Blawgletter has stated our guess that credit default swaps — which insure against bad things that might happen to bonds and other securities — promote fraud.  Inherently.  

CDSs indeed strike us as akin to (i.e., the same as) gambling, most of all for people who buy CDSs even though they lack an interest in the bonds/other securities whose ill fortune would trigger the duty of the CDS issuer/insurer to pay.  (Think of your neighbor's home aflame and a big check to you for the value of the now-toasty structure.)

Some suggest that CDSs in a way promote liquidity.  By which we suppose they mean that owners of bonds/other securities wouldn't buy the bonds/other securities unless they (the buyers) felt secure in owning the bonds/other securities.

But that goes only so far.  Just a few purchasers of CDSs may assert such an insurable interest.  A great many others must claim that they've done a good deed (enhancing liquidity) by asserting that they need protection/insurance against a drop in the value not of the bonds/other securities themselves but against a decline in the value of bonds/other securities in the same ballpark.  But for the insurance, we can imagine them saying, they'd have never purchased the bonds/other securities at all.

We don't buy it.  The hundreds of billions that speculators have pumped into the CDS market reflect as much as anything the idea that a faltering economy will lower all ships, including those vessels that issued the bonds/other securities whose ill fortune triggers the CDS owners' right to demand payment.

We like liquidity as much as the next person.  But, really, what good does a CDS do?  Add liquidity to a market that needs it, if at all, to permit speculation in the notion that bonds/other securities in general will fall?  Don't we offer S&P 500 and other market indexes that let people bet with the market as well as short sales and other devices that permit gambles against the market?  Do we really need synthetic/derivative ways to speculate?

Our aversion to CDSs gains more force when we note that the biggest banks, including several that the U.S. government bailed out, got 100 cents on their CDS dollar.  From the federal government.  Which you and I pay for.

No, we don't need CDSs that benefit investors who stand to gain if bad things happen.  Suffer them to go to Las Vegas and bet on the equivalent of Butler winning the NCAA tournament, we say.

We'd all feel more honest then.