ENERGY AS CDS
The concept of the CDS is very old. In Amsterdam in 1600 the first multinational of the world (the VOC) used the CDS instrument in its project funding. Today the CDS has lost a lot of its attraction (and value) by the recent arrangements AIG, Ambac, MBIA, etc. had to make with their customers as they otherwise would go bankrupt. The whole AIG bail-out was just one (temperately) collective bail-out of the CDS industry under the AIG flag, leaving the other CDS companies out of the wind. The problem with the current business model of the CDS industry is that they think issuing guarantees is just only about getting signing fees and mailing huge monthly invoices and that it stops there. But insurance is about paying when the insured situation occurs. This is something that wasn't in the current business model. The whole CDS industry needs both new management and a new business model. Yesterday. The times of the past aren't coming back. They could play a huge role in the new energy attached CDO wave, but the problem is trust. That they have to fix first by openly say goodbye to the old operation and start to earn trust again, by grading risks just as risks, by being risk exposures and risk hunters instead of risk covering. This risk covering by insurance companies is a concept totally can not be understood: insurance companies always have exposed risks in the interest of their own business. This risk covering is just an example of the 'hit and run' way to do business. Current management should make a public stand against this 'tomorrow will take care of tomorrow' former business culture within the CDS industry. The CDS industry was forgotten what their core business was and just became a part of their natural claiming enemies: the high risk insurance demanding parties. The first problem in the CDS industry was that they liked the signing fees too much and that they were to seduced by these fees that they don't see risk as risk any more. The second problem in the CDS industry was that they could not recognize/analyse the walls of trusts that were build on the CDOs that where offered for insurance. The CDO packagers kept at the start of a CDO funding process the highest risk, attracting by this huge corporate names in the global finance community and than at the end sold this highest risk to the dumbest/laziest and more greedy (an combination often occurs) customer in the market. The CDS is a very attractive instrument that can not be pushed aside due to some hit and run men with no wider scope than the next quarter reports (with ditto bonuses). Regarding bonuses: only upside bonuses are the most stupid inventive tools ever installed: giving employees the rewards of being entrepreneurs, without the risk of it. Of course the dream of everyone: only the upside and not the downside, but besides stupid, it encourage bad behaviour with other peoples money/future. Still the CDS is a beautiful instrument in funding. Just like soap: if some people don't use it right, it says nothing on the function of soap. Soap still cleans. CDSs will play a vital role in energy finance. The CDS industry will be separated in two directions: the insurance fee based covering and the asset based covering, and both will use each other as complementary instrument. The concept of insurance fee based covering is risk covering by risk spreading. The concept of assets based covering is risk covering by asset cashing if needed. The asset based model always will have the fee based model as buffer before them (as they don't like to lose their assets. The Pension Funds and the Central banks will occupy the whole assets based CDS market as they're the only once that hold large assets. The central banks are only ones that can make assets in money when the going gets tough. The whole system of guarantees and liabilities is currently too less transparent, this will be changed, as the system now is to vulnerable for/by abuse. Guarantees (and that's what CDSs deliver) will become real guarantees again. The real guarantee issuers will exposure the fake ones for their own benefit. Energy as CDS is a concept capable of generating a massive energy transition investment wave.
Author: Gijs Graafland
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