But they cannot do this right now because if they do you can say goodbye to most major european banks. The CDS wrappers to a lot of dodgy paper in their Tier I capital is the only thing holding them up by this stage. The CDS market is rapidly moving to an open market traded exchange (plus only AIG was not posting counter party collateral) so it will unwind of its own accord to a more manageable size and form in the next year or two. Only then should they take out all the credit enhanced toxic Tier I garbage and shoot the mutha’s.
As the Lehmann event showed, parties had almost fully collateralised or hedged their positions which is why despite the very large nominal outstanding the final netted out positions only ran to low billions. CDS’s are perfectly legitimate derivatives when used for their original purpose and when you dont try to pull stunts like AIG did.
Airtime: Thurs. Mar. 19 2009 | 09 19 00 ET
Discussing what the day’s financial news means for the financials sector, with Martin Weiss, Weiss Research CEO; Ari Bergmann, Penso Capital Markets; and CNBC’s Maria Bartiromo.
Agree, if CDS were to be suddenly banned and contracts unwound, then markets would totally collapse. The CDS concept is actually a great idea because it allows movement of risk to those who want it. i.e Reinsurance, insurance companies are typically the biggest sellers…cough AIG cough. When market becomes more liquid, counterparty risk should become less of an issue as firmer requirements will be placed in credit desks in terms of trade sizes, capital ration etc.
What is interesting is that if AIG’s London unit had posted full collateral like everyone else they would not have been sunk by the rating downgrade and there would have been no systemic threat. We would still be hearing about all the credit enhancement scams using CDS’s but we would not have bozos in DC blaming them for everything. The problem was credit enhancement not CDSs. The whole credit enhancement scam was created and facilitated by rules and regulations put in place by Congress and the regulatory bodies. This had been going on for more than twenty years, long before the first CDS contract was signed.