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2 + 2 = CDS Are Evil!

By Anonymous

I love the logic of the anti-CDS crowd.

First, they claimed CDS were evil because protection buyers weren't required to own the underlying bond?they were mostly used for pure "speculation" rather than hedging. The anti-CDS crowd frequently cited Eric Dinallo's claim that 80% of CDS are held by investors who don't own the underlying bond ("naked CDS") as proof that CDS are evil.

Now that it's fashionable to blame CDS for pushing companies into bankruptcy, they look at the net notional CDS outstanding on a company attempting a restructuring, and assume that 100% of them are held by bondholders. What happened to all the anger about naked CDS?

If the problem is that you can buy CDS without owning the bond being protected (gambling vs. legitimate hedging), then CDS should be a non-factor in restructurings. After all, aren't 80% of CDS held by investors who don't own the underlying bond? And wasn't that supposedly the problem in the first place?

You can't have it both ways.

Full post as published by Economics of Contempt on May 12, 2009 (boomark / email).