The Epic American Credit and Bond Bubble Laboratory Message Board

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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: patron_anejo_por_favor who wrote (101535)	2/23/2009 12:05:47 AM
From: Hawkmoon	Read Replies (1) of 110194

OTOH, a lot of CDS SALES were sold as outright gambling. Just because they thought they'd pick up a few pennies in front of the steamroller.... The true problem with CDS's is that when financial markets are stressed fewer people want to take the other side of the transaction (short via writing a CDS). What's the benefit of taking on that risk when their loss potential is exponential in comparison to the CDS buyer (who can only lose 100% of their invested capital). What results is a short squeeze in CDS' where market distortions to the downside in the underlying bonds and ABS' have to become so extreme that the CDS buyer starts getting nervous about their speculation. Only at that time will money step forward and write CDS contracts and bring down the risk premium for financial surety converage. The CDS market is one of the true problems that MUST be tackled before this financial crisis subsides. And the problem is not just with the size, but with the risk/reward equation where betting that bonds will default poses less risk than betting that they will pay off at maturity. Hawk

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