“Every portfolio manager has the obligation to minimize risk and maximize returns, and CDSs can be part of a program to accomplish this if properly used,” says Viva Hammer, who was responsible for tax regulations governing CDSs while with the U.S. Treasury Department’s Office of Tax Policy. Following the collapse of Lehman Brothers Holdings, she points out, the CDS market behaved in an orderly fashion. “The cause of the crisis wasn’t derivatives; the cause was fraud and misbehavior in the underlying markets,” she argues.
Yet, as Viva Hammer says, “if you restrict or forbid pension funds from the CDS market” — as some legislators would do — “you would be excluding them from an important market and potentially increasing their risks and decreasing their returns.”
Read the full article here: How Pension Funds Exploit Credit Default Swaps