CDS Self-Regulation

I tried to call you before but I lost my nerve
I tried my imagination, but I was disturbed
--Tommy Tutone

Rick Santelli chats with a derivatives guy about the causes behind last week's JPM blowup. The proposed solution to 'regulating' CDSs is 'to put them on exchange.' That seems reasonable. But markets will do that on their own if it truly makes sense in the calculation of risk and reward.

However, if the risk/reward calculation has been impaired by background intervention that encourages moral hazard, then markets are likely to opt for riskier configurations--because they are factoring in the likelihood that their bad decisions will get bailed out.

That calculation has largely been correct when framed over the past 4-5 years.

The real solution is for non-market insurers to leave the market, thereby leveling the economic consequences of decisions on the shoulders of those making the decisions.

Absent that, why should people be surprised when JPM-like events occur?

position in SPX