Monday, October 27, 2008

Wipe Credit Default Swaps Off the Books

I learned something new on 60 Minutes last night about Credit Default Swaps, those nasty, unregulated mortgage default insurance contracts that are the disease behind the global financial meltdown.

At first I had the impression that these were insurance contracts that Wall Street used to convince prospective customers to buy its toxic securities - securitized mortgages, derivatives, bundled bad debt. Okay, I'm not really sure what it is I'm buying so I want insurance. That makes sense and it's Wall Street's fault for selling insurance when they had no means, no assets to honour those committments when the bottom fell out.

But there's more, a lot more. These Credit Derivative Swaps were available to anyone. They weren't limited to buyers of derivatives. Anyone could buy a CDS for a few pennies on the dollar without having to buy or hold the dubious mortgage bundles. In this way you were betting against the housing bubble, betting against the securitized mortgages, betting that this madness would collapse.

These unregulated bets earned some people billions in profits, and it's their billions in profits from gaming CDSs that are a big chunk of the problems that have rocked markets around the world.

What really is outrageous is that governments around the world are using wage-earners' tax dollars to bail out banks that need to make good on these gamed Credit Default Swaps and, right now, nobody even knows the total value of them or even who is liable for what. It's estimated that there are 60-trillion dollars of Credit Default Swaps in circulation.

Here's an idea. Rather than soaking taxpayers why don't our governments use their sovereign powers to declare those Credit Default Swaps to be redeemable for exactly what was paid for them. If you paid pennies on the dollar, you get pennies on the dollar and thank you for your patriotism in a time of troubles.

The Western world has been raped by these gamblers and swindlers. Why should working stiffs be saddled with making good their bad debts, especially on these gamey Credit Default Swaps? You want to clean up the financial markets, restore confidence and liquidity, get credit moving again? A good way to start is to wipe the CDS garbage off the books. Write them down to what was actually paid for them, pennies on the dollar.

Yes, some people will lose out on their windfall bets but, so what? After all, they not only bet the housing bubble would burst, they also bet that the outfit selling them the CDS would be good for it. That's a two part bet and they lost. Why should taxpayers be expected to make winners out of losers?


Anonymous said...

Why on earth should people who bet that something was rotten in the credit market be punished for being right? If you do this, you are letting the problem go uncorrected.

The Mound of Sound said...

Why on earth should wage-earning taxpayers have to be fleeced to prove them right? They bet not only that the market was rotten but that the party who took their bet was good for it. Taxpayers were never invited to accept or decline their bets, were they? Who should bear the loss, the people who took the gamble or the people who didn't? Sorry, you placed your bet with an outfit that wasn't good for it. Happens everyday. Now move along.

Anonymous said...


Sure - so let the bankruptcy process go ahead. The taxpayers' representatives are the ones entering into the situation - and doing so to prop up incompetent management and perpetuate unsound practices.

The Mound of Sound said...

It's tempting but that would only bring down the banking system, making the innocent again the victims. There are some estimates that these CDSs could reach several hundreds of trillions of dollars (one estimate is just shy of 600-trillion) because the law pushed through by McCain cronie Phil Gramm resulted in mortgage debt leveraging (via swaps) on the order of 30X actual value.

Now, with a pre-recession GDP of 14-trillion, there's no way the US or all the industrialized nations together can float that sort of obligation.

You just have to tell the folks who hold these scam securities, sorry you're S.O.L. It's rough justice admittedly but it's more than deserved.