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Do you think you are clever for suggesting this? do you think this is a good trade? Pure stupidity. Stock goes down - either because of market movements, GE bail out (dilution of equity or wiping out equity all together), etc. How is what you are suggesting not just good old buy stocks...

... not required to maintain sufficient reserve? that might have been true for a selected group of players once, it's certainly not true anymore. Almost everyone post collaterals and variation margins. In case of a counterparty default (so long as it's not a big bank), the contracts are torn and...

You seem like an kid who needs some real career guidance. I don't know if you have potential or not, but listening to the guys on ET is about the dumbest thing you can do if you are actually considering a real career in the investment business (not that there's much of a business left these...

What does cds have anything to do with ruining the economy? It's no different from a equity call or put ... And what you think is an insurance contract doesn't matter. It's not.

Ah. I assumed he'd be posting a strategy with positive expectancy - otherwise what's the point of event wondering about this strategy.

Why not? Just trade a 1/4 your account size and keep the rest in cash and thereby deleverage the strategy.

Quite sounding stupid. Lehman was an investment bank, not a deposit bank. Therefore, fractional reserve doesn't apply to it. Its use of leverage is in the same vein as margined accounts.

Wow.... just.... wow. You, sir, are the embodiment of mediocrity. Good thing history and progress do not depend on people like you, but on mavericks with unbound ambitions.

Valuable only to those who have already bought protection... Why wouldn't they get that value? the cash settlement protocol only helps with alleviating the issue of short squeeze.

Of course they are.... CDS spreads closely (for the lack of a better word) track debt spreads. How else would it be?

That problem has already been addressed and solved via the "cash settlement" mechanism. Upon a default event, according to ISDA protocol, an cash debt auction will take place and used to set a recovery price. This price is then used as a reference for cash settling all outstanding cds...

You know - a lot of institutions (banks, insurers, pension managers) uses CDS to hedge their long debt exposures... if you nullify the contracts, they are all of a sudden unhedged and exposed to positions they thought were neutralized (not to mention loses a boat load of money from what's owed...

Are you not trading in the interdealer broker market? Do you go through a prime brokerage?

No. Once you get to the credit derivatives world, that's where insurers and re-insurers go to layoff their risk, not take them on (except to invest their own asset. See later paragraph about how banks and other large financial entities have many desk that are independent of each other for all...

F*ucked. I'm pretty sure most of buy side firms are still trying to sort out their positions and where they stand with respect to Leh as their counterparty.

Wait - this is right. You've sold [protection on the] CDS.... I think there's where the terminology is getting flipped. We are used to saying buy as in buy protection, not buy as in long. If buy == going long, then you've sold protection. I think the original poster thought long means he makes...

Is this the question? The banks bought protection on the CDS on CDO. AIG was a taker of risk. The banks, for the most part and especially in cases like this, tries to hedge those risks by selling protection down the line. But that's all very complicated. CDS on CDO is a very very small...

Eh. It's a historical convention. You get used to it. Though remember, default can be thought of an extreme spread widening.

The "risk" in CDS world refers to default risk, not spread risk. So when you are long risk, you are long default risk, which means you lose when the credit defaults, which means you are selling protection, which means you are harmed by spread widening. Makes sense?

99.9% of CDS are on corporates and sovereigns.... there are almost no real estate tied CDS (unless you count CDS on mortgage CDOs... which sort of exist, but not significant)