The power of the CDS

Credit default swaps are the hottest new indicators of a company’s credit quality. But ‘reading’ the CDS market is a complicated task

A murder inquiry uncovers a series of accounting glitches at a major US company. Increased revenues – which have pumped up the stock price – are now in doubt because they were funnelled through a special-purpose vehicle. But at the same time, a banker points out that the cost of default protection on the company seems to be rising and rising. If only the average investor had access to this ‘elite’ warning system, he moans.

Sound familiar? In fact, this is the plot line of a recent episode of