Tom Armistead

Credit Default Swaps: Where the Real Action's At

This is really about an unregulated insurance business. Capital requirments are very low compared to potential losses, and some participants simply aren't big enough to spread their risk and take advantage of the law of large numbers.

There is also a moral hazard involved. A speculator can buy credit default swaps on a likely target, float a good rumor, and then get out of his position at a profit. If the target is vulnerable enough, an actual loss can be created.

Not to mention credit default swaps as a vehicle for insider trading. Academic research proves this occurs, although it can be referred to blandly as "asymmetrical information" and excused on the grounds it doesn't impair liquidity.

Regulators are strangely silent here. This mess is contributing to the credit crisis and it needs to be stopped, unwound, and then restarted under adequate regualtion as an insurance business.