Thanks for the link. I was looking for a good explanation of CDS.
Here are a few points I understood from the article.
1. CDS is insurance bought by lenders on debt.
2. CDS is unregulated and became some kind of speculative instrument for hedge funds.
3. Unless I misunderstood, it appears that the notional value of debt insured by CDS far exceeds the real debt!!! This means CDS sellers are guaranteeing debt that does not exists i.e. it is used for gambling not insurance.
4. Once a company default. Because of CDS the loss is highly amplified. If a company default on $1B in debt. The company issued CDS to insure this now has to pony up for the loss. Except that the total amount insured is $10B not $1B....because there is nothing to regulate the amount of CDS sold and it has become disconnected to the underlying debt it is suppose to insure.
CDS is like a financial bomb that can ignite and destroy a large number of financial institutions.
what is trillion? Mr. Tan can you tell me. From dictionary, either one of these; 1,000,000,000,000 (one million million; 1012; SI prefix: tera-) - for all short scale countries - increasingly common meaning in English language usage. 1,000,000,000,000,000,000 (one million million million; 1018; SI prefix: exa-) - for all long scale countries - increasingly rare meaning in English language usage but frequent in many other languages.
Thanks for the link. I was looking for a good explanation of CDS.
ReplyDeleteHere are a few points I understood from the article.
1. CDS is insurance bought by lenders on debt.
2. CDS is unregulated and became some kind of speculative instrument for hedge funds.
3. Unless I misunderstood, it appears that the notional value of debt insured by CDS far exceeds the real debt!!! This means CDS sellers are guaranteeing debt that does not exists i.e. it is used for gambling not insurance.
4. Once a company default. Because of CDS the loss is highly amplified. If a company default on $1B in debt. The company issued CDS to insure this now has to pony up for the loss. Except that the total amount insured is $10B not $1B....because there is nothing to regulate the amount of CDS sold and it has become disconnected to the underlying debt it is suppose to insure.
CDS is like a financial bomb that can ignite and destroy a large number of financial institutions.
Compare CDS and Ah Long, which is worst?
ReplyDeleteI prefer Ah Long for their hands on approach! Hahahahaha :D
ReplyDeletewhat is trillion? Mr. Tan can you tell me.
ReplyDeleteFrom dictionary, either one of these;
1,000,000,000,000 (one million million; 1012; SI prefix: tera-) - for all short scale countries - increasingly common meaning in English language usage.
1,000,000,000,000,000,000 (one million million million; 1018; SI prefix: exa-) - for all long scale countries - increasingly rare meaning in English language usage but frequent in many other languages.
so which one is true for your data?