Naked Credit Default Swaps Are "Like Buying Fire Insurance On Your Neighbor’s House — You Create An Incentive To Burn Down The House” → Washingtons Blog
Naked Credit Default Swaps Are "Like Buying Fire Insurance On Your Neighbor’s House — You Create An Incentive To Burn Down The House” - Washingtons Blog

Monday, March 1, 2010

Naked Credit Default Swaps Are "Like Buying Fire Insurance On Your Neighbor’s House — You Create An Incentive To Burn Down The House”

I have repeatedly argued that naked credit default swaps should be banned. See this and this.

Savvy commentators like Wolfgang Munchau and Yves Smith are saying the same thing.

As I wrote last July:

Obama's regulation of credit default swaps leave loopholes large enough to drive the biggest trucks through. Specifically, it forces over-the-counter credit default swap transactions to be traded through an exchange unless it is a non-standard cds. So all that the "financial innovators" who melted down the economy have to do is get a little creative in drafting their cds' - or just to tell regulators "oh no, that wasn't a standard contract", and they are excepted from the regulation.

Similarly, the Obama administration has just passed a new set of regulations "getting tough" on the naked short selling of stocks, which independent economists say can manipulate stock prices and bring down otherwise healthy companies.

But the regulation will exempt hedge funds, and allow them to continue hiding their shorts from regulators.

That's like passing a law outlawing arson to publicity and fanfare, but quietly exempting convicted arsonists from the new law.

As I wrote last September:

George Soros says ... that credit default swaps are “toxic” and “a very dangerous derivative” because it’s easier and potentially more profitable for investors to bet against companies using them than through so-called short sales ...

Credit default swap counterparties drive company after company into bankruptcy, and that - once a company the counterparties are betting against goes bankrupt - the counterparties cut in line in front of all of the bankruptcy creditors to get paid (and see this and this).

Now, the head of credit strategy at investment giant UniCredit is saying the same thing:

"It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.


  1. Like buying fire insurance on your neighbor's house?

    Come on! Use your imagination. That would be -criminal-! LOL!

    Why not just buy the credit default swaps against the debt of your own publicly traded company? That's what has been going on. It followed directly on the heels of companies shorting their own stock! -before they reported the horrific financial news.

    Think Bank of America as you consider that last paragraph.

    Imagine the following scenario, if you will.

    Find a business that makes a widget in demand. Make the same widget -better-, and sell it for -less-, regardless your cost to make that widget.

    Run the other company out of business by undercutting their product-offering -by providing a fancier product -at a lower price-.

    Lose lots of money. The strategy will pay off -later on.

    Issue an IPO to fund the enterprise, -pocket the cash.

    Report some small part of the IPO money as a fantastic "profit" leading toward much-much bigger things!

    Now short your stock. Then declare a huge and quite obviously company-fatal loss. Cover your shorts, and -pocket the cash.

    Default on your credit obligations, and -pocket the cash (you gain through the credit default swaps you bought against your own company's now defaulted debt).


    Bernie Madoff was made out to be a dummy who simply took the money -like a common thief.

    I think Bernie Madoff is a swell fall guy, in exactly the same way Warren Buffett is a swell phony poster-child for the crooks on Wall Street. Buffett is a common shill. Madoff is a sacrificial lamb.

    If there is a way... It's been proved time and again, there is always plenty of will -to game the system.

    In fact, the system is always set up by those who designed it -exactly so they could game it.

    Think "cap & trade", Barack Obama, and Al Gore.

    These are just some of the many reasons why credit in its myriad forms is -categorically immoral.

    Doesn't anyone find it a bit funny, as in -suspiciously-funny-, that credit comes in so many different flavors?

    Isn't it suspicious the way everyone wants to impose upon you -to buy with credit?

    Credit produces no positive gains in our society, -except for those who have gamed the system by creating clever credit traps for the unwary.

    These sorts of financial devices are -all- immoral.

    There is no free lunch, even if they give -out of what has been stolen- free lunches to the brokers on Wall Street -for their part in pulling off these swindles.

    These are all -ill-gotten gains.

    Much more of the financial world than meets the eye of the unwary -reading here- is categorically immoral.

    How many times need the examples be -so utterly obvious-, before economists and policy-makers say, no more!

    It will be a long time. It will be a long time because economists and policy-makers are bought for a dime a dozen.

    And people are just gullible enough to believe the hocus-pocus that gets handed around these circles with all these geniuses trying to tell everyone they understand what the problem is.

    The problem is with all the geniuses who refuse to accept -that some thing are categorically true.

  2. It isn't just the initially naked CDSes, it's ALL of them, because they are traded as securities (unlike insurance policies), and upon trading they're ALL naked.

  3. And that is what "they" did to the mortgages. "They" did not care or wanted these people to pay off the mortgages because "they" had an insurance policy (CDS) on those mortgages. What "they" did was criminal. And when "AIG" could not pay-up on these insurance policies...
    ....YOU DID..............SUCKERRRRR

  4. I share the same views. Liked your blog very much. I came to your blog just when I was surfing on this topic. I am happy that I found your blog and information I wanted.


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