Mark Gritter (markgritter) wrote,
Mark Gritter
markgritter

Hedging or Just Gambling?

Slate has an interesting article about CDS on U.S. government debt. Daniel Gross points out that these contracts probably have huge counterparty risk--- if things are bad enough that the U.S. is defaulting, what are the odds that the seller is able to pay you?

He suggests (and a commenter agrees) that these contracts are purely speculative: buy now, and hope to sell to somebody later at a higher price. But if it's a pure bubble play, who's the sucker? Who do the traders think is going to be buying these probably worthless contracts? ...well, who bought the last round?

Why not just dispense with the fiction that the underlying asset matters, and sell contracts that will pay off on the Rapture, alien invasion, or Earth's ejection from the solar system?

(Poker, of course, is still right out because we have to protect the middle class from the evils of gambling, while the CDS market is open to anybody who can prove themselves an accredited investor.)
Tags: finance, rant
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