Comments on: CDS and valuing control rights A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Craig Pirrong Fri, 24 Apr 2009 19:08:39 +0000 Felix:

Thanks for taking the time and thought to respond to my post. Re long–well, that’s nothing for me;-) I like to be thorough.

I am not at all persuaded by your response. Rather than responding in turn with a comment, I’ve done so on Streetwise Professor.

In a nutshell, I don’t think that your arguments address the crucial issue, which is what is the incremental contribution of CDS hedging to the lazy bondholder problem (to use your analogy). Many of your arguments are true of all distressed debtor situations, even when CDS are absent.

Anyways, thanks again, and perhaps this debate will continue.

By: Sandrew Thu, 23 Apr 2009 14:57:10 +0000 I think you may be focusing on the wrong transaction costs. To pierce the Coasean retort, one must demonstrate that frictions exist to impede the unwinding of CDS and the transfer of bonds. Pirrong argues that if such transactions are efficient, then the perverse incentives that bond hedging via CDS create can be efficiently diffused.

That said, I’m not convinced that the bond and CDS markets are as well lubricated as Pirrong seems to suggest. To me, the enormity of the CDS market is as much evidence for the presence of significant CDS unwind costs as it is for the popularity of the instruments. If unwinding or novating CDS was so cheap, why did the aggregate notional amounts balloon to umpty-trillion bucks over the course of the past decade?