[RochesterFan]

First, I appreciate your comments. This discussion has been helpful for me to refine my thoughts on this problem.

I don't doubt your graph but the information is incomplete without knowing what assets they back. Lenders get CDSs when, for example, a company borrows money to build a new plant or to build an expensive instrument for a customer. That paper is not nearly so toxic as the mortgages from the housing bubble that we have been discussing. To better understand the situation, we need an accompanying plot of CDS value as a function of independently estimated risk. I have not encountered such a plot, have you?

[ThePythonicCow]

I've not seen such plots of CDS value vs risk, no.

As I noted in another thread a few days ago, FReeper Guide to the REAL economic problem - Credit Derivatives - Lesson 3 [Post #6], Alan M. Newman in Crosscurrents has some of the best CDS information I've seen, but even there I don't recall seeing this detail.

[ThePythonicCow]

To better understand the situation, we need an accompanying plot of CDS value as a function of independently estimated risk. I have not encountered such a plot, have you?

A major problem with CDS's as currently traded is that they are not openly traded or priced. We don't know who has what. Apparently not even the Fed knows who has what.

I see plausible reports that the Fed was surprised by the CDS counter parties affected by the collapse of Lehman, and that this was a major, if not the major, cause of the market stress these last two weeks.