As you should know, I despise credit default swaps and the extreme risk that I believe they pose to the world’s financial system. Furthermore, I suggest that they are the largest fraud in history both in a figurative sense (with the claim that they actually reduce systemic risk) and in a legal/literal sense (insurance is being sold by people who either never intend to pay when a credit event happens or who know they have no ability to pay out(see Bear Stearns). And yet, it goes on and on and expands exponentially and nothing I say will change it. So I just watch in amazement and make a few observations about the absurdity. Please spend some time evaluating the trading in Fannie and Freddie CDS contracts both months ago and in the past few days.

Here’s a great example from Bloomberg. It will be very interesting to see how much insurance will be paid out for the GSEs bondholders (either senior or subordinated) on debt that will likely be assumed by the Treasury before or after Fannie and Freddie own up to being insolvent. I thought about using the Countrywide CDS or the Bear Stearns CDS situations as an example, but while there are similarities - this Fannie and Freddie mess is too unique. Regardless, please spend some time thinking through what kind of insurance is either being bought or sold with the Fannie and Freddie Credit Default Swaps. And more importantly, what counterparties will be able to make payouts if they are ever required?