To swap is not to insure: Aaron Brown column

Politicians seeking to clamp down on the use of credit default swaps should remember that hedging and insurance are two very different concepts.

“Buying naked credit default swaps is like taking out fire insurance on your neighbour’s house!” The phrase has been uttered with increasing regularity by embattled chief executives and politicians, but ignores the difference between insurance and hedging.

Insurance protects against damage to physical assets. By contrast, CDS protection buyers are not betting that the physical assets of a company or country will deteriorate, but expressing a negative opinion on the managers of those assets. If