[iofj]

Why are these parties allowed to make contracts like that without putting up collateral ?

I can pay a bum on the street 10 dollars to sign his name on a contract like that (that he'd take over these payments in the case of bankruptcy). He would not pay up if it does happen. Apparently the situation is the same with these banks. Isn't this fraud ?

They're signing insurance contracts they know they might not be able to pay up. Why don't we demand that they put the money into a locked account like every landlord on the planet does with tenants ? If you don't have that guarantee on a locked account, not used for anything else, then why is that contract accepted as hedged risk ?