there is no reserve requirement for credit default swaps (otherwise they would call it insurance). When we give money to AIG, we are paying off a bookie's gambling debts.