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To: politicket
The surprise is that the bonds are still quoted and traded. In a vacuum, one would suppose that every CDS contract was closed out and every available bond traded in for par.

As you deduced from my explanatory post, there was indeed a short squeeze and it continues.

However, rather than sell assets to buy the underlying of the contract, a lot of managers have decided to simply take the loss on some positions and only settle others.

In much the same way, a equity derivatives manager might decide to allow an option to expire unexercised rather than sell assets that are more valuable than the exercised option which would have a lower rate of total return than the assets he would have to sell.

In this way, risk is spread much more diffusely.

34 posted on 09/30/2008 7:05:29 PM PDT by wideawake (Why is it that those who like to be called Constitutionalists know the least about the Constitution?)
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To: wideawake
In this way, risk is spread much more diffusely.

I understand. I'm not arguing that CDS's are bad, as they were originally intended to work. I'm saying that the broad leverage of them and the underlying mortgage bubble burst have caused enormous losses to be realized (either on the books or via transactions) on both sides of the CDS. Insurers got killed due to the leverage. Buyers got hurt (but not killed) by the exercise of a CDS contract for which they did not own the underlying security.

The commercial banks are now getting hammered by participating in highly leveraged CMO's that didn't have the support base that they thought.

37 posted on 09/30/2008 7:16:25 PM PDT by politicket (Palin-tology: (n) - The science of kicking Barack Obambi's butt!)
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