Credit default swaps are derivatives that function like an insurance policy that protects lenders against a third party's default on a debt. During the financial crisis of 2007-2009, many buyers of such derivatives faced bankruptcy because: The U.S. government refused to bail out financial firms that issued such derivatives A major seller had miscalculated the default risks of securities it had insured with such derivatives Homeowners refused to borrow mortgage loans from lenders that bought such derivatives