If you are one of those people who worry that credit defaults swaps are bringing the market to its knees, worry no longer! Market fear is conquering the CDS market also.
CDS transactions shot up to an average of 25,0000 per dealer, according to Reuters. The only time they’ve been that high recently was in April, as investors scrambled to hedge their risk as Bear Stearns collapsed. It’s still lower than August of 2007, when the market first went buggy and nearly wiped out the quantitative hedge funds.
In the past, increases in CDS volumes have been indicators of fear in the financial system. Now, however, the volume is going down because fear is so great no one trusts CDS counterparties. The collapse of Lehman, a huge dealer in swaps, taught many that buying credit protection is a useless hedge if the seller isn’t stable themselves.
In recent weeks, some people have called for the regulation or even wholesale elimination of the CDS market. They can relax. The financial collapse is totally taking care of that!