Friday, October 10, 2008

CDS Cascade

A credit default swap cascade would be horrible.....

CDS is zero sum, but if the cash transfers for the current CDS defaults on Lehman, WaMu, Landsbanki, Glitnir, and Kaupthing go from the weak to the strong and thereby triggering additional credit events on the counterparties who have written the CDS ... it will be a total disaster.

The rush to have these CDS's placed on an exchange seems to be a desire to figure out the CDS web, in other words, make transparent who is on the line for what... but that in itself will not prevent a cascade.

See:

http://www.reuters.com/article/bondsNews/idUSL958906520081009

http://www.ft.com/cms/s/0/7cb2e4e2-958a-11dd-aedd-000077b07658.html?nclick_check=1

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