Could the crash of 2008 have been avoided by simply declaring CDS transactions illegal? | LinkedIn Answers | LinkedIn
Could the crash of 2008 have been avoided by simply declaring CDS transactions illegal? | LinkedIn Answers | LinkedIn
Could the crash of 2008 have been avoided by simply declaring CDS transactions illegal?
An insurance product spreads risk of the buyer to a large population of subscribers. When you buy a medical insurance, in the event of your needing surgery, the bill is footed by all the subscribers to that product.
In the case of a bank buying CDS to insure against a credit default, the bill is not being paid by a large population of other creditors but by a single counter party who is also another financial intermediary and may have also bought CDS for its own credit default insurance ...therefore CDS is not an insurance product at all but just a form of gambling...there is no spreading of risk happening...
Now the Europeans are actually extinguishing CDS in a round about manner....the 75% voluntary haircut is designed to avoid invoking of CDS....
Why not just outlaw all CDS transactions unless these are re-insured by the Fed or ECB who have printing presses....
If creditors do not have a false sense of security from CDS, they would be more careful in transacting with Greeces and Portugals....the cost of credit for these countries would be what it needs to be....it would be a self correcting mechanism...
In the case of a bank buying CDS to insure against a credit default, the bill is not being paid by a large population of other creditors but by a single counter party who is also another financial intermediary and may have also bought CDS for its own credit default insurance ...therefore CDS is not an insurance product at all but just a form of gambling...there is no spreading of risk happening...
Now the Europeans are actually extinguishing CDS in a round about manner....the 75% voluntary haircut is designed to avoid invoking of CDS....
Why not just outlaw all CDS transactions unless these are re-insured by the Fed or ECB who have printing presses....
If creditors do not have a false sense of security from CDS, they would be more careful in transacting with Greeces and Portugals....the cost of credit for these countries would be what it needs to be....it would be a self correcting mechanism...
posted by Unknown at 11:58 PM
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