There was an interesting article in Bloomberg today that highlighted the unique aspect of the current crisis: There are many people who are benefiting from the complete financial collapse and it is not in their interest to see any meaningful recovery or beneficial restructuring. The culprit once again are Credit Default Swaps.

Here’s a simple explanation of the issue from the article:

“Before, you really had to worry mostly about where you were in the” company’s capital structure. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”

“Say you’ve lent $100 million to a company and you had bought $100 million in credit-default swaps,” said Henry Hu, a law professor at the University of Texas in Austin. “In that circumstance, the creditor really doesn’t care whether or not the company goes under.”

“You’re given these control rights under loan agreements or bond indentures on the general assumption that if you’re a creditor, you have an interest in the borrower surviving,” said Hu, who’s written about so-called empty creditors. “Because of things like credit-default swaps, that assumption no longer holds.”

In reading the above and the rest of the article, you may be wondering why Credit Default Swaps are still legal despite their clear role in causing the financial and economic crisis (where does anyone think the AIG bailout money is going?) and the danger they pose to a sound financial system. The answer, as always, is money and influence. If even Warren Buffett is gambling in Credit Default Swaps, how can anyone have the guts to outlaw and nullify these destructive, and completely useless, financial instruments? Ultimately, though at some point, the prospect of a major social dislocation due to the ongoing real economic meltdown, may force the hand of the CDS gambling gang who now hold the world hostage in an attempt to make billions. For surely all the money in the world will be worthless in the event of a complete financial and economic collapse, which sadly seems more possible with each passing day.