Saturday, June 12, 2010

One more time on credit default swaps, briefly

At some conference yesterday George Soros made a speech in which he expressed his opinion that we were now just entering Act II of the great global credit crisis. As reported by Bloomberg he commented,

"Credit default swaps, which aim to protect bondholders against a risk of default, are dangerous and a license to kill. CDS's should only be allowed if there is an insurable interest."

So simply said, so correct. Rather than banning all CDS's like the Germans or attempting to paint all derivatives as toxic like some members of the U.S. Congress, he focused on the exact problem that will be part of opening the curtain on Act II. Rather than support unlimited uses of CDS's like Geithner, Summers, and capital markets "experts", Soros underscores the need to limit their use to insuring against held credit risk.

Now it's not mortgage backed securities and challenged companies that will feel the effect of this unlimited ability to gamble and manipulate, it's governments, countries, and the people that work and live there.


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