Credit enhancement: Letters of credit, guaranties, insurance and swaps (the clash of cultures)

`Billions of dollars of publicly issued debt securities are supported by financial instruments issued by third parties. The use of these instruments, letters of credit, guaranties, insurance and swaps, has carried with it a set of business assumptions concerning their performance. The first decision arising out of the Enron debacle, JPMorgan Chase Bank v. Liberty Mutual Ins. Co., 1.89 E Supp. 2d 24 (S.D.N.Y. 2002), exposed the brutal fact that the legal principles underlying these instruments do not necessarily deliver the business results anticipated. This created a tremendous crisis of confidence in the public debt marketplace that remains unresolved. This Article is an attempt to compare these instruments side by side in the context of both their historical origins and their current use in the capital marketplace. The instruments' individual histories are used to explain why each instrument developed as it did, and that the legal principles that govern each instrument are entirely consistent with their respective historical roots. In addition, the Article makes specific recommendations regarding two relatively new instruments created by the insurance and investment banking industries: financial guaranty insurance and credit default swaps.