For practical purposes, it is almost impossible to differentiate “gambling” from “investing.” The characteristics of each are so much in common that they are for all intents and purposes the same.
While you might view credit default swaps as “gambling”, somebody who has a position in mortgage securities would view it as a “hedge.” Unless you can figure out a way to divine investor’s intentions in advance, you will never be able to differentiate between the two.
One thing I don’t get is that the journalists and pols keep talking of the total CDS liability as though they could all go wrong at once to the tune of so many trillions of dollars? But aren’t a lot of the “bets” or hedges on opposite sides of the same potential event, so that when some have to pay out others benefit? I’m not saying there’s not a huge problem, I don’t know, but I keep hearing it described as though all of the CDS market could have to be paid off and that doesn’t seem plausible.
True, but I was not talking about "gambling" vs "investing", I was talking about "betting" vs "insurance", which is what CDS started out and were supposed to be (an insurance), but were transformed to be exactly opposite. And the article talks about short-sellers against financial institutions which have been weakened by leveraging due to real-estate inflation caused in part by government rules and demands and encouragement of questionable loans, not the banks buying CDS as an insurance against their CDOs. So let's not get these mixed up.
Also, As I said, short-selling as a "hedge" / insurance has its uses, but insurance is well defined as non-leveraged "covered sell" against your own position - none of this has been the case with CDS, and the the sheer growth and size of the market in latter stages that dwarfed the value of underlying real-estate loans market by several magnitudes makes it abundantly clear. You essentially had more money (in fact, in multiples) and people vested in quick and substantial destruction of value, than in growth or flat or orderly deflation of it that had relatively little consequences to economy. That usually leads to at best, unethical, and more often, illegal "practices", some of which I already described and which are well understood.
And it's very easy "to divine investor’s intentions in advance", the article itself describes it and those who played by the rules of "matching" CDOs and CDSs, i.e. "market-neutral" long and short positions using CDS as an "insurance" not a "bet".
Here's how Soros and some others have used short-selling, with rumors and inside information from political class:
You Lose, Soros Wins
Market has recovered when Cox put in place rules prohibiting short sales against the financials, that is very telling in itself. These institutions might have failed eventually, but we would not have the financial crisis of these proportions and global credit freeze (LIBOR and TED spreads) if it were not accelerated by short-selling and their tactics betting on the destruction of financial system.