George Soros says high-risk credit default swaps could be the next sector of the investment market to strike trouble,

George Soros high-risk credit default swaps could be the next sector of the investment market to strike trouble, increasing the current turbulence.
Mr Soros said there was no regulation of CDS investment products globally, giving speculative investors freedom to punt on debt. CDSs are a form of insurance against bond issuers defaulting on their interest payments, and premiums have jumped sharply in recent months. The investor and philanthropist has called the current global market rout a financial "Armageddon" and has predicted further problems. Mr Soros has earned a worldwide reputation for picking the peaks of the market. He has blamed the US Government and its regulatory bodies for not intervening in the market slide earlier. He said the growing credit default swap market was incredibly risky and could be the next area of danger. CDSs are traded on a grey market that is reportedly on a similar scale to the US share market. "It is a very large business. It allows people to speculate effectively in the bond market without owning or borrowing the bonds," Mr Soros said. "That means it can be done on a very, very thin margin and they can take very large positions with very little capital. "It allows them to assume risk without being regulated. You can actually act as an unregulated insurance company." CDSs have been extending their reach. ANZ struck trouble with the investment products through its involvement with bond insurer ACA. "One does not know, if there's a default on a big scale, that CDS investors can meet their obligations," Mr Soros said. "This uncertainty is creating mistrust and there is a counter-party risk involved. "You have this market with a nominal value of $45 trillion. "It's an enormous amount and it's totally unregulated." In a new book, Mr Soros says the current market crisis is a "man-made" event exacerbated by free-market theory. Mr Soros said the US economy was already in recession, and the actions taken by the Federal Reserve, and the Bush administration's fiscal rescue package, were not enough. "This is a man-made crisis that was created by the false belief that the market can correct itself, and the regulators have failed to do their jobs," he said. "There have been some steps taken but they have not been sufficient. "The situation is going to get worse before it gets better."
Hedge funds were contributing to the current share market volatility, he said.
The recent spike in commodity prices, particularly soft commodities, has been attributed to hedge funds diversifying out of equities.
"Hedge funds are influential. Some hedge funds employed a strategy of being very leveraged and they claimed to be market-neutral," Mr Soros said.
"It was a losing strategy. Some of those guys have been wiped out, and generally hedge funds have had to de-leverage.
"They are in the process of de-leveraging now, and it's a very painful process involving wealth destruction