John Lanchester on the UK Bank Bail-Out

Put simply, this is an insurance scheme. The government is insuring the banks against losses on their assets. There’s nothing unusual about such schemes: they’re a standard feature of the banking world. In fact, they are one of the sources of the current crisis. In the commercial world, a deal in which one financial institution insures another against defaults, in return for a fee, is called a credit default swap, or CDS. In effect, the UK government has undertaken a CDS with our imploded banks.