Credit Default Swaps
I am not afraid to admit that I am not sure what they are, but I know they are some kind of insurance for financial firms that allow them to off put some of their risks. Unfortunately, not many others know what a credit default swap is or how to value one. The imploson of AIG's CDS exposure lead to AIG's takeover by the Government. CDSs are not traded and tied in large part to a firms' credit rating. When AIG's rating got cut it had to raise cash to cover its CDS requirements. There is no market for CDSs, so if a firm runs into trouble the market and ratings agencies have no have not clue about how to value the CDSs, and assume the worse.
Rick Santelli of CNBC, is making great points today. There needs to be market for CDSs. This would eliminate the need for regulation. This is a great idea. It would also get rid of the black box nature of many financial corporations' balance sheets. These black box financial statements have helped the current problems.