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[QUOTE]Originally posted by glassman: [QB] i've been looking all over for a clear concise explanation of the CDS market, if there is one? i can't find it. part of the reason for that is that each "contract" is written specifically for the underlying security... ther eis no centralised clearing house for them, apparently they don't even have cusip#'s... basically a hedge fund or a bank or even indivdual can and did collect a couple of hundred thousand a year for garanteeing rates of return on bonds... each contract is negotiated/taylored specifically for the "needs" of the parties of the contract ... [b]Originally used as a form of insurance against bad debts, these instruments became a tool for financial speculation when the US Commodity Futures Modernization Act of 2000 specifically barred regulation of these trades.[/b] http://en.wikipedia.org/wiki/Credit_default_swap the other thing that crashed the markets is an accounting rule change requiring that all assets be priced based on their actual trading value, and not some arbitrarily convenient value decided by the holders. these contracts can be made by any party with any other party. [b]One large difference between credit default swaps and other types of insurance, is you do not need to own the bond or instrument being insured in order to obtain insurance on it. If the bond fails, then, theoretically, you get paid, possibly along with many others. Yet the "insurer" of the bond is not regulated and the transaction is beyond federal or state regulation. This allow speculators to make money by purchasing insurance on a company's bonds and then shorting the stock of the company in great quantity and getting a payoff that exceeds their risk of shorting if the price of the company's stock increases.[/b] and that is why they banned shorting [/QB][/QUOTE]
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