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In an article I read, Soros called credit default swaps as instruments of destruction. Below is part of the article:Soros said the asymmetry of risk and reward embedded in CDS exerted so much downward pressure on the bonds underlying the contracts that companies and financial institutions could be brought to their knees.

“Some derivatives ought not to be allowed to be traded at all. I have in mind credit default swaps. The more I’ve heard about them, the more I’ve realized they’re truly toxic,” he told a banking conference.

“CDS are instruments of destruction which ought to be outlawed,” Soros told a meeting of the Institute of International Finance, many of whose member banks and financial institutions are active participants in the huge CDS market.

Going short on bonds by purchasing a CDS contract carried limited risk but almost unlimited profit potential. By contrast, selling CDSs offered limited profit and practically unlimited risk, Soros said.

He said one financial institution that discovered to its cost the risk/reward distortions of CDS was insurer American International Group, which was a big seller of CDS, offering banks protection against a deterioration in their bond portfolios, especially mortgage-linked securities.

“AIG thought it was selling insurance on bonds and as such CDS were outrageously overpriced. In fact AIG was selling bear market warrants and it severely underestimated their value,” Soros said.

But the potential damage that CDS could do was not limited to financial firms, Soros added. He pointed to the bankruptcy of North America’s largest newsprint maker, AbitibiBowater Inc, and the pending bankruptcy of General Motors”In both cases, some bondholders owned CDS and they stood to gain more by bankruptcy than by reorganization.

“It’s like buying life insurance on someone else’s life and owning a license to kill,” he concluded.

Soros’ criticism echoes fellow investor Warren Buffet’s description of derivatives in 2003 as “financial weapons of mass destruction.”

On derivatives in general, Soros said they should be as strictly regulated as stocks.

He said derivatives should be standardized and saw no case for custom-made derivatives, which he said only increased the profit margins of the financiers who tailored them.

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Oil prices broke through the $70 per-barrel barrier Friday and more forecasters are broadening expectations for an upward swing in crude.

Benchmark crude for July delivery lost 37 cents to settle at $68.44 on the New York Mercantile Exchange, finishing the week with a gain of nearly $2 a barrel.

Earlier in the day oil jumped as high as $70.32 per barrel, the highest since October.

Oil prices have been soaring for months despite a massive surplus of petroleum and natural gas. A large amount of speculative money has flowed into the markets, according to government reports, potentially taking advantage of a weak U.S. currency.

Surging energy prices appear to be outpacing an economic recovery for now, and there are concerns that consumers may pull back spending further, especially with retail gasoline nearing the $3 mark.

“That everyday, in-your-face experience of seeing higher gas prices at the pump; that has quite an impact on people’s psyche,” said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

“There’s this feeling of ‘here we go again’ with what happened last year,” Kloza said.

“It hurts discretional spending.

“It leaves people to think about not taking those summer vacations.”

This week, Goldman Sachs revised its forecast and predicted that oil would rally to $85 a barrel by the end of the year as the economy stabilizes and OPEC production cuts take hold.

The forecast assumes, however, that the Organization of Petroleum Exporting Countries will stick to its cuts – and that has never been a sure bet.

Yet even news that could be perceived as negative on the surface has brought more money into oil markets.

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Ratings agency Standard & Poor’s lowered its outlook on Britain to negative on Thursday, citing government debt that would be hard to rein in and political uncertainty about the policy response with an election looming.Ratings agency Standard & Poor’s lowered its outlook on Britain to negative on Thursday, citing government debt that would be hard to rein in and political uncertainty about the policy response with an election looming.

The agency affirmed Britain’s ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings.

“We have revised the outlook on the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of GDP and remain near that level in the medium term,” Standard & Poor’s credit analyst David Beers said in a statement.

Beers said S&P had a more cautious view than the government of “how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow.”

Britain’s finance ministry said uncertainty in the economic outlook meant S&P could revise back its negative outlook and that last month’s budget had set out a path to cut a deficit forecast to hit $276 billion this year.

“There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable ‘if fiscal outturns are more benign than (they) currently anticipate’,” a Treasury spokesman said.

“The Budget set out a clear plan to halve the deficit in five years. That judgment was based on a deliberately cautious view of the public finances,” the Treasury said.

Analysts said S&P had heaped further pressure on the next government to act to rein in public debt. An election is due by mid-2010 and the opposition center-right Conservatives are tipped to win.

“Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day — but today’s announcement by S&P puts that much more pressure on the next government to act quickly,” Colin Ellis of Daiwa Securities said.
Borrowing soars

Official data released minutes after the S&P announcement showed British public borrowing hit a record high for the month of April — the first month of the new tax year — as the recession-hit economy battered public finances.

The June gilt future and the pound tumbled sharply after the S&P announcement. British share prices also fell.

Fellow ratings agency Moody’s declined comment on its plans.

It was the first time that Britain had been on negative outlook since S&P introduced outlooks in the 1980s, an S&P spokesman said. Britain has been on a “AAA” rating since 1978.

In his April budget, finance minister Alistair Darling said public debt would spiral — with a record 220 billion pounds of gilt issuance this year — but would decline further out based on assumptions of a return to growth which business chiefs and economists have described as optimistic.

S&P said Britain’s ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility and relatively flexible product and labor markets.

But an election due by next year was creating uncertainty about government policy despite support across the parties for fiscal tightening.

“The rating could be lowered if we conclude that, following the election, the next government’s fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term,” Beers said.

“Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate.”

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