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Matt Levine

CDS Creativity Is Everywhere

Also Main Street, Fannie and Freddie and loan market liquidity.

CDS manipulation?

Here’s a hypothetical situation for you. Let’s say Company X is in bad shape: It has a lot of debt, its business isn’t doing great, and it is running out of cash. It is likely to default on its debt in the next few months. In desperation, it sounds out financing options, but no one is all that keen to lend it any more money since there is no clear path to getting paid back. Credit-default swaps on Company X trade at distressed levels, say 40 points upfront—you have to pay $40 to insure $100 of debt for one year—reflecting the market’s expectation that default is likely and that recoveries in default would be low.