CaptainJJack

David Einhorn Increasingly Concerned About Dollar Crisis, Hoarding Gold

I understand the concern about insurable interest, but the same issues arise when you talk about any speculative risk.

There is a fundamental difference between an insurable risk and a speculative risk. It is pooling of risk versus transfer of risk.

The CDS market is a risk transfer market, not an insurance market because the underlying risk is an investment risk, and all the markets dealing with investment risk are transfer markets, including the stock exchanges, the options exchanges, and the futures market.

While I understand there have been abuses, I do not think the solution lies in identifying an insurable interest anymore than it would be to require that only the holders of a stock should trade the option on a stock, or that only grain farmers trade grain futures.

YES, there will be bubbles, but that is the nature of a speculative market.

But, I do not think the existence of the CDS market was the main problem here.

The way I assessed the Lehman downfall is that hedge fund managers took huge positions in the CDS market betting on the failure of Lehman AND THEN started "asking questions" about Lehman's solvency AND THEN started a concentrated program of shorting the stock.

THAT was the abuse, in my opinion.

As Warren Buffet has said many times, financial stocks trade on trust, and there are laws about starting false rumors, causing a run on the bank.

By putting the CDS market in an exchange, you get at a lot of these abuses because you force transparency.

At least a regulator can find out if the guy "asking questions" (i.e. promoting the rumor) is the same guy who stands to make a lot of money if it is true.


On Oct 21 09:07 AM CaptainJJack wrote:

> For the life of me, I do not see where a regulated market, similar
> to the markets for options and futures, would not solve 95%+ of the
> problem.
>
> I understand that there are some situations where the standard contract
> would not work well, but that often happens in futures markets, and
> most of the time, the basis risk is far less than the risk you are
> trying to hedge.
>
> With a regulated market, the contracts "settle" each day, in cash,
> and leverage, while high, is controlled by contract.
>
> I can see why many do not want to have even the margin money tied
> up, and that, I think, is the primary appeal of the current CDS market.
>
>
> But, that is what got us into trouble in the first place, and anyone
> doing a large transaction today almost always has to have some escrow
> to back up the guarantees, anyway.
>
> Am I missing something?