No Virgina, There Is No CDS Fairy
Everyone knows about the tooth fairy. Who as a child did not place a tooth under their pillow and wake up with a shiny quarter instead? Of course discovering that there really is no tooth farily is not as big a deal as learning there is no Santa Claus. Really, that particluar belief was not that important.
But when it comes to the CDS fairy, there are a lot of members of the financial community who are in complete denial. The way it works is, you go to sleep with a lot of risk managment problems and capital requirments under your pillow, wrapped in a piece of tissue paper or maybe sealed in an envelope, and when you wake up they have been replaced by nice shiny profits from CDS. It happens like clockwork, and has been going on for years.
Listen up. There is no CDS fairy. CDS is a zero sum game, whatever one player wins another must lose. The only way you can continue to claim that everybody is making money is by continuing to increase nontional amounts and premiums, an ongoing Ponzi scheme. They don't create price discovery for bonds, they create manipulation of bond spreads.
I don't know why you don't listen to Uncle Warren and Uncle George, they both say CDS are weapons of destruction but you sit there sucking your thumb and believing the CDS fairy will solve all your risk management problems and your capital requirements and your need for trading profits to mask the credit losses and you have peed and pooped your pants again and made a mess.
There is no CDS fairy.
Comments: View Comments | Sunday June 14, 2009 | Stocks: BAC, C, GS, HSBC, MS,
