George Soros Says Credit Default Swaps are Truly Toxic and Should be Outlawed

By on June 14, 2009

Dealbook reports that George Soros has called the CDS an instrument of destruction which should be banned. The CDS was instrumental in creating the financial crisis leading to the collapse of AIG, and contributing to the downfall of Lehman Brothers, Bear Stearns and Merrill Lynch.

CDS’s explained in the article:

In theory, credit default swaps can allow the holder of a bond to buy a kind of insurance. If the bond defaults, the counterparty — often a financial institution — is required to pay the difference between the defaulted bond’s value and its face value.

In practice, default swaps can be used for all kinds of speculative purposes. They are subject to abuse, such as when the holder of the protection actively tries to hurt the perceived credit quality of the underlying issuer in order to profit. In some situations, the holder of default-swap protection benefits more if the issuer goes bankrupt than if it were able to fix its finances in a less drastic way.

Soros further stated, “It’s like buying life insurance on someone else’s life, and owning a license to kill.”


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