In that recession, banks took serious hits from credit losses, and the weakness in the banking sector led to “headwinds” that restricted the availability of business credit and slowed the recovery. The past two years have seen the largest-ever corporate bankruptcy, that of WorldCom, and the largest-ever sovereign default, in Argentina.
There have been many other high-profile defaults, such as Global Crossing, Kmart, and Enron. By helping to spread the credit risk associated with these large borrowers throughout the financial system, the credit derivative market likely contributed to financial stability.