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Alright I'll bite. I fully agree with this. > 2) they're not subject to potential abuse. But to be fair, no one claimed otherwise;) I'd appreciate it if you

Alright I'll bite. I fully agree with this. > 2) they're not subject to potential abuse. But to be fair, no one claimed otherwise;) I'd appreciate it if you can change my mind but you really haven't' laid out a good argument yet. My thesis is that CDS's allow the credit markets to be larger than they would be without them, not that credit markets can't function without them. Obviously credit markets have existed before the ability to easily hedge out risk I mean I think you'd have to agree that hedging and risk minimization is a good thing and something that allows the market to be alot larger and more liquid due to the ability to hedge out risk with them. If swaps go away tomorrow, what replaces them? How do people hedge out credit risk without any form of swaps?

JackFr 9y ago
My argument is that they are not now, and never were, primarily a hedging instrument. While they can be used for hedging, like options for instance, they are primarily used for leverage. That is, it is much cheaper go long or short a particular name with CDS than it is just trading bonds. (Especially short which used to be nearly impossible.) It is argued that this actually allows for better price discovery more efficiency in the credit markets. But that has be balanced with the fact that the CDS's have become untethered from the actual bonds that they purport to insure, and the tail has begun to wag the dog (as evidenced in the original article.)