Credit default swaps can be confusing, so our good friends at the Heartland Institute have provided some nice links on the topic. Here is an overview of CDS. Here is why CDS is good for you. Here are misconceptions of the CDS market. Here is why the CDS market didn't fail. Here is talk of an exchange for CDS, and here is more on the same topic.
Addendum: Tom and Rob, I'm curious on your take on the CDS scenario-- you guys probably know about this stuff better than the rest of us. Everyone seems to be suggesting an exchange for CDS in the future, and it takes an act of government to set that up. (Foolish, but the legacy of FDR lives on.) The big advantage of an exchange seems to be the clarity in price, and I agree, that is a big plus of an exchange, but my question is: Were the "true" prices of CDS really that tough to figure out before? I have a hard time believing these firms would be engaging in such a large volume of CDS activity without a good grasp on the price. That just doesn't make sense. Say what you will about the incentive to become too big to fail, but blindly running a bank down a path is not something these people were bred to do. Now, if there was a systematic bias in how these were priced, that could explain the mis-pricing-- but what is the source? I similarly have a tough time believing that everyone believed that this just wouldn't happen; remember, the CDS evolved as a hedge in case the "just wouldn't happen" did just that.
Subscribe to:
Post Comments (Atom)
5 comments:
Yeah people probably ought to want an exchange. If you don't want it for price discovery, you ought to want it for offsetting purposes. If you don't want it for either of those, you ought to want it so that you can bail out just one institution in the case of a massive failure instead of having a chain-reaction of CDS defaults run through the entire financial system. Whether or not it requires government sign-off is sort of irrelevant.
Also, in regards to "blindly running a bank down a path is not something these people were bred to do": http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=asNEEfktF32o
I wouldn't connect "pursuing a higher risk/higher reward" strategy with knowingly operating in an environment sans price information. The fact they chose to engage in a high risk/high reward strategy is proof right there that they had some knowledge of prices.
Are you talking about the article? The guy was off playing bridge while his bank was collapsing!
Bridge is a tough game! Besides, the man can't work 24/7!
Post a Comment