Thursday, January 29, 2009
Congressman Peterson is sponsoring a bill to address the Credit Default Swap problem. As Bloomberg writes:
House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. The document, distributed by e-mail by the committee staff in Washington, would also force U.S. trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse.
“This would basically kill the single-name CDS market,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. “Given the small size of many issuers’ bonds outstanding, this would make it practically impossible for the CDS market to exist.”
(See also this FT article).
Peterson's bill would ban "naked CDS trading" (that is, buying CDS when you don't own the underlying asset, which is the only valid business purpose for CDS's).
Because CDS are a large part of what caused the financial crisis, I urge everyone to contact Congress to support the bill.
As soon as the bill is assigned a number, I will post that information here.