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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ggersh who wrote (101594)	2/23/2009 9:42:47 PM
From: Hawkmoon	1 Recommendation Read Replies (2) \| Respond to of 110194

Hawk, the question is do you need all this insurance that CD's were suppose to insure. Seems to me they were only created as a money making(losing) scheme.? Well.. financial surety is a long integral part of the financial system, providing risk mitigation. But CDS's were proposed as a means of circumventing the rules and regulations that apply to the insurance industry. And for the insurers to continue to be able to compete, they had to "play ball" and write CDS contracts that put them in a position of financial vulnerability far greater than those buying the protection. What frightens me is that, for example, were some cash rich corporation to issue bonds (in order to make better use of their cash hoard, possibly to fight off a hostile takeover, or make an acquisition), the CDS's could be manipulated in such a way as to undermine the perceived safety of those bonds, EVEN IF the company had the ability to call them and do a payoff at any time. It would be a risky trade, but it could be done. Again.. this is my understanding of them.. I've never trade them, but I've tried to understand how they work. But most importantly, even though I despise Soros for his politics, I acknowledge his market savvy. And if Soros believes CDS's are grievously distorting the markets and feels that the financial system is disintegrating, then I have to share his fear. Again, who will want to utilize leverage (borrow money) when it's so easy for speculators to pummel the value and risk perception of that debt by manipulating the CDS'? They drive the price of the CDS contract up where the perception will be that it's nothing but "junk rating". Hawk