I think it's interesting. In the case of Hovnanian, you have two companies who are making bets against each other on whether Hovnaian will survive. Hovnanian

I think it's interesting. In the case of Hovnanian, you have two companies who are making bets against each other on whether Hovnaian will survive. Hovnanian has no involvement in the CDS market on their own debt. And yet they were able to take the CDS market and turn it into funding, which allowed a company that was in financial trouble to continue to exist and provide jobs. Solus was free to offer Hovnanian funding with more favorable terms and the agreement to not default. And if GSO and Solus want to go back and forth offering better and better terms then in the end you have a viable company that's leveraged CDS to get additional funding at good terms. I think a much sketchier case is what Aurelius did to Windstream. There you have no benefit being created on the back of CDS engineering, you just have a hedge fund who drove a viable business into bankruptcy against the wishes of the primary bondholders. Conceptually, the CDS market is useful. If I do a bunch of business with a company and them going bankrupt would cause me financial problems then I can use CDS to hedge against that possibility. I don't know how you can prevent this kind of engineering though. I think it's easier to prevent what Aurelius did to Windstream. But the GSO/Hovnanian deal seems much harder to regulate. Maybe instead we just decide that it was actually a good thing and going forward people should be aware that it's a possible outcome? The risk of default isn't just the risk that the company on its own defaults, but also the risk that the company defaults and can't find outside funding. If people are expecting that eventuality then the CDS market should settle in a spot that prices in the possibility of CDS buyers or sellers offering refinancing.