Credit Default Swaps is probably not a topic most regular business news readers would pay any attention to in normal times. I am a regular business news reader, now is not a normal time, so I’ve been paying attention to credit default swaps. At the moment, the question that I’m looking for an answer to is: Who is profiting from the CDS fiasco?
When the Fed announced last week it was loaning even more money to AIG to help it get out from underneath $70B in CDOs it insured through swaps, I took notice. The Fed / AIG strategy, as I understand it, is to buy the underlying debt (the CDOs) so that the insurance (the CDS) AIG sold against the bonds failing can be canceled. Of course, the banks that hold the CDOs have to be willing to play and a price has to be agreed upon -- because if they are the holders of the insurance they are already covered if the CDOs fail. I assume that the Fed thinks it has leverage with the banks, having invested in them too. We’ll see soon enough.
Who is profiting from the CDS fiasco?? Did anyone buy the AIG CDS, or any other CDS, not as insurance to cover losses in CDOs they own, but as investments, betting that the CDOs held by others would fail? If such people are out there, will we find out who they are? And, if we do find out who they are, will the public be outraged by such speculation or applaud such a smart investor as being the last man standing?
