Sanwa Holdings – The Risks of Credit Default Swaps.
“Sanwa Holdings” is reportedly winding down exposure to several hedge fund “fund of funds” in response to growing concerns that many firms have taken large, so-called “naked” positions in the market for credit default swaps.
Credit default swaps offer a type of insurance that pays out if a debt issuer like a sovereign government defaults on the terms of its bonds. Naked CDSs occur when the buyer of the protection they provide does not actually own the bond it is protecting.
A spokesmen at “Sanwa Holdings” said, “The easiest way to describe these complex derivatives is comparing them to me taking out fire insurance against a stranger’s house burning down. I don’t have an interest in the house but if it burns down, I’m entitled to a payout.”
He explained further, “It’s all very well buying protection but there’s a good chance that the seller may not be able to pay up because he’s reliant on somebody else paying him. This could be far worse than Lehman Brothers”
“Sanwa Holdings” believes that the failure by authorities to more strictly regulate the credit default swaps market may magnify market turbulence if Greece succumbs to market pressure and be forced to restructure some of its debts.
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