I was reading this over on zerohedge: http://zerohedge.blogspot.com/2009/06/recent-average-cds-auction-recovery.html#disqus_thread The auction they hold to settle up with the CDS holders is for the underlying bonds, isn't it? So if there's a credit event (lets say a bankruptcy) they have an auction on that company's bonds to determine their fair value, and then pay out the difference on the CDS's, right???? So if a $100 GM bond sold at this auction for 7 bucks, then CDS writer would have to come up with $93 for each contract they wrote, right??? So I guess I don't understand why the CDS's are supposedly only paying 10%. Are the bonds of these bankrupt companies still going for 90% of face value???? : confused :
I think you misread. The 10% is the recovery rate. So, if a bond defaults, the protection seller pays 90%
I have a simpler theory. I've gathered that CD's are used for the banks to borrow your money and my money at a very low interest rate so they can turn around and lend it at a higher rate. Well, when the US Gov't is giving them billions of dollars for free, they don't have to entice us with high rates of return on the CD's. Just a theory though...