Credit Default Swaps

[dudley]

I found this article

http://online.wsj.com/article/SB1000142 ... cle_MoreIn

and the diagram therein



helpful for understanding CDS's.

[Blue Peter]

Suddendebt is very good on these, e.g.:

Suddendebt

Basically they are insurance contracts, but so constructed as to avoid all the regulations that go with insurance, e.g.

The Greek debt crisis is a perfect example of what is wrong with the Credit Default Swaps market. As I have said many times previously, starting in 2007, CDS are not real swaps (as in forward FX swaps or interest rate swaps) but insurance contracts. (I am more than suspicious that Wall Street and The City came up with this obviously misleading name in order to avoid regulation from the staid and conservative insurance regulators.)

AND... as this very good article in the Financial Times makes clear, everyone in the CDS market plays with fire without having any insurable interest in the underlying credit risk (i.e. without owning the bonds). The FT writer says it succintly: "We have given Wall Street huge incentives to burn down your house".

Peter.