Bank to tie hedge fund lending to their own CDSs

The Financial Times reports that Morgan Stanley and Goldman Sachs have developed systems that tie their lending commitments to hedge funds to the value of their own credit default swaps. As the price of CDS "insurance" grows, the amount they are willing to commit declines. Goldman Sachs already has a similar arrangement in place that ties lending to its bond prices. This is certainly an understandable outgrowth of that. Presumably, there will be a high level of transparency, such that all funds know when various triggers are being reached--to facilitate an orderly unwind. CDSs can really whip around when sentiment shifts. The FT suggests also that the move toward using CDSs instead of bonds is yet another indication that derivatives markets have replaced rating agencies as measures of creditworthiness.

For more:
- here's the FT article