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October 2, 2008

Required Reading: Fortune on CDS

Other than insisting on using notional value to really hike up the Fear Factor (and to irritate me), the current Fortune has a required reading article on credit default swaps (CDS). Best characterized as an insurance market run by under-capitalized non-insurers for people who only want to pretend their debt is insured, the CDS business's vestiges are dangling out there waiting to explode, like abandoned ordinance.

Here's a snippet:

It doesn't help that CDS trading is a haphazard process. Most contracts are bought and sold over the phone or by instant message and settled manually. Settlement has been sloppy, confirms Jamie Cawley of IDX Capital, a firm that brokers trades between big banks. Pushed by New York Fed president Timothy Geithner, the players have been improving the process. But even as recently as a year ago, Cawley says, so many trades were sitting around unfulfilled that "there were $1 trillion worth of swaps that were unsettled among counterparties."

More here.

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