It seems perhaps that credit default swaps aren't the boogeyman that they've been painted by some.
The Meltdown That Wasn't http://online.wsj.com/article/SB122670411909729683.html Excerpt: Credit default swaps are contracts that insure against a borrower defaulting on its bonds. The buyer of a CDS contract essentially pays annual premiums and the seller agrees to pay back the principal if the issuer of the bonds doesn't. It's different from insurance in that an investor doesn't actually have to own the underlying bonds -- he can simply buy a CDS as a way to make a bearish bet on a company or to offset other risks. Shattering Beltway illusions, the unregulated CDS market is holding up better than the regulated bond market. Here we are more than a year into the credit meltdown and the CDS market is offering more liquidity than the actual cash market. Eraj Shirvani at Credit Suisse notes that "over the last 18 months, the CDS market -- not the bond market -- has been the only functioning market that has consistently allowed market participants to hedge or express a credit view." * * * * * * * * The column goes on to talk about Lehman's failure - that had little to do with CDS, but a lot to do with "toxic mortgages". Anyway, I'd like to hear what other people interested in the economic debate here have to say about it. Julia _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
