I’ll take the unpopular other side of the debate. Just because CDS’s were abused doesn’t mean they should be banned. Annuities, options, short sales, Straddles, barbells, Swaptions, mutal funds…etc. can all be abused.
CDS’s have very legitimate uses both as speculative products, and as hedging devices for people with exposure to corporate debt. They also provide a valuable market signal that, over time, will prove much more accurate than any ratings agency (they provide a leading indicator of where rating agencies will move).
Classic baby and bathwater argument. Have there been abuses on a gargantuan level? Absolutely. Should there be more regulation in this space? Probably? Should we outlaw a valuable product precisely at the time where the market has now unveiled their true dangers (lets not forget that there always must be two sides to a transaction like a CDS)? No, we shouldn’t.
Financial innovation has risks, these risks are becoming much more well understood. Regulations that will have huge long term negative consequences are being proposed precisely at the moment when they are least necessary.
