So Why Hasn’t the Credit Default Swaps Casino Been Shut Down

[Joanne98]

Credit default swaps played a much more central role in the financial crisis than is widely understood, and they continue to get a free pass in financial reform proposals that they do not deserve. As we have discussed on this blog, and recount in more detail in the book ECONNED, central clearing and/or putting them on exchanges are inadequate remedies. Only a small subset of CDS contracts trade often enough for to be suitable for exchange trading. As for central clearing, the logic is that this would provide for consistent and sufficiently large margin to be posted (think of it as a reserve against the ultimate possible insurance payment required on the contract). But unlike real derivatives, CDS are subject to massive price moves (”jump to default’) when a reference entity (the entity on which the CDS is written) defaults or goes into bankruptcy. That large price movement, means that the margin already posted will be insufficient, and there is no guarantee that the counterparty will be able to pony up the amount now due.

But perhaps more important, the idea that CDS have legitimate uses is questionable. They are used to hedge credit risk (sometimes) yet their pricing, per Bloomberg or any of the common commercial models, price CDS based on volatility, which is not based on any assessment of the underlying credit. So the idea that the pricing reflects default risk is spurious; indeed, CDS failed abysmally in predicting financial firm default risk during the crisis (Lehman was a particularly vivid illustration). But they serve to perpetuate the erosion of proper credit analysis (why bother if you can just lay off the risk?).

In the last two days, Gretchen Morgenson of the New York Times and Wolfgang Munchau of the Finacial Times have both launched salvos at CDS. Munchau’s is even more vituperative than Morgenson’s, which given the sober sensibilities of the Financial Times, suggests that opinion on the other side of the pond may be coalescing against the product.

Morgenson points out that even Ben Bernanke has started to question the legitimacy of CDS, but peculiarly is not as hard on his remark as she should have been:

“Using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that.”

Yves here. Huh? How, pray tell, is the SEC, of all regulators, going to look into CDS? CDS are specifically exempt from SEC regulation. If anyone has (or could decide it has) jurisdiction, it’s the Office of the Comptroller of the Currency, and the Fed. So saying that swaps are a problem, and saying that someone who cannot possibly look into them will handle them, is just a fancy form of regulatory three card monte.

Continued>>>>
http://www.nakedcapitalism.com/2010/03/so-why-hasnt-the-credit-default-swaps-casino-been-shut-down.html

[PHIMG]

1. CDS and these other vehicles are tools of economic warfare

"National Security" --

If you have too much transparency in the financial markets you'll destroy some of the tricks the CIA has up its sleeve.

If the world kicks the oil addiction, then TRILLIONS spent by the U.S. to control the world's supply of foreign oil is rendered MOOT.

And another reason is that the financial system is, and always has been a huge financial ponzi scheme.

Watch the Frontline show "The Warning" about what Brooksly Born faced when she tried to regulate Derviatives during Clinton's day.

[patrice]

2. Just guessing: Because HC Ins Cos have been taking losses on Wall Street lately?

http://www.tennessean.com/article/20100220/BUSINESS01/2200311/Health+insurers++outlook+uncertain

An industry caller on Thom Hartmann said that there is 3 weeks of hang-time in between when HC Ins Co receives a given pile of premiums and when claims are processed on that same money. I wonder what they have been doing with that money during those 3 weeks.

[FreakinDJ]

3. The only chance Dems have in Nov - "Get Tough on Wall St."

"The Working Stiffs Get It" - Folks are brutally aware of what caused the "Too Big to Fail" to fail and are paying attention to these issues

[DCKit]

4. Yet, for some reason, they don't realize...

they'd be heroes if they took on Wall St., the banksters, regulation and new laws. They could pound the shit out of those scumbags and not even have to campaign to hold their seats, but they won't.

There's just too much money flowing from the scumbags toward the Capitol.

[LeftHandPath]

5. Buying insurance on your neighbor's house...

There is a reason you cant buy fire insurance on your neighbor's house, or collision insurance on their cars.

Because if we allowed this, fires and collisions in your neighborhood would skyrocket.

This is exactly what Credit Default Swaps are. Insurance on other people's debts. And they are nothing more than a tool to commit fraud.

We should be putting the writers of these instruments in jail. Instead we're covering their loses, and paying them bonuses with our tax dollars.

[upi402]

6. 'We should be putting CDS writers in jail, not covering their losses and paying bonuses with tax $

So true. America is now more corrupt than the Asian countries that so many Republicans like to feel superior to. We failed to heed The Warning huh?

[FreakinDJ]

7. The CDS was a scam from Day 1

[stevebreeze]

8. It real simple Like Dick Durbin Said "they(meaning banking industry" own the joint

meaning the Senate. The health care bill the lack of financial re-regulation, and a host of other ills on capital hill point to the way special interests buy a place at the table while working people are frozen out.