Friday, July 17, 2009
Congress Woman Introduces Bill to Ban All Credit Default Swaps
I'm a little late to this story, but last week Congresswoman Maxine Waters introduced a bill to ban all credit default swaps.
As Waters said:
Preventing all credit-default swaps is essential to bringing stability to the market and preventing a similar crisis in the future.Many top experts - including nobel prize winning economists and numerous other well-known PhD economists - agree.
Indeed, just today, Credit Sights published a report documenting - as I have previously pointed out - that CDS drive companies into bankruptcy.
But aren't Obama's new regulation of CDS good enough?
I have repeatedly argued that they aren't.
But don't listen to me. Satyajit Das is one of the world's top credit default swap experts. Yves Smith says of Das:
Satyajit Das is a hard core derivatives expert, having worked with them in enough markets and enough vantage points to be very well versed . . .
This is Das' area, and if he says it's an issue, it is ...
Today, Das wrote an essay arguing that the new credit default swap regulations not only won't help stabilize the economy, they might actually help to destabilize it.
Indeed, the only people that are for CDS and the current half-baked regulations are the handful of giant banks that are making a killing from them. Everyone else is against them (indeed, the economy is the thing "being killed").
Call your Congress member and demand he or she support Waters' bill to ban all credit default swaps.
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I truly wonder just how many companies we have to watch being destroyed by these rich bastards looking for a few more bucks. For my money all these contracts should just be cancelled by the Obama administration. Yep it would bite the big guys in the ass, but we are down to the survival of the majority , so screw em, take them down now.
ReplyDeleteIt's not all CDS's that are bad. It's the naked CDS's that kill a company. Basically, a naked CDS is just a bet that a company will go out of business. Lot's of bets against a company increase spreads and push up borrowing costs. Not much different than a 1920's bucket shop. There is, however, a real need for a CDS for lenders. It is a legitimate way to hedge risk. The bill should ban only the naked CDS's.
ReplyDeletemy congresswoman resigned so I wrote to my two state senators. For all the good it will probably do, i'd probably have been better off surfing the net for porn. oh well, ya gotta believe sometimes.
ReplyDeleteFor all the -now obvious- expense -credit imperils every community with, credit ought to be severely taxed, even taxed nearly out of existence.
ReplyDeleteRisk is risk, but for whom is credit risky?
If you live in a home where your neighbors on either side of you and across the street have lost their homes to foreclosure, and those homes are now boarded over, YOU have been imperiled by the risk of the credit extended to those neighbors.
RBM how can you defend un-capitalized insurance policies?
ReplyDeletewhich is what CDS's are...naked or not
.they are fraudulent financial inventions especially immune to regulation and un-supervised. From what I read certain swaps have an illegal component SIDE LETTER that makes them especially pernicious!
DCOS:
ReplyDeleteI have also read that AIG had many CDS's with side letters that the Government paid in full on. Side letters are clearly a fraudulent activity that allows a bank to increase leverage without increasing reserves. However, I have no problem with say AFLAC (12% of their free cash is tied up in CIT) taking an insurance policy out against its CIT bonds/investment. If they don't take out a CDS they would just short an equal amount of equity which doesn't really help the company they are investing in.
Yeah lets ban CDS, and while we are at it why done we ban interest rate swaps, stocks, bonds, options, health insurance, life insurance and any kind of securitization. Just because some scummy execs at AIG thought it would be a good idea to sell as many contracts as possible without worrying about the risks, you cant take down the market. This is ridiculous. They should have let AIG fail and taught everyone a lesson. All you libs that are for all this socialization are against CDS trading because you have no idea what it is and what it does for markets. Grow up.
ReplyDeleteAnonymous,
ReplyDeleteI would think that the nobel economist who helped to create the pricing structure for CDS - Myron Scholes - and the many other PhD economists and CDS experts who say they only benefit the big banks and hurt the economy, know a little bit about what CDS trading is and what it does for the markets.
I invite you to read all of the links in the article.
Look guys, I agree that unregulated CDS markets have behaved irrationally of late. However, a large part of this has been due to counterparty risk. The price of a CDS contract depends on corporate default probability, liquidity and counterparty risk. Introducing an exchange trading mechanism, such as the Big Bang protocol in the US will improve transparency and reduce counterparty risk so the instruments can behave more rationally.
ReplyDeleteBuying protection on companies CDS is much like shorting its stock, if an efficient market investor believes that too much debt or falling performance will pull the company into financial difficulty - this is an incentive for managers to keep efficient debt capital structures and for capitalism to work – by allowing weak companies to fail. We are heading into over regulation as a reaction to the current crises and I worry the pendulum swinging too far the other way will stifle growth and innovation in western economies.
hi,
ReplyDelete