Derivatives: Darth Vader's Revenge Message Board

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Non-Tech : Derivatives: Darth Vader's Revenge

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To: Hawkmoon who wrote (1533)	3/19/2010 9:22:21 AM
From: axial	1 Recommendation of 2794

Hawk, thought you might be interested in this lame defense from the ISDA... History’s Case Against Naked CDS “A simplistic analogy has surfaced and been repeated that compares CDS to fire insurance. People who use this analogy point to insurance law prohibiting individuals from buying insurance on a neighbor’s house so that they will not burn it down to collect the insurance proceeds. Under this analogy, writing naked CDS is equivalent to buying such insurance and committing arson and should therefore be banned.” The analogy refers to something called the principle of insurable interest, or the requirement that those taking out insurance must have exposure to either a gain or loss, particularly a loss, on the subject of the insurance. England in the 1700s recognized the danger inherent in taking out insurance on property. As CFTC Chairman Gary Gensler remarked last week: “English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking.” And so Parliament responded with the Marine Insurance Acts of the mid-1700s. For its part, the ISDA statement continued: “The analogy leaves some important points unsaid: How, for example, can buyers of naked CDS actually burn down the house? It is important to remember that for every buyer of CDS there is a corresponding seller who benefits when the reference entity’s credit quality improves. It is unclear how such activity alone can lead to a default by a sovereign government on bonds it has issued. Such claims ignore the commonsense facts available and fail to show either cause or effect. These claims also ignore short selling activity in Greek government bonds, which certainly has a greater effect on Greek bond prices as it involves selling the actual instruments in the market.” blogs.wsj.com --- How? Disingenuous question! I think everyone here could tell the ISDA how the arsonists have been working, and who's making money. Jim

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