Your Unfriendly Unneighborly Unscrupulous Hedge Fund
The unregulated CDS market...The US government needs to get involved
Government regulation is usually imposed when things (anything, really) gets out of hand. Whether it be the airline industry, financial industry, or government itself. But one area within finance that has no regulation, and really really needs it, is the credit defaults market (CDS are essentially insurance against the credit of a company defaulting).
With all the carnage in the financial sector the US government should soon take a close look at the unregulated CDS market. There is no arguing that many financial companies are in serious trouble with their overleveraged toxic assets. But one thing that is likely exacerbating the rapid destruction of some of these companies is the scary fact that hedge funds can purchase CDS without having ownership in any part of a publically traded company. That just doesnt make sense! Once their large CDS position is obtained, these hedge funds then heavily short the same stock. What this does for the shorts is not only make money on their increasing CDS purchase (as fear of a stock meltdown increases the price of CDS), but additionally make money on their short stock position as negative sentiment increases because of the widening CDS! Obviously a very vicious cycle if allowed to continue.
In the most basic sense, this is the equivalent of taking out a life insurance policy on your neighbor (purchasing a CDS) and then poisoning him (shorting the stock)...its a win win. So if the government doesn’t come in to somehow put a stop to this practice, the future of the financial sector will only get bleaker, faster
TRADING: "More Signal...less Noise"
LIVING: "One World, One Family, Warm Heart" Dalai Lama
