Credit Default Swaps: Bad Enough to Ban?

"I'm perfectly happy to have a discussion with those who would advocate otherwise, but I don't understand what the economic interest in [naked CDS] is," Greenberger says. "It is nothing more than taking a flyer, for example, that AIG will fail, or Lehman will fail, and I don't think we should be writing those guarantees. They're essentially shorts on companies outside of the regulated stock market. If you want to short a company, short it on the stock market; don't buy a derivative."

But such a remedy would amount to an outright ban, according to the trader, who says banks that write CDS protection must be also able to hedge themselves, which he says is done by actively buying and selling naked CDS.

While hedge funds are big users of CDS and would probably prefer to have them around as another weapon in their arsenal, they have less to lose than the banks if the instrument goes away. David Tepper, founder of hedge fund Appaloosa Management, says CDS should be centrally cleared with less leverage allowed and more money down required.

"There's nothing inherently wrong with CDS," Tepper says. "The problem was when you only put down 2% and could do things endlessly. But if they ban, it they ban it. I'll live with that."

The banks are likely to be less blasé, as is evident from the frustration in the words of the CDS trader who suddenly finds his livelihood threatened by a regulatory zeal in Congress that has been dormant for a generation, at the very least.