Credit Default Swaps (CDS) wtf?

[WilderMan]

Last I heard back in October there was an estimated $62 T in outstanding CDS. Haven't heard a peep since then.
Can't imagine they're out of the woods, although haven't seen a big firm BK since then.
Is this perhaps why?
Anyone keeping tabs on this?
It's mostly beyond my understanding but not beyond my curiosity.

 

[piezoe]

Quote from sjfan:

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.

The problem is that because they were unregulated too much risk was associated with them. Those selling CDS's were not required to maintain sufficient reserves, and they vastly underestimated the probability of systemic failure in the bond markets.

 

[sjfan]

Quote from piezoe:

The problem is that because they were unregulated too much risk was associated with them. Those selling CDS's were not required to maintain sufficient reserves, and they vastly underestimated the probability of systemic failure in the bond markets.

... 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 it's over.

I'm not sure what "they vastly underestimated the probability of systemic failure in the bond markets" means. They are idiosyncratic bets. If you were talking about senior tranche on CDOs, I'd agree. But that's another discussion all together.