Toddsterpatriot
Diamond Member
Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable", in fact it was common for speculators to buy both the underlying debt and the CDS contract for the debt if they reasoned that the debt was likely to default (so they could get the risk premiums on discounted debt) as well as the inverse case where speculators buying high premium CDS contracts and the underlying risky debt that they reasoned wouldn't default (same reason as the inverse case). Along with the above you also had a proliferation of naked CDS positions which is essentially just another synthetic derivative bet by speculators on assets they didn't own thus magnifying the negative effects of credit disruptions if the bets went bad.and then of course you have secondary markets for CDS contracts which is where opaque CDS risk chains come into the picture (A buys a CDS contract from B who then sells it to C who then sells it to D, if D can't pay off then everybody up the chain takes it in the rear) .
Pretty sure they didn't work that way in 2007-2008.
All swaps were between the 2 parties. A couldn't sell the contract he signed with B to C, A would have to write a new contract with C.....no netting.
The bigger problem however wasn't the buying and selling of contracts (since that is a two party risk transfer), it was the situation you described where the original underwriter insures the CDS risk (with a new contract) to a third party and then that third party does the same thing with a fourth party and so on, this creates an opaque risk chain; its difficult to calculate actual risk because it's hard to determine who all the parties in the chain are let alone which ones are the "weak link(s)"; there is a cascading effect if any of the parties involved are unable to pay off in the event that the original debt defaults.
Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable",
No. They're contracts between 2 parties. Not standardized, not nettable and not tradeable.
You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded), just like a myriad of other types of derivative contracts.
You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded),
If Goldman wrote a CDS contract with Merrill, Merrill could not liquidate the position by selling it to Morgan.
Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?If Merrill wrote an offsetting contract with Morgan, Merrill would have 2 contracts on the books, not zero contracts.
I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.just like a myriad of other types of derivative contracts
Don't confuse these contracts with exchange traded options and futures.
Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.
Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.
You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.
Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?
Who said it was? In my scenario, does Merrill have zero risk? Why?
Don't confuse these contracts with exchange traded options and futures.
I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable
Only because the 2 party contracts aren't.
which leads one to conclude that you think that trades only occur on public exchanges.
If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.