Credit Default Swaps (CDS) wtf?
- Thread starter jonbig04
- Start date
No one has declared these CDS "contracts" illegal. The amount of counter-party risk isn't going away anytime soon. There are still a series of CDS auctions coming up . . . and just because you think that CDS's could be declared "illegal" doesn't mean that the current counter-party risk ( which is huge ) somehow evaporates. The cash has to come from somewhere.
http://www.isda.org/
But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agencyâs failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
A lone dissenter â a software consultant and expert on risk management â weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
http://www.nytimes.com/2008/10/03/business/03sec.html?_r=1&oref=slogin
There seems to be a lot of questions on CDS and some mis information. First they are swaps in the traditional sense that it is an exchange of fixed for floating payments. CDS have a particular feature in certain events (default, reorganization etc.) This is why they are not insurance (strictly speaking). I'm not here to defend the CDS market or its players. That said, it is messed up and needs fixing.
I know they haven't been declared illegal but should and coud be. Since they are insurance against corporate bonds but named something else to subvert the insurance regulations, they are, in my opinion, illegal insurance. If the alternative is to lets these worthless pieces of paper ruin our economy then the legislatures should step in and declare them illegal and non enforcable in the courts. People that own these CDSs are just speculators anyway. Someone needs to step up and draw the line and set things right.