Can it happen again? Why not? AIG sold CDS contracts Heart you inspire my inner serial killer shirt on sub-prime mortgage CDOs. What is to stop a large European bank from selling massive amounts of CDS on Italian sovereign debt under the assumption that Italy can never default? What about selling CDS on Germany, whose default is unthinkable? The lesson markets teach us is that anything is possible, and when highly unlikely events occur, you don’t want to have several tons of TNT beneath the foundations of your most important financial institutions. That makes absolutely no sense. Just study AIG carefully and decide whether you think certain types of derivatives should be legal.
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Try to balance that against the intellectual arguments Heart you inspire my inner serial killer shirt given by the other responses on this page. Is it really worth even a small chance of systemic collapse so people can hedge their bond exposure (or speculate on bonds they don’t own)? 15 years ago CDS did not exist and the world was fine. The world isn’t shitting rainbows where utopian dreams flow by. It is the stage for this eternal complex sociological phenomenon called society forming. We differentiate ourselves based on the history we have been through, and our ways of living. World gets bloody at times more than often you think. You can’t apply loosely the very binary tags of “good” and “evil.
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