Quote from achilles28:
I'm not surprised you threw out that light read as 'proof positive' for CDS.
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Firstly, achilles, if you don't start talking like a sensible person, as opposed to a 5yr old, this will be my last post in response to your comments. So, pls, rein in your imagination and let's have no more 'chicken-necked women' or whatever...
First and foremost, as someone who has all these grand views on the systemic issues CDS contracts have single-handedly caused, have you actually ever traded CDS? Or cash bonds, for that matter? Normally, the people who complain the loudest about the dangers of CDS are outsiders, who know very little about how the credit mkts function. Just for your guide, I have, although I don't claim to be any sort of expert (sovereign CDS is a somewhat different mkt). At any rate, I agree with your argument that excessive leverage is bad. What does that have to do with the viability of CDS as a financial instrument? Yes, the system, in its current format, has become unstable, but I don't see what's so dangerous about CDS, provided, for instance, they're exchange-traded and stringently margined. As to all this 'fractional lending' commentary, pls do grow up. Leverage in its various forms (incl fractional reserve lending) is part of modern society. Trying to ban all leverage, because it's dangerous and destabilizing when taken to extremes, is akin to banning bathtubs, 'cause they can cause drowning accidents.
Secondly, yes, we all agree that AIG irresponsibly and recklessly sold too much protection at wrong prices. I agree that's stupid. So what's your point?
Thirdly, yes the government does have the authority to ban any further trading of CDS. There's no need for it (which is why nobody sane is suggesting it; Taleb doesn't fall in the above category), as I pointed out above. What I was referring to as 'idiotic' is your suggestion that the govt
nullify all existing contracts. Do you have even the slightest clue of what sort of havoc this would cause? As someone who had to deal with residual and wrong-way risk in the aftermath of Leh, I can assure you that it's not something you can even begin to imagine.
Fourthly, yes, excessive leverage, and the fragility of the financial system that results, is a bad thing. Where did I say otherwise that you have to keep belaboring the obvious time and time again? In general, all this 'house of cards', 'cascading failure' malarkey sounds awfully cliche and, frankly, regurgitated to me. Let me give you a hint, it's not about structured credit, CDOs, CBOs and what have you; it's all about repo and the money mkts. It all started with BNP and Coventree; I was there, so pls don't give me the fluff you've read somewhere.
As to your last point, you seem awfully confused and jumble everything together (and you rant a lot, which doesn't help). So let me try to unscramble for you. I already spoke about CDS trading on an exchange and being strictly margined. That should ensure that leverage is kept under control. As to your absurd point that CDS should be traded 1-to-1 vs the underlying, you need to realize that CDS is NOT insurance. It's a mkt instrument designed for price discovery and hedging, like futures. Or do you, in your infinite wisdom, suggest that I can't trade a crude contract, unless I have 1000 barrels of oil in my backyard?
I hope this clarifies things for you. Pls let me know if you need me to expand on anything
