Wouldn't this also create a reverse market as well? They'd be like 3 year bonds that could be traded and rated based on the health of the originator of the swap...Mr. Raynes’s resolution is more radical: unwinding all outstanding credit-default swaps through a process he calls inversion.
Under this plan, insurance premiums would be refunded to buyers of credit protection from the entity that wrote the initial contract. And the seller would no longer be under any obligation to pay if a default occurred.
The premium repayments would be made over the same period and at the same rate that they were paid out. If a contract was struck three years ago and charged quarterly premiums, the premiums would then be refunded quarterly over the next three years.
One of the funny things about the CDS market is that everyone gets so worked up about it because of the size of the market (Est: 30 Trillion $US). But the chances of payment on even a fraction of this is extremely remote. The larger problem with them is the psychological risk associated with the currently interwoven global economy; should an institution go bankrupt the carnage would not be contained to their own poor choices, but would be magnified (many times possibly) by forfeitures by CDS issuers, and then again by CDS insurers on Swaps in the orginal issuer, etc.. Seems like a freeze would help, but what is really needed is a new major bank that is decoupled from the other entities in this market and is able to operate freely without these liabilities. Hmmmm...
Yet another reason to keep on the lookout for the rise of community banks in your neighborhood. VC opportunities? We all know that there is some cash out there.
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