Traders are finding a new way to profit from CDS spreads and holding the underlying bonds.

Bondholders can buy the bonds at any point below par and also buy insurance against the bonds with credit default swaps.

This is what New York traders are doing with the bonds and swaps of GM, Six Flags Amusement Parks and Ford Motors.

According to Citigroup analysts this strategy can yield 6% with very little risk.

If the bondholder holds the credit to maturity he will recover the principle plus the payments.

If the underlying company defaults and files chapter 11 bankruptcy then the CDS buyer will be paid by the counterparty or issuer the principle on the loan.

A consistent, intelligent strategy to profit from the CDS mayhem is the right move considering that even two of the rare AAA rated corporations that still exist, General Electric and Berkshire Hathaway are struggling to maintain a high credit standing.

For example, Despite its huge cash hoard of over $25 billion, Berkshire protection against default trades at a cost equal to that of KB Home, a home builder that has lost money in seven consecutive quarters. GE, a company that has over $45 billion in cash sees its swap contracts trade at a price matching that of building materials maker Louisiana-Pacific, which has lost money in nine consecutive quarters!

Six Flags debt stands at Caa3 according to Moody's Investor Service. S&P holds Six Flags at 3 and 5 levels above the default level. Ford is not taking any of the federal bailout monies. That car company is the only one of the Big 3 that will not accept the money that keeps the automakers from falling further behind on their debt payments.

If you lend $50 million to a company and buy $50 million dollars in credit default swaps against the same company then a creditor could care less if the company remains solvent.

This is called a "negative-basis-trade" where the cost of the bond is less than the cost of the CDS against it. Traders at Deutsche Bank have used this strategy with the bonds of Lyondell Chemical Co. Detractors call this sort of strategy an obstacle to clean mergers and acquisitions as was the case with the botched merger of Dow Chemical and Lyondell in 2009.

There are at least $47 trillion in credit default swaps outstanding according to JP Morgan Chase and Company which created the financial product in the late 1990s. Up until the credit crisis began in 2007 they were used as a tool to boost leverage and bets in trading and investment for pension funds, insurance companies and hedge funds.

Basis traders hurt efforts by companies drowning in debt to stay out of bankruptcy according to those who do not support the use of credit default swaps. Swap traders (and issuers, who are paid fees and premiums for their use) say that the derivatives bring efficiency and liquidity to the market, especially for illiquid and esoteric trades.  

Despite the fact that AIG received tens of billions of dollars in bailout loans in 2008 and 2009 it has never revealed who its counterparties are.

Pressure builds in the public and private sphere for American International Group to move forward and make the counterparties public. Sen. Ron Wyden, D-Ore., brought up his desire to see the revelation of all of the AIG private information being made public during testimony in Congress by Federal Reserve Chairman Ben Bernanke on March 3rd, 2009.

If the insurer's ratings fall to BBB or Baa2 some counterparties will be allowed to cancel certain contracts. The notional value of these contracts was $38 billion in January 2009.

It is important that this information be made public so that the total outlay of derivative contracts insured by the giant insurance company can finally be known. This information would go a long way to calm the credit markets which froze solid after the failure of Lehman in September 2008. AIG is 80% owned by the American taxpayer.