C-span hearing this afternoon on derivatives...Chairman Collin Peterson, D-Minn

[Joanne98]

I don't know what time or channel....

Bill to curb speculation could kill CDS: analyst

SAN FRANCISCO (MarketWatch) -- Ahead of a two-day hearing on derivatives, a bond analyst is warning that a proposed House bill to ban speculation in the once-obscure securities would annihilate the $31 trillion credit-default swaps market.

Proposed legislation to regulate credit default swaps to limit purchases of protection only to those with exposure to economic loss in the instrument being insured could have the unintended (or intended) consequence of collapsing this market," Banc of America Securities credit strategist Jeffrey Rosenberg wrote in a report.
Starting Tuesday afternoon, the House Committee on Agriculture, led by Chairman Collin Peterson, D-Minn., plans two days of hearings in Washington, D.C. to discuss legislation that would impose severe curbs on credit derivatives. Representatives of trade groups representing farmers and gasoline-station operators and the major futures exchanges are scheduled to testify.

Peterson's bill would make it a violation of the Commodity Exchange Act to enter into a type of credit derivative known as a "naked" credit default swap. In other words, the only buyers of those securities, which act as protection against the risk that an underlying corporate or sovereign borrower will default on its debt, would be those investors who must have "direct exposure to financial loss" on the underlying entity.

Derivatives are often used to hedge against unwanted price movement in commodities like oil or assets like corporate debt. Airlines such as Southwest Airlines Co. (LUV:Southwest Airlines Co.
News , chart , profile , more

LUV 6.82, +0.06, +0.9%) buy heating-oil futures, a commodities derivative, to hedge against higher jet-fuel prices. Commercial banks can buy credit default swaps to hedge against a borrower -- like now-bankrupt Smurfit Stone Container Corp. (SSCC:smurfit-stone container corp com

But investors, from pension funds to investment banks, have also used commodities and credit derivatives for trading profits.

http://www.marketwatch.com/news/story/story.aspx?guid=%7B01DB8823%2D01CA%2D490E%2D8656%2DB7B78C2C9DA5%7D&siteid=rss

[JohnWxy]

1. Bill would stop trading in "naked CDSs": buying a CDS protecting against default of securities the

the buyer of the CDS does not even own. In other words it makes side-betting on financial instruments illegal. This is the kind of stuff the Commodities Modernization act of 2000 made legal.



Peterson's bill would make it a violation of the Commodity Exchange Act to enter into a type of credit derivative known as a "naked" credit default swap. In other words, the only buyers of those securities, which act as protection against the risk that an underlying corporate or sovereign borrower will default on its debt, would be those investors who must have "direct exposure to financial loss" on the underlying entity.

In other words the only entities which could buy Credit Default Swaps are those entities owning the underlying securities that the CDS is providing protection against default of those underlying securities (e.g. corporate bonds of lower rating).

Believe it or not, and most people still do not realize this, CDSs were being sold to entities which did not even own the underlying securities which the CDS protected the buyer against default of said securities. In other words the CDS was a side-bet on the default of certain securities (e.g. the low rated bonds issued by a particular corporation). It is another form of short selling - which is betting that a security will go down in value. It is also called gambling. Something which state "bucket laws" made illegal in the early years of the 20th century.

A good report on this was provided on 60 MInutes

NOte this activity is not limited to betting against corporate bonds check Red Earth's post here:

Goldman Recommends Credit Default Swaps Against NJ, CA, WI, FL, OH, MI, Others

[Joanne98]

2. Thanks JohnWxy . It's not on yet. But I watched the Madoff hearing. WOW

He gave the SEC HELL!....

WASHINGTON (Reuters) - Harry Markopolos, a former investment manager who warned U.S. regulators about Bernard Madoff, criticized the Securities and Exchange Commission and said on Wednesday that Madoff had help in running his alleged $50 billion fraud.

Markopolos told Congress that the SEC staff was neither willing nor able to uncover what Madoff, accused of having run the world's biggest Ponzi scheme, was really doing. He also said that he knows the names of a dozen other so-called feeder funds that helped Madoff raise money from pension funds and wealthy investors and that he would turn these over to regulators this week.

Calling SEC staff "too slow, too young and too undereducated," Markopolos said regulators "did not understand the red flags and could not do the math."

"They looked at the size of Madoff and said he's a big firm and we don't attack big firms," Markopolos said about U.S. regulators.

Madoff, a former chairman of the Nasdaq stock market, has been accused of running a massive Ponzi scheme in which he paid of earlier investors with money from later investors.

The failure of the SEC to detect the massive scandal was examined at a U.S. House Financial Services subcommittee hearing on Wednesday. The panel is gathering information before it launches a broad reform of U.S. financial regulations.

At the hearing, Markopolos described his probe of Madoff and attempts to share information with SEC officials. As early as May 2000, Markopolos said, he provided the SEC's Boston office with evidence that he said should have triggered an agency investigation of Madoff.

Over the subsequent years, Markopolos said he resubmitted the evidence to the agency, but to no avail.

"I gift-wrapped and delivered the largest Ponzi scheme to them," said Markopolos, who is now working as a fraud examiner.

http://www.reuters.com/article/topNews/idUSTRE5133ZF20090204

[JohnWxy]

3. I like this part: "At the hearing, Markopolos described his probe of Madoff and ....

"At the hearing, Markopolos described his probe of Madoff and attempts to share information with SEC officials. As early as May 2000, Markopolos said, he provided the SEC's Boston office with evidence that he said should have triggered an agency investigation of Madoff.

Over the subsequent years, Markopolos said he resubmitted the evidence to the agency, but to no avail."

The SEC was looking the other way for 10 years. Part of the Republican atmosphere of let business "boys be boys".

Now were staring a depression in the face unless Pres. Obama and Dems can get the Repubs to let them save our nation.

PleeeeeeeZe Republicans will you help us help the nation if we promise not to mention the obviuous that you F---ed the whole thing up.