The problem is that there has been no regulation and no central clearing. It could very well be that the vast majority are offsets, however, insurance type CDS could generate staggering losses without any offset. This would be a net loss of wealth, translate that to a loss of liquidity which in turn translates to a recession.

Until all outstanding CDS are registered and accounted for in some form of emergency regulation, the markets will remain jittery. Chairman Peterson was just stating what everyone already knows so I don’t think that his remarks caused any damage or additional loss of confidence.

As for the SEC playing catch-up, this is not new either. The SEC has never had a ‘preemptive’ doctrine and has always played the role of ‘cop catch crook’. One first has to do something wrong before the SEC puts down the dough-nut and hits the pavement. Some things never change as no one is attempting to legislate a change. Admittedly a presidential hopeful called for Cox’s head, but that would have accomplished nothing anyway…just business as usual under the tutelage of someone else.

Saul Sterman

Credit Default Swaps are probably the deadliest weapon of all. Credit default swaps are used to hedge against the risk of a borrower defaulting on their debt, but there’s no transparency in this market. The CDS market will end up being far more deadly than the CDO market.

The following article has more information on Credit default swaps and the Lehman bankruptcy fiasco….
http://www.bearmarketinvestments.com/credit-default-swaps-2