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Just a Little Explanation Should Do..

March 10, 2010

I just had the following clip from alphaville:—

In the midst of the ongoing and increasingly heated debate about credit default swaps, be they naked, sovereign or Sharia compliant, one fundamental fact has been overlooked — CDS are not insurance.

Authoritative isn’t it. Though hardly explanatory.

So, just a little explanation for more folks to gettit.

Insurance relates to owned asset/s.

Most credit default swaps business is naked, meaning not owned asset/s. This latter in fact being underlying asset/s. CDS is thus a betting slip.

Hence talk most recently of speculators betting Greece will default on its debt payments.

Wolf Munchau @ FT has opined this a criminal activity… if lack of regulation has not in point of fact rendered it legal.

That Greece might suffer exceeding consequences ( wider sovereign spreads ) through no fault of its own by such speculation does, IMO, require appropriate regulation.

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