I so agree with this statement. I think they should nulify every CDS in existence. Its a very negative way to make money. Its like years ago when i was a craps dealer in vegas. You got the whole table betting on the pass line and one a-hole betting on the Dont's. The whole table hates that guy and ruins the experience for everyone at the table and when everyone else loses their money and he wins, they all want to kill him. Who would want to be THAT guy?
lawsuits... not to mention how could the govt just proclaim rich corporations no longer need to honor the debt derivatives they themselves created and got themselves in trouble with. the fallout would be huge..
You know - a lot of institutions (banks, insurers, pension managers) uses CDS to hedge their long debt exposures... if you nullify the contracts, they are all of a sudden unhedged and exposed to positions they thought were neutralized (not to mention loses a boat load of money from what's owed to them on a contract). And how is it a "negative way to make money"? There's a buyer for every seller. It's no more "negative way to make money" than buying and selling futures or options.
I think the main problem with the cds's is that they we created in excess of the debts they were derived from. maybe they could find some way to get the cds's and the debt in a 1 to 1 ratio. the current cds's are like naked shorts. maybe some sort of compensation plan to those that own the cds's that are over the limit that the debt can pay. but you would still need (i guess) to address the companies that will undoubtly fold...
That problem has already been addressed and solved via the "cash settlement" mechanism. Upon a default event, according to ISDA protocol, an cash debt auction will take place and used to set a recovery price. This price is then used as a reference for cash settling all outstanding cds instruments on that default.
so the cds holders are taking a hit also? its gotta be better than bankrupting the whole system, although I don't blame the cds holders.
Of course they are.... CDS spreads closely (for the lack of a better word) track debt spreads. How else would it be?
but aren't the cds's very valuable right now but with the auction system you mentioned they wont get the value they should out of the cds's. cds's trade in inverse to the credit there derived from correct?
Valuable only to those who have already bought protection... Why wouldn't they get that value? the cash settlement protocol only helps with alleviating the issue of short squeeze.