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Author: WatchingTheHerd Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465111  
Subject: Re: Will the Bailout Plan Work? Date: 10/5/2008 12:25 PM
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The government can't cancel existing contracts. That's the law. But they can begin to mitigate the problem by restricting CDS insurance only to actual owners of bonds, and only for the par value of the bond. That isn't anywhere near happening.

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Great explanation.

In the larger picture, the more I think about this, the more I believe CDS instruments should be banned, even for actual owners of bonds. The presence of CDS instruments only abstracts away the analysis of risk that must be the first order factor in any decision to borrow and lend money. If you're lending money and worried about the borrower's ability to pay, raise the interest rate to collect more up front while the borrower IS making payments to compensate you for the risk they might eventually stop or DON'T LEND THE MONEY.

One may think it serves some higher purpose for expanding growth and economic activity when things are going relatively well and predictably but the presence of CDS type securities actually accelerates the creation of phantom money. THAT is the root of the entire problem.


WTH
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