| Submit your comments on this article |
| Economy |
| Big Money Ahead of Obama on Derivative Flushing |
| 2009-09-12 |
| It looks like the Wild West days of the over-the-counter derivatives market may be coming to an end as 15 of the largest derivatives dealer banks told the New York Federal Reserve Tuesday that they plan to put 90% of their trades through clearinghouses by year's end. As we approach the anniversary of the NY Fed's ax on Lehman Brothers and Merril Lynch, the big banks are at long last attempting private regulation (cough) of the derivatives' market. Prior to the ax, the mortage brokers used candy-store practises to over-value credit worthiness of hillbilly borrowers, and then sold derivative packages (Collateralized Debt Obligation) paper at inflated prices, on the premiss that the pigeons could be soaked when credit contracts were renewed. While there is little or no current exchange of CDOs the upshot is a snakeoil pseudo-market for Credit Debt Swaps (CDS). By self-regulation, Big Money (the Fed calls AIG, etc "insurers"), hopes to collude on write-downs of debt. That allows a magical transformation of red-ink into black, as the "free market" is reduced to what can be freely traded after collusion.. The move is likely prompted by looming regulation of the derivatives market and the return of Congress to session. With messy issues such as healthcare and climate change on the menu, putting the much maligned credit default swaps under a regulator may be an issue that the two parties can agree on. Derivatives, and credit default swaps in particular, were faulted in the need to bailout American International Group Inc. (NYSE:AIG) and now hold the dubious reputation of being a possible threat to the entire financial system. The commitment to go through clearinghouses carries heft because the four banks that control 90% derivatives markets -- J.P. Morgan Chase & Co. (NYSE:JPM), Bank of America Corp./Merrill Lynch & Co. (NYSE:BAC), Citigroup Inc. (NYSE:C) and Goldman Sachs Group Inc. (NYSE:GS) -- have all signed on. Also committing were Morgan Stanley (NYSE:MS), Barclays plc (NYSE:BCS), UB (NYSE:UBS) and Credit Suisse Group AG (NYSE:CS). Clearinghouses for derivatives will (hopefully) add more stability and transparency to the market since it will be a central counterparty to all trades, ensuring that the failure of any one institution doesn't leave its trading partners holding useless swaps. by George White Translation: Big Money isn't waiting for Congress to abolish the derivative market. While it is true that AIG, etc were negligent in underwriting the CDO circus, it is also true that the better the position of the CDS holders, the stronger will be the American economy. Competition-within-collusion doesn't sound like capitalism, but leave them alone and this will produce public benefits without a 10 year recession as in Japan, where cultural "honor" compelled strict market repayment of dubious real estate debts. But, corporate disclosure must trump concealment for this to work. Honesty: what a concept! |
| Posted by:Elmosh Slaique7604 |
| #3 Still - the run down may be a valid argument.. but it should be illegal. |
| Posted by: 3dc 2009-09-12 14:28 |
| #2 AH: Private enterprisers want to write down CDS paper a little bit each year, but at a uniform rate so that they can maximize the process. Within 10 years derivate residue would evaporate. Congress would be too embarassed to sandbag a private initiative that won't cost tax-payers a cent and will deliver the type of stability, necessary to correct recession elements. Lehman Bros were caught off-guard when Paulsen and Bernake called the major players into the meeting where the Treasury Secretary said he wouldn't bail out CDO vendors. Bernake was then put into the position of using Fed statutory and regulatory powers to force re-capitalization on Lehman and Merrill Lynch. The Fed always had regulatory leverage over the derivative market but, then again, Lehman' CEO, Richard Fuld, was on the NY Fed board until mid 2008. |
| Posted by: Elmosh Slaique7604 2009-09-12 11:17 |
| #1 Credit default swaps (CDS) were ILLEGAL up until 2000, when an act of Congress was passed, canceling state laws against them. If you wonder that there might have been some kind of valid reason for the bans, check out this story on 60 minutes. I see no reason why these CDS bets shouldn't be outlawed as gambling, as they used to be. |
| Posted by: Anguper Hupomosing9418 2009-09-12 10:50 |