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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: Paul Kern who wrote (85709)8/30/2007 9:59:38 AM
From: stan_hughes  Read Replies (3) of 110194
 
Allow me to play a bit of Devil's Advocate here for everyone's educational benefit -- if I was a Pension Fund manager who was about to pay out a sum to purchase a CDS to reduce my risk of loss on something exotic in my portfolio, a reasonable person might expect me to probably put some effort into evaluating whether my CDS counterparty had the ability to make good in the event of a default.

IOW, as a steward of third-party funds, I wouldn't accept a guarantee to cover my losses from the guy on the corner running a squeegie across my windshield -- I'd be wanting to see a financial entity of some substance on the other side of the deal, otherwise it would plainly be an empty promise, and by buying such an instrument I'd just be throwing away my premium to some Jack and his magic beans.

That being the case, how does CDS viability come to degrade to the point where it ceases to be a legitimate guarantee without fraud occurring? It seems to me that at some point in the re-assignment process someone would have to knowingly transfer the liability (perhaps multiple times) to an entity clearly incapable and/or without any history of performing in the event of a claim (which is insurance fraud).

Got any inputs on this subject?
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