Smarty_Pants

Credit Default Swaps, Part One: Origins and Implementations

Research:

The extra yield for corporates would be required to pay for the "insurance" needed to make them equivalent risks to treasuries.

As the article notes, the insurers can't afford to tie up sufficient capital to cover the worst case at the current premiums.

The premium paid would need to be increase to the point where the cost of setting aside sufficient capital is profitable. It's likely that doing so would make the cost of insuring the bond exceed the interest paid therefore rendering the 'insurance' beside the point. Why buy an asset that pays $100/month when it costs $200/month to 'insure' it?

Sounds like this is a product that isn't finiancially feasible strictly by the numbers unless the credit rating of the issuing entity is top notch and the true chance of default is very small.

As LEH was percieved to be a very small failure risk and later proved that perception wrong. It sorta sounds like these instruments aren't economically sound for all parties.

Hey, at least there's only $55 Trillion of the things out there.

Yikes!