What Is A CDS, And How Did It Almost Destroy Our Economy (1 Viewer)

[JoeTheEconomist]

What is a Credit Default Swap?

A CDS is just insurance, much like health insurance that you may buy for yourself. People buy health insurance to protect themselves from the remote possibility of getting very sick. In such cases, the expense of your hospital stay and medical treatments are paid by the insurance company. The insurance company doesn't charge you very much because the likelihood of you getting very sick is very small. It is a bet on your health.

While similar in theory, there is a big difference between Credit Default Swaps andlike health insurance. One is regulated and safe, while the other is completely unregulated. With a credit default swap, phrased in terms of health insurance, I can buy health insurance on you, where I get paid if you get sick. Moreover, I can do everything in my power to make you sick. So, I would be allowed to buy insurance on your health, and then loosen the lug-nuts on your car tires.

Another difference is there nothing to stop a complete fool from selling financial insurance. Investment and risk are something like nuclear power and nuclear waste. In an completely unregulated market, you would find that the company that stores the nuclear waste is run by the person who knows the least about the half-life of spent uranium rods. In the case of credit default swaps, the company that understood the least about risk was AIGFP, or American Insurance General Financial Products.

What should bother you is that these things are still sold.

The longer piece is :

Lehman Brothers Crash: Inside the Accounting Trick That Destroyed the Economy

 

[DaveFagan]

What is a Credit Default Swap?

A CDS is just insurance, much like health insurance that you may buy for yourself. People buy health insurance to protect themselves from the remote possibility of getting very sick. In such cases, the expense of your hospital stay and medical treatments are paid by the insurance company. The insurance company doesn't charge you very much because the likelihood of you getting very sick is very small. It is a bet on your health.

While similar in theory, there is a big difference between Credit Default Swaps andlike health insurance. One is regulated and safe, while the other is completely unregulated. With a credit default swap, phrased in terms of health insurance, I can buy health insurance on you, where I get paid if you get sick. Moreover, I can do everything in my power to make you sick. So, I would be allowed to buy insurance on your health, and then loosen the lug-nuts on your car tires.

Another difference is there nothing to stop a complete fool from selling financial insurance. Investment and risk are something like nuclear power and nuclear waste. In an completely unregulated market, you would find that the company that stores the nuclear waste is run by the person who knows the least about the half-life of spent uranium rods. In the case of credit default swaps, the company that understood the least about risk was AIGFP, or American Insurance General Financial Products.

What should bother you is that these things are still sold.

The longer piece is :

Lehman Brothers Crash: Inside the Accounting Trick That Destroyed the Economy

Explain why the CDSs covering the Greek debts didn't have to be honored when Greece defaulted?

 

[specklebang]

What is a Credit Default Swap?

Another difference is there nothing to stop a complete fool from selling financial insurance. Investment and risk are something like nuclear power and nuclear waste. In an completely unregulated market, you would find that the company that stores the nuclear waste is run by the person who knows the least about the half-life of spent uranium rods. In the case of credit default swaps, the company that understood the least about risk was AIGFP, or American Insurance General Financial Products.

What should bother you is that these things are still sold.

I'm not disagreeing. Can you explain why the economy was NOT destroyed. Harmed, sure, but how did this whole thing not crush us and why is it still not being viewed as a problem?

I'm looking to learn, not to argue (in this case anyway).

 

[JoeTheEconomist]

Explain why the CDSs covering the Greek debts didn't have to be honored when Greece defaulted?

That is an excellent question, and it feeds into a different article I wrote. But your question seems to be rethorical. Am I right?

 

[JoeTheEconomist]

I'm not disagreeing. Can you explain why the economy was NOT destroyed. Harmed, sure, but how did this whole thing not crush us and why is it still not being viewed as a problem?

I'm looking to learn, not to argue (in this case anyway).

The economy was not harmed, but all of the citizens being harmed. When we bailed out these companies, it cost a significant amount. We are talking about trillions of dollars of debt have gone into trying to revive the economy.

The way that the government engineered the bail-out, fostered a great deal of uncertainty. We bailed-out the equity owners of one company, and left the debt holders of another like company without any support. With that level of uncertainty comes panic. This is a different piece, but what it suggests is :

The experts blame Lehman Brothers, but the financial crisis was largely unavoidable. If the government had saved Lehman, then Merrill Lynch would have been the trigger. Wachovia, Wamu, and others were waiting to trigger the crisis. It was going to happen. The magnitude of the crisis, on the other hand, was the fault of the government. The government started by saving the equity players. Then it was going to save the debt holders. Then it saved no one.The market has only one response to the situation created by the government: horde cash.

Paulson and Bernanke Screwed Millennials, and Now Expect Your Graditude

 

[DaveFagan]

That is an excellent question, and it feeds into a different article I wrote. But your question seems to be rethorical. Am I right?

No, I would really like to know what lame excuse was publicized to not pay those defaults. Greece did default.

 

[274ina]

Ban all securites that are not approved by the people. And totally regulated.

We cant allow WS to print there own money all day long. Which is what inventing "securities" is.

Read
The big short
recless endangerment

 

[Respecthelect]

The problem is exactly the same as 1929 - leverage. CDS accounting tricks enabled high leveraging. Investors can't be allowed to walk away from their downside obligations. Better stated, investors need to be able to cover their losses. In 1929 it was margin calls, today it's CDS insurance scams. The 38-page Glass-Steagall Act (1933) clarified the limits of leveraging and gave regulators authority to keep the banking system safe through well-understood and unchanging written rules. Dodd-Frank eliminated rule-of-law Glass-Steagall and the crash was inevitable. Let folks legally over-leverage and they will crash the market every time.

Two-thousand page Dodd-Frank Act purports to replace Glass-Steagall, but reliance on written rules is replaced by rule-of-man. Banks and investors now follow whatever the current regime of bureaucrats whim. As anti-American a law until Obamacare coerced purchases. Why let the destroyers of the economy (Dodd and Frank) write the new law is impossible to understand? Why not simply return to Glass-Steagall or write an equally simple set of rules to protect the markets?

America needs written rules. Rules everyone can read and understand. Rules that incentivise productive participation and disincentivize destructive behavior. This goes for every aspect of law-wriiting. Stop writing thousand page monstrosities that leave anything up to regulators. Regulators should enforce clear, written law, not make it up as they go. The problem is not complicated in the financial world. Simply make sure investment instruments are covered on the downside. Limit leverage.

.

 

[PeteEU]

No, I would really like to know what lame excuse was publicized to not pay those defaults. Greece did default.

Actually they did not. They got bailed out with write downs for private banks, which means the requirements for CDS's did not get triggered.

And there was a good reason for this... both politically and economically... and even criminally.

1) Had the CDS's been triggered, then it would have brought AIG and other issuers to the brink of bankruptcy.. again, which would prompt a new bail out of these companies.

2) Plus the political fall out would have been massive since a triggering of CDS would have brought a lot of dirty laundry out in a court of law.. something that had to be avoided.

Fact is some of the Greek debt was help on by 2 American banks and made in secret. These banks then took out CDS on that debt. At the same time they started a whisper campaign pushing for Greek default so that to trigger the CDS that they had just taken out.. that way they would earn their money back faster. This is borderline legal, but no one wants to have the political and legal fight over this ponzi scheme because it happens all the time and is totally unregulated.

What these 2 American banks did was the equivalent of going to Vegas, betting on a horse and making sure that horse won.. in Vegas they take you out to desert to dig a hole,.. on Wall Street you get a massive bonus.

CDS is in theory a good thing, but because of their total unregulated form and the fact that they take risk totally off the table... they basically are harming the economy. When you can invest in something and have a guaranteed outcome.... a great thing right? But ultimately someone has to pay for that guaranteed outcome and that was the tax payer when AIG went belly up.

Now if Greek CDS had been triggered then the political blowback would have yet again brought the whole financial sectors under pressure and at the time they had barely recovered from the original Lehman cluster****.

Now personally I would have loved to had the people and companies involved with the secret Greek loans put on trial for fraud, and it pisses me off that they got away with it.. but I do understand that it was for the good of all that it happened.. and eventually that the private lenders were forced to take almost full write downs on the loans and that meant that the CDS holders were screwed.. was a bit of justice.

 

[DaveFagan]

Actually they did not. They got bailed out with write downs for private banks, which means the requirements for CDS's did not get triggered.

And there was a good reason for this... both politically and economically... and even criminally.

1) Had the CDS's been triggered, then it would have brought AIG and other issuers to the brink of bankruptcy.. again, which would prompt a new bail out of these companies.

2) Plus the political fall out would have been massive since a triggering of CDS would have brought a lot of dirty laundry out in a court of law.. something that had to be avoided.

Fact is some of the Greek debt was help on by 2 American banks and made in secret. These banks then took out CDS on that debt. At the same time they started a whisper campaign pushing for Greek default so that to trigger the CDS that they had just taken out.. that way they would earn their money back faster. This is borderline legal, but no one wants to have the political and legal fight over this ponzi scheme because it happens all the time and is totally unregulated.

What these 2 American banks did was the equivalent of going to Vegas, betting on a horse and making sure that horse won.. in Vegas they take you out to desert to dig a hole,.. on Wall Street you get a massive bonus.

CDS is in theory a good thing, but because of their total unregulated form and the fact that they take risk totally off the table... they basically are harming the economy. When you can invest in something and have a guaranteed outcome.... a great thing right? But ultimately someone has to pay for that guaranteed outcome and that was the tax payer when AIG went belly up.

Now if Greek CDS had been triggered then the political blowback would have yet again brought the whole financial sectors under pressure and at the time they had barely recovered from the original Lehman cluster****.

Now personally I would have loved to had the people and companies involved with the secret Greek loans put on trial for fraud, and it pisses me off that they got away with it.. but I do understand that it was for the good of all that it happened.. and eventually that the private lenders were forced to take almost full write downs on the loans and that meant that the CDS holders were screwed.. was a bit of justice.

The "essence" is that if you don't call non-payment a default, but some other name, it is not a default. Yet the insured does not get paid, and the creditor realizes the same loss, or nearly the same loss, as a default. I'm not siding with the crooked banks, just indicting the whole system as being rife with fraud, top to bottom. The biggest bankers are the biggest crooks? Eh.

 

[Khayembii Communique]

A CDS is just a security, like an option. Saying that CDS product is to blame for an economic crisis is like saying an option or even a stock is to blame. It's simply stupid.

 

[PeteEU]

The "essence" is that if you don't call non-payment a default, but some other name, it is not a default. Yet the insured does not get paid, and the creditor realizes the same loss, or nearly the same loss, as a default. I'm not siding with the crooked banks, just indicting the whole system as being rife with fraud, top to bottom. The biggest bankers are the biggest crooks? Eh.

Pretty much.. but with a twist. The reason for not calling it a default is to avoid triggering the CDS.. and that has a twofold reason.

1) Because of the numbers involved it could be a catalyst for defaults/bankruptcies in insurers and financial institutions that would require a bail out.. most likely much bigger than the default in question. That was the problem with Lehman Brothers.. TARP was forced on many banks, not to save them, but to shore up them up and create an aurora of trust in a time of panic.

2) By triggering the default you are rewarding in large part the criminals that lead to the default in the first place and that is not something that politically could be accepted in any country.

Just imagine it coming out that JP Morgan or Morgan Stanley earned billions on a Greek default... after they earned trillions on the bail-out? That is not something you can gloss over once the facts come out on how they earned the money and their actions in a lead up to a Greek default. By not calling it a default, and not triggering the CDS, and letting those 2 banks take the hit.. the industry could with the media help.. gloss over the complicity of especially Morgan Stanley in the Greek problems.

In my mind CDS should not be able to be taken out on sovereign debt.. pure and simple. Yes it would increase the risk and rates, but so freaking what. That one countries debt problems could bring down several insurance and financial companies because of the amounts involved.. is simply unacceptable. Add to that, the emergence of a speculator driven market, and you have a cocktail of massive problems in the work.

 

[PeteEU]

A CDS is just a security, like an option. Saying that CDS product is to blame for an economic crisis is like saying an option or even a stock is to blame. It's simply stupid.

That is simply not correct.

The definition of a CDS is the following.

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.

There was over 62 TRILLION in CDS in 2007, and that has gone down to "only" 25 trillion in 2012... just imagine any insurance agent trying to pay out those sums.. it is impossible.

 

[Khayembii Communique]

In my mind CDS should not be able to be taken out on sovereign debt.. pure and simple. Yes it would increase the risk and rates, but so freaking what. That one countries debt problems could bring down several insurance and financial companies because of the amounts involved.. is simply unacceptable. Add to that, the emergence of a speculator driven market, and you have a cocktail of massive problems in the work.

I don't think CDS on sovereign debt is an issue at all, as the risk is baked in. The problem with CDS during the economic crisis was the exact same as MBS/CDO product, which is that risk in the housing market was not properly assessed, so investors become unknowingly over-exposed without the ability to hedge.

There was over 62 TRILLION in CDS in 2007, and that has gone down to "only" 25 trillion in 2012... just imagine any insurance agent trying to pay out those sums.. it is impossible.

Yeah sure but this number is meaningless as no issuer of CDS is ever going to have to pay out on all of its product. That's the entire basis of insurance. You're basically arguing that insurance is bad, because look at how many insurance contracts United Healthcare has out, and just think about how much money it would have to pay out if everyone got cancer at once.

Higher risk assessment by insurers is offset by higher premiums and hedging exposure. It's the same with financial insurance providers.

 

[LowDown]

The problem is exactly the same as 1929 - leverage. CDS accounting tricks enabled high leveraging. Investors can't be allowed to walk away from their downside obligations. Better stated, investors need to be able to cover their losses. In 1929 it was margin calls, today it's CDS insurance scams. The 38-page Glass-Steagall Act (1933) clarified the limits of leveraging and gave regulators authority to keep the banking system safe through well-understood and unchanging written rules. Dodd-Frank eliminated rule-of-law Glass-Steagall and the crash was inevitable. Let folks legally over-leverage and they will crash the market every time.

Two-thousand page Dodd-Frank Act purports to replace Glass-Steagall, but reliance on written rules is replaced by rule-of-man. Banks and investors now follow whatever the current regime of bureaucrats whim. As anti-American a law until Obamacare coerced purchases. Why let the destroyers of the economy (Dodd and Frank) write the new law is impossible to understand? Why not simply return to Glass-Steagall or write an equally simple set of rules to protect the markets?

America needs written rules. Rules everyone can read and understand. Rules that incentivise productive participation and disincentivize destructive behavior. This goes for every aspect of law-wriiting. Stop writing thousand page monstrosities that leave anything up to regulators. Regulators should enforce clear, written law, not make it up as they go. The problem is not complicated in the financial world. Simply make sure investment instruments are covered on the downside. Limit leverage.

.

Dodd Frank was signed into law in 2010, so it could not have caused the financial crisis. It was a response to the crisis. Glass Steagall would not have prevented the use of financial instruments that lead to the crisis because it didn't prohibit them. Nor would it have prevented any of the bad practices that resulted in the crisis. By the time the crisis rolled around Glass Steagall was being interpreted such that commercial banks were able to buy and sell securities, so not even that would have been prevented by Glass Steagall. The bad actors in the financial crisis were small institutions, not the large conglomerates that were created by the repeal of Glass-Steagall.

The Community Reinvestment act and other polices promoted by the federal government and government regulators encouraged Fannie and Freddie to buy up sub prime mortages and bundle them together into securities that were rated at a much lower risk than they were. This junk was injected into the financial markets to the tune of more than a trillion and all of that risk was hedged against the assets of other institutions until the whole system was tied together and therefore all went down at once when the housing market bubble burst. Institutions were making a lot of money selling CDSs, but it pulled them down when the mortages securities all went south at once. They had sold far more CDSs than they had money to cover them, but there is nothing new about that, insurance companies do that as a matter of course betting that they won't be hit by a bunch of claims all at once. Nobody realized the extent to which finanical institutions had been tied together by these instruments such when when one went down they all went down. If there had been that realization the use of CDSs would have been seen as irrational. Again, none of this was covered by Glass-Steagall.

 

[Fenton]

What is a Credit Default Swap?

A CDS is just insurance, much like health insurance that you may buy for yourself. People buy health insurance to protect themselves from the remote possibility of getting very sick. In such cases, the expense of your hospital stay and medical treatments are paid by the insurance company. The insurance company doesn't charge you very much because the likelihood of you getting very sick is very small. It is a bet on your health.

While similar in theory, there is a big difference between Credit Default Swaps andlike health insurance. One is regulated and safe, while the other is completely unregulated. With a credit default swap, phrased in terms of health insurance, I can buy health insurance on you, where I get paid if you get sick. Moreover, I can do everything in my power to make you sick. So, I would be allowed to buy insurance on your health, and then loosen the lug-nuts on your car tires.

Another difference is there nothing to stop a complete fool from selling financial insurance. Investment and risk are something like nuclear power and nuclear waste. In an completely unregulated market, you would find that the company that stores the nuclear waste is run by the person who knows the least about the half-life of spent uranium rods. In the case of credit default swaps, the company that understood the least about risk was AIGFP, or American Insurance General Financial Products.

What should bother you is that these things are still sold.

The longer piece is :

Lehman Brothers Crash: Inside the Accounting Trick That Destroyed the Economy

ACTUALLY, it was Democrat iniatives and mandates to lower standards on both lending institutions and the GSEs that Destroyed the economy.

Credit Default Swaps were used to Collateralize all those MBSs backed by sub-prime loans.

According to SEC mandate those loans HAD TO BE COLLATERALIZED.

Fannie Mae was the primary customer AND CREATOR of sub-prime backed mortgage securities.

Going after the investment banks as the root cause is innacurate.

 

[Khayembii Communique]

ACTUALLY, it was Democrat iniatives and mandates to lower standards on both lending institutions and the GSEs that Destroyed the economy.

ACTUALLY, lower standards on lending institutions and the GSE's was a bipartisan cause.

Credit Default Swaps were used to Collateralize all those MBSs backed by sub-prime loans.

According to SEC mandate those loans HAD TO BE COLLATERALIZED.

Fannie Mae was the primary customer AND CREATOR of sub-prime backed mortgage securities.

Going after the investment banks as the root cause is innacurate.

You are entirely 100% wrong, and this shows how completely ignorant you are. A Credit Default Swap is absolutely nothing like a Collateralized Debt Obligation (CDO). There is no way one simply mistakes one for the other unless they don't know what they are talking about.

 

[Fenton]

ACTUALLY,
lower standards on lending institutions and the GSE's was a bipartisan cause.



You are entirely 100% wrong, and this shows how completely ignorant you are. A Credit Default Swap is absolutely nothing like a Collateralized Debt Obligation (CDO). There is no way one simply mistakes one for the other unless they don't know what they are talking about.

Lol...

No you're wrong...as usual.

A CDO is a structured asset backed security, that promises to pay investors a structured dividend that is collected from the pool of bonds and assets that are owned by the CDO.

The CDS, ( Insurance more ore less) were used to COLLATERALIZE MBSs being pushed around by Investment banks.

A Regualtory mandate that those MBSs HAD to be backed while they were in the possesion of the Investment bank.

NOW do you understand ?

 

[Fenton]

ACTUALLY,
lower standards on lending institutions and the GSE's was a bipartisan cause.



You are entirely 100% wrong, and this shows how completely ignorant you are. A Credit Default Swap is absolutely nothing like a Collateralized Debt Obligation (CDO). There is no way one simply mistakes one for the other unless they don't know what they are talking about.

Wow you're 0 for 2 in that ridiculous post.

Clintons 1995 National HomeOwners Stratey lowered capital requirements on loans purchased by Fannie and Freddie from 10% to 3%.

The National HomeOwners Strategy was a long list of Executive Orders.

Yea thats real bi-partisan.

Clinton appointed a bunch of corrupt Democrats to run the GSEs from 1993 to 1998 including Franklin Raines who misreported BILLIONS in profits so he could meet his bonus targets.

Yea, thats real bi-partisan.

The riddled with mistakes" Boston Fed Report" that was ordered by Clinton that "legitimaized" the False narrative of " redlining" wasn't a bi-partisan effort either.

In 2004 when the Republicans were holding Committees on the corruption at Fannie Mae, 72 Democrats signed a letter warning him not to regulate the two mortgage giants.....so no thatss not bi-partisan either.

When Democrats sat in front of those Comittees lying about the health of those GSEs, Fannie was heading into increasingly risky loans ( NINA ).

No thats not Bi-Partisan either.

When Democrats voted NAY along party lines on the 2005 McCain, Hagel bill ( S.190 ) that would have put huge new restrictive regulatory mandates on Fannie and Freddie, they also pledged to veto the bill in the Senate.

With only 55 votes the Republicans needed 5 Democrats to cross the aisle to make it VETO proof but NOT ONE Demorat cossed over.

It never receieved a vote......yea thats REAL bi-partisan there.

So as usual you typed out a bunch of nonsense before thinking didn't you.

It's ok, I enjoy correcting your lack of knowledge on this issue

 

[DaveFagan]

Pretty much.. but with a twist. The reason for not calling it a default is to avoid triggering the CDS.. and that has a twofold reason.

1) Because of the numbers involved it could be a catalyst for defaults/bankruptcies in insurers and financial institutions that would require a bail out.. most likely much bigger than the default in question. That was the problem with Lehman Brothers.. TARP was forced on many banks, not to save them, but to shore up them up and create an aurora of trust in a time of panic.

2) By triggering the default you are rewarding in large part the criminals that lead to the default in the first place and that is not something that politically could be accepted in any country.

Just imagine it coming out that JP Morgan or Morgan Stanley earned billions on a Greek default... after they earned trillions on the bail-out? That is not something you can gloss over once the facts come out on how they earned the money and their actions in a lead up to a Greek default. By not calling it a default, and not triggering the CDS, and letting those 2 banks take the hit.. the industry could with the media help.. gloss over the complicity of especially Morgan Stanley in the Greek problems.

In my mind CDS should not be able to be taken out on sovereign debt.. pure and simple. Yes it would increase the risk and rates, but so freaking what. That one countries debt problems could bring down several insurance and financial companies because of the amounts involved.. is simply unacceptable. Add to that, the emergence of a speculator driven market, and you have a cocktail of massive problems in the work.

Thanks for taking the time to compose the thoughtful replies. The effort is appreciated.

 

[Fenton]

Blaming CDO's, CDS's and investment banks for the Sub-Prime Collapse in any way is comparable to a Police Officer pulling over a speeder and then ticketing the car.

CDSs and derivitives are not intrinsically dangerous, neither are MBSs.

They were simply financial tools that were used to prop a secondary market, and a bubble built on a toxic layer of asset backed securities.

It was absolutely imperitive to the Housing Goals of the GSEs that these instruments be misused because without them there would have been no way to fund the dangerous and ever inflating bubble.

 

[JoeTheEconomist]

No, I would really like to know what lame excuse was publicized to not pay those defaults. Greece did default.

Seriously you are not going to like the answer. 3rd Paragraph, but it will make your head explode.

Credit-default swaps: How Wall Street is gaming the Greek bailout. - Slate Magazine

 

[JoeTheEconomist]

The problem is exactly the same as 1929 - leverage. CDS accounting tricks enabled high leveraging. Investors can't be allowed to walk away from their downside obligations. Better stated, investors need to be able to cover their losses. In 1929 it was margin calls, today it's CDS insurance scams. The 38-page Glass-Steagall Act (1933) clarified the limits of leveraging and gave regulators authority to keep the banking system safe through well-understood and unchanging written rules. Dodd-Frank eliminated rule-of-law Glass-Steagall and the crash was inevitable. Let folks legally over-leverage and they will crash the market every time.

Two-thousand page Dodd-Frank Act purports to replace Glass-Steagall, but reliance on written rules is replaced by rule-of-man. Banks and investors now follow whatever the current regime of bureaucrats whim. As anti-American a law until Obamacare coerced purchases. Why let the destroyers of the economy (Dodd and Frank) write the new law is impossible to understand? Why not simply return to Glass-Steagall or write an equally simple set of rules to protect the markets?

America needs written rules. Rules everyone can read and understand. Rules that incentivise productive participation and disincentivize destructive behavior. This goes for every aspect of law-wriiting. Stop writing thousand page monstrosities that leave anything up to regulators. Regulators should enforce clear, written law, not make it up as they go. The problem is not complicated in the financial world. Simply make sure investment instruments are covered on the downside. Limit leverage.

.

Sensible post

 

[JoeTheEconomist]

Actually they did not. They got bailed out with write downs for private banks, which means the requirements for CDS's did not get triggered.

And there was a good reason for this... both politically and economically... and even criminally.

1) Had the CDS's been triggered, then it would have brought AIG and other issuers to the brink of bankruptcy.. again, which would prompt a new bail out of these companies.

2) Plus the political fall out would have been massive since a triggering of CDS would have brought a lot of dirty laundry out in a court of law.. something that had to be avoided.

Fact is some of the Greek debt was help on by 2 American banks and made in secret. These banks then took out CDS on that debt. At the same time they started a whisper campaign pushing for Greek default so that to trigger the CDS that they had just taken out.. that way they would earn their money back faster. This is borderline legal, but no one wants to have the political and legal fight over this ponzi scheme because it happens all the time and is totally unregulated.

What these 2 American banks did was the equivalent of going to Vegas, betting on a horse and making sure that horse won.. in Vegas they take you out to desert to dig a hole,.. on Wall Street you get a massive bonus.

CDS is in theory a good thing, but because of their total unregulated form and the fact that they take risk totally off the table... they basically are harming the economy. When you can invest in something and have a guaranteed outcome.... a great thing right? But ultimately someone has to pay for that guaranteed outcome and that was the tax payer when AIG went belly up.

Now if Greek CDS had been triggered then the political blowback would have yet again brought the whole financial sectors under pressure and at the time they had barely recovered from the original Lehman cluster****.

Now personally I would have loved to had the people and companies involved with the secret Greek loans put on trial for fraud, and it pisses me off that they got away with it.. but I do understand that it was for the good of all that it happened.. and eventually that the private lenders were forced to take almost full write downs on the loans and that meant that the CDS holders were screwed.. was a bit of justice.

So it was of vital importance to perserve AIG which was the incompotent that started the 2008 crisis. Companies that write this stuff need to pay the price, and be driven out of business. The reason that AIG was around to write Greek CDSs was because it wasn't washed-out in 2008. As Ron White says there is no fix for stupid.

 

[JoeTheEconomist]

A CDS is just a security, like an option. Saying that CDS product is to blame for an economic crisis is like saying an option or even a stock is to blame. It's simply stupid.

I am going out on a limb here. I am guessing that you didn't read the article or you wouldn't be throwing around words like stupid or security. CDSs allow for an insane amount of leverage. They hid systemic risk off-balance sheet, and introduced an economic incentive to destroy the economy.