Category: Think Tank

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2 Responses to “A Look at Credit Default Swaps and Their Impact on the European Debt Crisis”

  1. denim says:

    From our knowledge of life insurance, some of us have an inkling of how insurance works. We know, for example, that it requires the insurance company to have enough reserves to pay out claims according to risk exposure and statistics on life expectancy. State laws and insurance rating services police these companies. What is the equivalent for the Derivative Industry? Is it the Ayn Rand devotee’s like Alan Greenspan policy of no regulation or not?

  2. howardoark says:

    Am I wrong in thinking CDSs are just a way to create infinite leverage? If I can sell 3% CDSs on all of Italy’s debt, I collect 3% interest on billions of euros. If no one makes me keep any reserves (or has any notion that I’m insuring the entire debt) I make billions essentially risk free (my only risk being that Italy defaults and my company goes bankrupt leaving me with billions of euros and no job, boo hoo). Why wouldn’t any rational actor take that risk (of course if anyone asked how likely I would be to be solvent in the event of a credit event, good morals would require me to answer, “not effing likely.” – but if no one asks, am I really obliged to tell them? Chances are, if you’re insuring billions of euros worth of Italian bonds you’re not a naif there for the shearing).