Originally Posted by DuckieHo
The difference is that a Ponzi scheme generates nothing of value.
CDS provide insurance. Of course, when there is a big disaster, too many people may also file claims and it is the insurance company's responsibly to have enough capital.
If CDS never existed, the market would find a way...
Actually.... this happens weekly....
My issue with CDS was they were initially designed as protection for bondholders. They were cheaper than true insurance. Then people got the idea to use them as bets. They should have capped the amount of outstanding CDS could be issued against a bond. Governments are terrified that all the outstanding CDS will trigger somehow. The idea behind a CDS is great, its how overused they were that was terrible.
But like you said duckie one huge problem is you had things rated AAA when people really were not sure hot to value them or rate them. CDO's were even worse, how you could have a CDO rated AAA when 25% of the underlying mortgages would not have been investment grade let alone AAA.