Having very briefly traded CDS, but also having had some experience in the wider hedge fund trading space, here's my explanation, along with some clarification.

Having very briefly traded CDS, but also having had some experience in the wider hedge fund trading space, here's my explanation, along with some clarification. - CDS is basically a way to bet for or against some bond defaulting. It's pretty much like car insurance: you pay each month, but if something happens to your car, the insurer pays you. You make money on the trade if the malls can't pay, basically the car crash scenario. The thing is, you don't need a car to be involved. - The bonds they were trading against are actually big bags of loans on shopping malls. You make a big bag because investors want to lend to shopping malls, but they want to diversify against more than one mall, and they also don't want to keep track of thousands of malls. Of course this means there's a bag-maker who has an interest in organizing bags that investors will be interested in, on both sides of the trade. There's a fair bit of critique that fits here, eg are you really helping both sides or is one side a dummy that you can fleece to help your relationship with the other side? - The thing about bonds is you get paid a higher interest if they are distressed, but they look just fine as long as they are able to pay. Even if they are just able to pay by the skin of their teeth, the bondholder gets whatever they were owed. If there's a default a lot of messy things happen, and as the bondholder you really don't want that problem. So the Putnam and AB had good reasons to make some noise and try to get politicians to help. There's more questions here, people should ask whether it's right to go to the news to affect the outcome, vs letting a bunch of more or less anonymous investors make their bets and letting the market decide. - For the fund, betting on stuff going down isn't all that different to betting on things going up. Either way you are weighing the cash flow (carry) against the potential movement. This goes for just about any security. The environment is typically also one where you don't question the wider implications of what you're doing. If you buy an oil company, it's because you think it's going up. Maybe you are an ESG fund and you have some angle, but the default is to think about what will happen from what you think the dynamics are, not whether you thik it makes the world a better place. - The most standard excuse for the above is that it's better for the prices of things to get to where they are supposed to be sooner rather than later. If malls are no longer going to be as large a part of the economy, it's better for people involved to find new jobs now, and not later. This is not exactly bullet proof, but you can't avoid this argument in any critique of how the market works, someone will come up with some version of it.