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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (10540)	11/12/2008 9:00:19 PM
From: Hawkmoon	1 Recommendation Read Replies (1) \| Respond to of 33421

John, I need to understand something here. The core of this problem we all know are the quality of loans, even if they are still performing. But what's truly aggravating this problem are the CDS insurance contracts, right? So there are indices which are being shorted, and exacerbating the deterioration of the underlying bonds. So why hasn't the Fed coordinated an intervention in the CDS market indiceds to stave off further manipulaton by the hedge funds? Would seem to make sense to me that stabilizing those CDS indices would frighten anyone who was short and hoping to drive bond prices down. They are derivatives, after all, and certainly the Treasury would get more bang for the buck working from where the damage is primarily being inflicted.. the CDS markets. Hawk

To: John Pitera who wrote (10540)	11/12/2008 9:25:36 PM
From: Hawkmoon	Read Replies (1) \| Respond to of 33421

John, prior to answering my question about Treasury intervention in the CDS indices, you might want to look at John Mauldin's latest: investorsinsight.com I was particularly by this comment on CDS's and Hedge funds: Add to this the fact that some hedge funds (mostly the bigger ones) have been selling credit default swaps (CDSs). A CDS is an insurance against corporate default. The buyer of a CDS supposedly makes money if the underlying credit blows up. I say 'supposedly' because the payment is a function of the seller's ability to pay up. That was why Morgan Stanley had to be saved at all cost. MS has been, and continues to be, one of the largest players in the CDS market. So if I'm to understand the above properly, the Hedgies have actually been selling CDS' contracts, which certainly seem lucrative on their face given some of the terms. So, given that the premiums for some of these CDS contracts are in the 60% range ($6 million to insure $10 million in debt) would it not seem reasonable for the Feds to sell CDS contracts to shore up the underlying bond markets? Hawk