Here’s something Senator Corker and Senator Shelby and the rest of the union-busting crowd ought to consider: the bankruptcy of GM will trigger the credit default swaps naming GM as the reference entity. A bailout won’t, according to the Bank of America.
The current gross notional amount of credit default swaps with GM as the reference entity is $44bn*. This is down from $65bn just three weeks ago. The net notional amount is $3.4bn, up bit since then. According to the DTTC, the notional amount is the maximum amount of money that will change hands on the occurrence of an event of default, after netting and application of collateral. The Bank of America says the cash requirement is around $4bn, again after netting and application of collateral. According to the Bank of America
"CDS contracts require daily posting of mark-to-market collateral posting," Taksler said. "Given that auto company bonds already trade in the $20s, the additional collateral posting prompted by a potential bankruptcy should be fairly small."
This implies that a large additional amount of collateral has been posted. That money is gone from the banking and investment sector, and isn’t available to be loaned out or otherwise put to good use. It is merely sitting in vaults, waiting around to see what happens to GM. Meanwhile, the price of GM CDSs has gone way up:
The cost to insure GM’s debt has surged to an upfront cost of 80 percent the sum insured, or $8 million to insure $10 million in debt for five years, in addition to annual payments of $500,000, according to Markit.
The rapid increase in the price of GM CDSs this year, coupled with the decrease in notional amount outstanding, implies that sellers of protection have been buying up protection in the over-the-counter market, presumably to set off against their sales of protection. The AIGs and Citigroups of the world are the sellers of protection, and they’re busy sending money to the buyers of protection, both directly through purchases of gambling CDSs and indirectly through posting collateral for their sins. And we all know where that money is coming from: Henry Paulson and Ben Bernanke. If the bailout comes, and the bankruptcy doesn’t, the prices of GM CDSs will fall quickly. The recent purchasers will be hurt, and maybe that will include AIG and Citi.
Corker and Shelby and the rest of the DC ignoranti need to think about this: who is benefiting from the bailout stall-out? There are a lot more games going on here than just Corker and Shelby’s effort to bust unions, and benefit the foreign manufacturers in their home states. There’s the whole shadow question: who will profit if the bailout doesn’t happen, and who will profit if it doesn’t.
This shadow question can’t be ignored. It infects every aspect of the whole bailout situation. Take Citigroup, with its $3tn plus in credit default swaps. Taxpayers are pouring money and guarantees into their treasury. Are they pouring money onto hedge funds and other buyers of protection, trying to prop up their swaps, or solving their exposure to GM and the other failing entities?
And, what about AIG? The Treasury is now participating directly in the shadow world, buying up securities insured by AIG through its CDSs, in the hope it will stop the bleeding of collateral. This is from AIG’s most recent 8-K on file at the SEC:
AIGFP, ML III and the NY Fed have entered into agreements with AIGFP’s CDS counterparties to terminate approximately $53.5 billion notional amount of CDS and purchase the related Multi-Sector CDOs. Of these, CDOs with a principal amount of approximately $46.1 billion settled on November 25, 2008 and a corresponding notional amount of CDS were terminated. Settlement on the remaining $7.4 billion notional amount of CDS is contingent upon the ability of the related counterparty to obtain the related Multi-Sector CDOs and thereby settle with ML III and terminate such CDS with AIGFP.
It is now perfectly clear that the Treasury and the Fed are afraid of failure to pay off on the gambling side of CDSs. That’s what the part about the related counterparty trying to “obtain the related Multi-Sector CDOs”** means. If the CDOs are worth 50 cents on the dollar, as this article claims, the Gamblers will spend $3.7bn to buy the securities, and trade them to the Fed for a like amount. Then they get to keep the collateral they already have, which we can estimate at $2.96bn. Nice. Those counterparties are sucking up taxpayer money on their CDSs. The insured parties, apparently banks, may be getting some kind of minor haircut, maybe 10%, according to the last link.
That’s more important than, say, bailing out the auto industry? Has anybody asked whether this is a good idea? Does anybody dare to ask? Who is protecting American taxpayers from the wolves of Wall Street?
*The link is to the current chart. I saved the earlier version, and can’t find it on-line.
**Multi-Sector CDOs are pools of other securities, and heaven knows what else.
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No one. Not one word has been said about letting the CDS market collapse under its own weight.
Rather than bailing out the banks from abysmally bad debts, how ’bout companies come to the Fed directly for their short-term capital until a new crop of properly regulated banks grow up from the ashes of the old unregulated behemoths that by free-market rights ought to be going down in flames.
Bernanke and Paulson are totally committed to propping up the house of cards that is the financial system regardless of the damage it does to the real economy and ordinary Americans. They are like gamblers doubling down on every losing bet. For the amount they have lost or left lying on the table they could have bought the casino. This is rapidly becoming about personal pathology and addiction, not about fixing the problems of the banking system.
Your post does a good job of describing another reason why Paulson and Bernanke’s piecemeal approach creates more problems without really solving those already on the table.
That’s a fascinating idea. Let’s ponder on it a while.
This idea has some potential. The short-term problem is that we can’t count on anyone at Treasury to make intelligent loans.
I’m thinking that if the Fed or the Treasury made sensible loans, they could sell them off to a group of regional or community banks, banks that are solvent.
FWIW, there is some decentralization built into the 12 Federal Reserve Districts
Thanks. That’s what I thought was going on, but it was nice to hear you confirm it.
masaccio, apologies, I know you know about the 12 FED districts. I didn’t mean to imply you didn’t.
I think phred’s idea has merit and I wanted to emphasize that it didn’t centralize lending decisions in DC as much as it might have appeared.
Simple question in 2 parts: Who exactly are the counterparties for the gambling (nee “naked) CDSes? If we don’t know, how can that be discovered?
Underlying concern: Someone (or plural) shorted airlines stocks to benefit from 9/11. Has someone (or plural) who is now in a position to effect the economy been betting on it collapsing, while taking steps to activly cause same collapse?
No problem.
The government can find out who the counterparties are for a huge number of the CDSs. We have the ability to send in examiners to the banks and insurance companies and simply go over them one at a time. I’m not sure if we can get that information spread to the public. On the other hand, knowing gives the government the ability to fight off improper actions by both sides. If it has the will to do that.
Thanks, masaccio. Of course in the case where there may be close ties between the USG — more specifically, the current administration and its installees — and the counterparties, then there may be disincentives, perhaps strong ones, for the USG to disclose such identities.
digg
Thanks masaccio, I’m glad you like it ; ) On the one hand, taxpayers wouldn’t get stuck throw good tax dollars after bad corporate investments, plus it would directly inject liquidity into the economy, which seems to be the real problem for all non-Wall Street businesses. On the other it would require the Fed to do a good job making loans, and that is no safe bet. I like your idea of rewarding the smaller solvent banks around the country by selling them the Fed loans. That way business in the broader economy stays afloat, Citi and AIG et al. go the way of the dodo as they should.
Since you know a lot more about this stuff than I do… I have a question for you… I have read that the EU may place a moratorium on CDS payments. If we instituted such a moratorium here, what ripple effects do you think that might have on the rest of our economy? I can see how that might isolate the problem with CDS, but it still seems to me we would be stuck with our liquidity problem, which is why I like the idea of the Fed directly helping businesses with what’s left of our $700b.
Also a good point Boo. The district Fed offices could work with regional banks that remain in good shape. I know the smaller banks complained to Congress when the bailout first came up. I’m sure they would like to be rewarded for the good behavior as well as to be part of the solution to the problem.
So what if we started sending a massive mailings (e-mail and other means) to congresspersons, Obama and letters to the editor and let them know, in simple terms, what the hell is going on. We will need the help of people like Ian and others at FDL who can put this in a VERY easily understood terms. But if we can cause a prospective cabinet nominee (AG I think) to withdraw, maybe we can cause the same pressure to be applied to future bailouts in the Wall Street banks.
Food for thought Angry B
masaccio — this is cross-posted from EW’s thread, just want to make sure you see my response to your reply on the moratorium question (too many tabs open indeed!)
You raise a good point in distinguishing between (what are they called “regular”?) CDSs that are based on real underlying assets v. naked CDSs that are flat out gambling. My understanding (which is limited) of a lot of this market is that these were private deals made between two parties. In general when I think of hedge funds I think of well-heeled private investors trying to get better-heeled.
However, the fact is that most of us are investors now via work related benefits. Do you have any idea the level of exposure various pension funds and 401k assets might have? I would have thought they would be required to stay in more transparent transactions, but perhaps that is wishful thinking on my part. If the retirement savings of ordinary Americans are in the soup in a big way, then simply writing off naked CDS bets would have serious consequences for too many people to go that route…
Thanks.
Agree.
FWIW, there are tons of out-of-work bankers, if the Federal Reserve banks want to start hiring.
One thing that might help quality is 100% transparency. If people knew who was receiving the Fed’s loans, as well as what the terms and amount were, it makes it tougher for bureaucrats to screw up. Also, they turn someone down, those folks have something to compare it to.
AFAIK, the transparency also facilitates the eventual selling of the loans to local lenders.
I have a lot of fear of putting that much power in the hands of the Federal Reserve’s banks, but I don’t see a better option.
phred, great question at 16, I’ll be checking back for an answer.
I doubt that there is much in 401(k) money in any of this stuff, because the funds aren’t big enough to justify the associated risk, and it would probably be a serious breach of fiduciary duty of the trustee of the fund. Similar concerns about risk make it unlikely that pension funds bought credit default swaps, except for actual hedging. It is less clear whether they bought CDOs and other derivatives for investment purposes.
However, a lot of pension funds and endowment funds of non-profits bought interests in hedge funds. Hopefully this was a small part of their portfolios, the part committed for highest risk/reward ratios.
Thanks.
Thanks masaccio. That makes me feel a lot better about letting those in naked defaults take their well deserved losses. That would address the lion’s share (as I understand it) of the CDS market, since it was the gambling end of things that really pumped up that market. Then as you note here, we need to find a way for those with asset-based defaults to unwind their positions with the least damage possible.
Would a two-pronged system work? Place a moratorium on the asset-based defaults to buy them time to sort things out as best as possible, let the naked CDS collapse, and have the Fed pump liquidity into the rest of the economy, either directly or via the smaller solvent regional banks. What do you think?
Another excellent post masaccio!
I’d like to also strongly recommend this Vanity Fair article “Wall Street Lays Another Egg”.
It gives, what I think is, an excellent, layman-readable, précis of just how the world’s “best and brightest” finanancial system ended up circling the toilet.
A must read for those who ask: “Why? How?”
It may be a good idea, but I’m not sure it can be done effectively. We know there are billions of gambling transactions, but proving that the purpose of the trade was purely speculation is a problem. We have a truly dysfunctional legislative process, and trying to pass a statute would open the process to all kinds of lobbyists a way to argue that the speculative transactions should be defined to nothing, just like the limits on executive compensation in the bailout bill were defined so as to be utterly meaningless.
It’s a problem, but I haven’t got a real good plan to fix it.
how much liquidity do you think it would take? is it possible and even if so would the fed be able to judge and target it accurately enough?
i don’t see how that can work.
i’ve posted links from bernhard on this many times before, so forgive me if you’ve already seen them…. bernhard has been arguing for some time that the naked CDSs should be declared null and void – but only as part of a comprehensive approach:
I gotta be honest. Well, I don’t gotta be, but I will. I probably understand economics less than John McCain. I don’t get this post — which clearly is not the fault of massaccio.
Let me try the basic question and hope someone can help me.
“[T]he bankruptcy of GM will trigger the credit default swaps naming GM as the reference entity. A bailout won’t. . . .”
Is there any easy way to explain that? It was probably explained in the post but I just didn’t get it. If not, never mind.
Or are there any past posts I can read?
I didn’t really explain it in this post, but here is the short version, from Wikipedia:
Bankruptcy is a trigger event, in the sense that if it occurs, the seller of protection has to pay off the buyer.
Some holders of protection actually hold the underlying debt security. For example, a pension plan might hold $10 million in GM long-term debt, and it might want to hold the bonds, but it might be worried about a default. For this fund, the CDS acts like an insurance policy, assuming the seller can pay.
But many, if not most, of the holders of protection do not own the underlying bonds. They are just gambling that GM will fail; and I refer to these as naked CDSs. If GM fails, the gamblers get paid off the face amount of the bonds, less their actual value, and their only cost is the price of the CDS, typically a quarterly premium, and maybe a down payment. As you can see from the quote in the post, now that GM is in trouble, buying protection is very expensive.
A cleanout, not a bailout
The government should not be sending money to Wall Street. It should be sending the FBI’s white collar crime squads.
I’ve got a couple of posts which you can see by clicking on my name. This one might be a good place to start.
One major problem we have is that the financial regulatory agencies have been gutted by repubs, starting with Reagan. Our financial investigative ability is very low.
Thanks for that and your 27. I appreciate it. Off to read and get smarter. Thanks again.
except that the gamblers won’t get paid, will they? – because they don’t have the resources. what they do have will get sold at firesale prices to raise some cash (maybe to pay a few cents on the dollar?). i really don’t understand this either, but i’d think that would trigger a massive round of deleveraging like we’ve never seen. and to make it all the more complicated – i think for the auto companies there are a bunch of CDOs that include CDSs.
what this would actually mean i don’t know – but i’m not sure anyone else does either.
My reply thing isn’t working. My 31 was to masaccio 27 & 28.
This is a real problem. Paulson has decided, openly and blatantly, to use taxpayer dollars to pay off the gamblers. We don’t even know who they are, although the author of one of my links is pretty sure they are banks. I’m less sure of that, myself.
If the Treasury is really insistent that all CDSs are getting paid, we’re looking at a huge bill to the taxpayers, I think. On the other hand, it may be the case that the gamblers sold protection, to shed some risk themselves while locking in their profits. They need to payoff from their seller to pay off their buyer.
Problems everywhere.
is there enough money in the world to do this?
I’m not a structured finance expert by any stretch of the imagination (although I am an ex pvt eq banker), so maybe this question is complete nonsense, but if these CDSs are determined by Congress and Federal regulators, in the presence emergency situation, then why could they not be unwound at their entry (or latest paid-in and fully serviced mark to market values) values, by official fiat? In other words, the initial trades would be unwound at settled values, and no foul on either side (effectively, time travel backwards) and some Fed monies for those not able to service the much smaller outstanding net cash call obligations (the initi bets, before things got out of control). This would be no greater of a regulatory interventin than a multitrillion dollar bailout. Then, when the trades are unwound and all counterparty obligations reset to zero, close the market. This is how fraud situations would typically be handled in a sane financial market.
thanks for that q. maybe someone knows.
sorry in #36, I meant to say “determined by Congress and regulators, in the present emergency, to be truly pernicious”
somethin like that could be done only after 012009. even then askin all those involved to agree would be next to impossible, imo. by fiat? mebe. martial law?
Outstanding post masaccio. The general point that important interests stand to gain from GM’s bankruptcy has been hidden in most of the discussion about auto restructuring.
thanks! i’m really curious how this could work in practice – especially in the more complicated cases, for example a CDO which includes CDSs.
could you walk us through a hypothetical? if you’re willing to give it a shot, please assume complete ignorance.
I doubt it. That’s why even attempting to bailout out the gamblers is completely nuts.
Thanks for your reply @ 24, especially for the link to bernhard. My attendance has been intermittent lately, so I had not seen them. Thanks also for the link to the Born material (you too Thrasyboulos, if you are around) and your truly excellent diary on “What idiot…” (great title by the way). I tried to leave my thanks on the thread yesterday, but the comments closed before I got back to it.
I think bernhard’s suggestions are excellent. As you can tell I am mostly thinking out loud about this stuff (and I am by no means an economist). Clearly no one in DC is thinking about this (other than covering their chums’ kiesters), so someone’s got to do it. ; )
In any event, my main concern is to make sure the free market works to the extent that the naked CDS market has to live with their losses, while salvaging what we can of the true assets in our economy. How ever we can get there is fine by me, but I don’t see any of the powers that be even contemplating how this might be achieved. In part because they are doing their damnedest to make sure any losses are passed on to the taxpayers.
I heard a great analogy for this once… Imagine you buy insurance to cover you in case your house burns down. Now imagine that your neighbors start placing bets on whether or not your house will burn down. All of a sudden half your neighborhood has a financial incentive to see your house burn down. Arson, anyone?
Naked CDSs are or should be illegal, and they certainly are un ethical. If you are betting huge sums and paying a small premium (relatively) to have the bet then there is nothing to prevent YOU from causing the company you bet on failing to fail and win the bet from the jerk who bet that the company wouldn’t fail.
YOU have absulutely NO interest in seeing said company successful or even survive or limp along.
So apparently our “wonderful” financial institutions are betting that corporations go under… in order to win bets. How perverse is that?
Investors / the “finance sector” / hedge funds – the uber wealthy with oodles of money to “invest” (to make more money – are engaged in the betting that huge corporations go under.
Lovely
And we are giving our tax dollars to save THAT system and THOSE players? Ha?
Great article. The CDS problem may turn out to be the scandal of the century. I like phred’s idea of a moratorium on payoffs of the CDSs – at least until we have some transparency on who holds them and who is liable to pay (most likely the US taxpayer!)
It is entirely possible that the potential cost to taxpayers would be much greater if we allow the automakers to fail, when you consider the pension obligations that will be transfered to the government as well as any CDS exposure.
me too. me neither. i agree. *g*
p.s. i’ve posted the regulation stuff (including the idiot diary) at my site, and kept the comments open in case you come across any good links, etc. i think better when i have help. thanks!
This is the main point I want to make. Nobody wants to talk about who benefits in the shadow market by interfering in the real economy.
It’s bad enough that we are all at tremendous risk because of the jerks on Wall Street, but now a bunch of them are interfering in the real economy to grab cash from us in both the shadow market and the real economy. For another example of this, see this diary.
a “moratorium on payoffs” would certainly break the system. there would be chaos.
nah. it’s much better than that. one the prime architects of preventing regulation of CDSs is the person obama has chosen to head his national economic council (larry summers).
This is not a shadow “market” – wrong terminology. When you have in financial interest in a company failing that is criminal.
The Blue Texan is upstairs with new thready goodness.
Again, I must disclaim any expertise here. I understand the math from my MBA days and I’m familiar with the basic ISDA contract structures, but that’s it. What we really need is an ISDA law expert. Basically, I think two things would need to happen: 1) there would have to be a judicial or arbitration determination that a large
pool of at risk swaps were entered into not as prudent risk mgmt strategies (to buy down the cost of borrowing while, on the other side, managing volatility), but as intentional, possibly even conspiratorial, attempts at speculative manipulation of the share prices (establishing SEC jurisdiction) of the underlying companies and/or the manipulation of interest rates and the credit markets (establishng Fed and potentially OCC jurisdiction). In other words, that the dealers, traders and primary parties conspired to push GM et al to the wall, possibly even the entire US domestic corporate credit market in order to make extraordinary and fraudulent gains. I guarantee these emails exist if you raid the right traders’ email (”wohoo! if I can make GM default I’ll make $900 million!”). Such a finding would cast doubt on the legitimacy of the ISDA generic contract at the heart of the present crisis.
2) congress steps in to reverse and unwind unsettled obligations at risk of destroying publicly traded companies, as per above, giving breathing space for the economy while the Fed and SEC investigate manipulation charges
Yes, this would mean people in treasury offices and in the money center banks’ bankruptcy remote financial products/off balance sheet transactions arms would face jail, and, yes, there will be years and years of litigation, but who cares? The important thng would be that the most toxic liabilities would have gone away, and the ISDA contract itself would be recognized for what it is – an off balance sheet means for manipulating on balance sheet results, in terms of enterprise viability, credit supply and demand and share price.
I know. I wonder if he has some Machivellian strategy and he’s gonna MAKE these suckers eat crow and reverse themselves? Na he wouldn’t do that.
These slackers are not willing to say… none of them – that they CREATED the casino so the uber rich could do some serious gambling BASED on the manipulation of the real economy. They don’t care if company A or B makes it or not. All they care about is ROI on 100s of millions they invest in betting.
This is occuring in shorting in the market now. Investors are not buying shares to make dividends… they are buying shorts to make profits on companies losing their market cap.
can we even really know who is? seems to me it’s just another one of the down sides of the lack of transparency.
hmmm, let’s see if i have this right:
the gov can spy on all my email, phone calls, etc – because i might be a national security threat. but the gov can’t know who has written all the CDSs contracts because that would be interfering in the markets?
Thanks masaccio and all of you whose comments shed more light on this ever growing horror show to which we the people are captive audiences whose ticket price is enslaving us.
I am not into economics and have never played the stock market. You all help me to better understand what has been done to us. We Been Robbed!!
Those Shadow Manipulators are the ones that bother me. I don’t right now have the link to an online tape and text that I heard and read a few months ago. In March, 2004 the CEO’s of the Big 5 investment banks on Wall Street met with the decision makers of the SEC, asking for (demanding/bribing?) the SEC to cut the few strings remaining which regulated the swaps, derivitives, etc. Paulson was the Big Guy of the bank crew, being CEO of Goldman Sachs then. The 5 Robber Barons got what they went after. The new rule-less rules were to become effective 01/01/2005. In this respect Paulson was a major cause of the present melt-down. IMHO.
In 2005 Paulson received a bonus from GS of $30 Million. His bonus in 2006 from GS for Jan. thru mid-June was $18.++ Million. He took over as Secty Treasury Mid-June 2006. He is said to be the richest cabinet member worth over $700 Million.
Shortly after his presenting the 2 1/2 page stick-up note to the Senate, a report came out that he had lost over $300 Million in the meltdown. Now, the ugly suspicions dominate my thoughts concerning Paulson, particularly in light of his generosity without accountability revealed in his dispersal of the $350 Billion bail-out to WS banks. He appeared to me to be pretty bug-eyed and breathless when he went before the Senate…..had he just learned that his own fortune was disappearing? Was that his true motivation?
I would like to know where Paulson’s millions are banked/invested. Also those of his cronies: GW Bush, Poppy Bush, Cheney, Bernanke, Rummy, Henry Kissinger, David Rockefeller, James Baker III, The Carlyle Group,and the rest of the Criminal Crew.
Are Paulson, Bush and Bernanke making sure THEIR millions are stashed in banking facilities that are saved by the bail-out?
Thanks for letting me rant. (I DUGG and commented, and recommended. Truly a fine piece of work, masaccio.)
heck, you can do it anytime you want. shorts/puts? it’s the americun way.
Honestly, before the government goes around doing anything for any more companies of any kind, they need to put down retroactive regulations on CDS’s.
I don’t see how anyone can trust input into the system on what to do about the Big-3 when nobody knows who stands to greatly benefit from their failure. Not to mention the massive moral hazard in allowing entities with no equity in the asset the contract is for generate so much possible debt, that not only does the asset become too big to fail, but the CDS’s on asset that could safely default become too big to fail.
Consider two huge financial entities enter into a CDS on a company that that’s not nearly as critical as GM, like Bob’s Hardware on 3rd and Pine. These two parties create hundreds of billions of dollars in debt obligations if Bob’s goes under. You could create a situation where not only do you have to be prepared to bailout the seller of the CDS, because they’re too big to fail, but you have to consider that to avoid the seller bailout you have to bailout Bob AND subsequently force the CDS buyer to continue to make payments on the CDS to the seller.
The whole scheme, because of who’s involved, and the size of the assets on which the contracts are written, are an out-and-out extortion racket perpetrated against the government, the citizens, and the larger economy.
Force disclosure of the contracts to the courts, force the CDS buyer to write down half their contract payments as losses, and the confiscate payments made to the seller, and force them to write down the losses as well. Use the confiscated money to do direct commercial lending, or to recapitalize commercial/retail banks under the premise (under penalty of seizure if they don’t) that they’ll do the lending.
The biggest crime in everything that has gone on with our response to this crisis, is that we’ve done literally nothing to stop the practices that are creating these crises. We’re infusing blood into the arms, and it’s continuing to poor out the severed legs; nobody’s bothering to tourniquet the victim.
Thanks for that selise. I bookmarked your timeline the other day, if your idiot diary was there then, I overlooked it. It’s good to have that info in one place.
FWIW, I see now the distinction you are making between declaring the CDS contracts null and void v. mine of letting those involved default as the house of cards collapses. It’s an important distinction and I think you are quite right that nullifying the contracts is the only real solution to the underlying problem of too many bets and too little money to cover.
Of course they say they don’t understand these “markets” because if they admit they do, it and explained it to the people in understandable terms as in the taking insurance out on a neighbor’s house, it would reveal what a disgusting thing the rich and their “banks”, hedge funds, and private equity funds are doing to the real economy.
There’s not an absence of liquidity or “credit”, there’s a shitload of rich folk’s gambling debts to pay.
As I noted above in comment 6, we can easily find out who the holders of the CDSs are. We simply send in our examiners from the banking and securities industries, and we get the States to send in their insurance examiners. It might take a while, as there are a total of 2.1 million outstanding contracts on the top 1000 reference entities. One thing it would be fun to know is who is betting against the US: there are 126 contracts iwht a gross notional value of $4.5bn.
Thanks for that comment. Although it is obvious that naked CDS are unethical, I had not realized that they were potentially criminal. Here’s hoping someone pursues such criminals!
Nice comparison selise — well put!
credit to hugh and bernhard on that (they independently started calling for nullification of CDSs back in september) – like i said before, i’m just trying to play catch up. luckily there are people thinking about it (even if none of them are in deecee).
but isn’t this based on voluntary reporting? and if so, how does that tell you anything about the ones that were not reported? or do i have that all wrong?
I don’t understand a word of this post.
I think the only the only way that’s going to happen is if regulators think out of the box. I guarantee that somewhere a trader-Corp treasury official duo, as part of a transaction they were negotiating, mentioned in an email or taped phone exhange (most banks tape counterparty calls) how a prospective uncovered deal might, if it goes the way they want it to) influence the share prices of the Corp treasury official’s company. That would, as I understand it, establish the basis for an SEC investigation or enforcement action. That trigger has to somehow prompt large scale raids that’ll no doubt expose many such communications. Then Congress acts to unwind and shut down the suspect market when the investigations continue. I think that would be how it would have to work.
I don’t think you nullufy them. I think you criminally prosecute those who entered into these as felonies to interferring in doing business?
If someone was betting on your financial failure and manipulating the markets *share value” and so forth to bring about your demise… you want that bet nullified or them locked up for criminal malfeasance?
Paulson is a criminal
Bernanke is a criminal
Virtually all the big hochos on Wall street and the hedge funds are criminals
I think obtaining that information is vital and should be our first order of business in the bailout process.
Those tapes would be the proof of criminal conspiracy.
Everyone knows that the big boys play the market like a fiddle. THEY conspire to make money on bets and short selling.
This is not a free market, but a rigged market.
Thanks for the clarification. I’m still going to be hopeful that someone follows up on this!
not everyone who entered into one of these contracts has attempted to manipulate the market – so i don’t agree about prosecuting them all. only where market manipulation exists (which i expect will be enough to keep the courts busy for decades).
thanks.
i’m afraid congress does not agree. any ideas what to do about that?
probably should have mentioned this earlier…
there is a congressional hearing scheduled for tomorrow at 1pm on credit derivatives. i’ll post a diary with the details tomorrow morning.
Perhaps not all actually manipulated conditions to bring on failure. But the very notion of betting against a company has a certain bizarre nihilist approach to american industry. We win when they go under.
That’s sounds criminal to me.
Of course the real zealots actually are making those companies fail BY conspiracy and manipulation. They can do it by jerking around the share value and ruining a companies ability to get financining.
Are we surprised that Congress doesn’t have the best interests of the public at heart? No. we. are. not.
As to what to do about it… no idea. Progressive challengers to all incumbents in two years is too late and insufficient. The best we can do I expect is to educate everyone we can about what the underlying cause to the economic crisis really is and bitch to high heaven.
Rachel? KO? You guys or anyone else with a megaphone out there reading up on any of this?
short sales are not illegal though.
I disagree that we can somehow figure out, using publicly available info, the money trails. Most of the ISDA/CDS have offshore counterparties. Remember, the swaps market is unregulated. The only way to get this info is police action to seize the files of the US money center banks’ swap books and corresponding emails/ISDAs. And the only way to do this is to establish that these banks’ used dealings in this unregulated market to conspiratorially influence a regulated market like share prices or the credit market. Then and only then will you have the ammo congress will need to fix the problem.
I remember when Japanese regulators raided all of their banks and security houses in a single day in, I think, 1997.
or 1988, in one morning, simultaneously. It was quite a sight.
They should be!
I agree that we haven’t got the publicly available info that we need (which is why I think getting it is so important). masaccio suggested sending in various inspectors. However you raise an interesting point, perhaps we cannot legally do so (given previous legislation) and we won’t be able to get Congress to change the legislation unless we can show criminal intent. A bit of a catch 22, eh?
i’m keeping this quote to use next time i get called cranky for making an issue of the lies and massive theft that is called economic policy.
thanks *g*
but it only takes one high profile case to get the ball rolling. All we need is for a single treasury VP at GM to come forward with a mea culpa and an immunity deal, to rat out two dealers, at two different money center banks.. then just follow the slippery slope to hell. The problem is, this isn’t out either Congressor regulators are thinking now. We need Elliot Spitzer in charge, sans hookers.
We can get the data with respect to the contracts we care about, those held by US entities.
I might add that derivatives, including naked CDSs, are legal. See the heading, conception.
Ya know… Spitzer might be perfect for this. His political aspirations are shot. He’s got time on his hands. And he knows the financial industry… What else has he got to do with his time these days? Don’t answer that ; )
selise, you’re welcome ; ) And as always remember you have a friend and fellow cranky person to back you up ; )
yep, completely legal and unregulated… up until the point they are used as a means to intentionally manipulate a regulated market instrument. The problem is, I’m quite. sure that somebody out there is using them to do precisely that. Trouble is, proving it when neither the Feds nor congress really wants to find out what’s lurking under their proverbial rug.
Agreed, but what Blub is talking about is market manipulation, which I suspect is not legal. Although I suppose it depends on the weaselly wording in the carte-blanch-legislation that was passed in 2000. Still, I agree with Blub, if one person comes forward and can show how there are vested interests in taking down US companies (are you listening Shelby?), then the ensuing public outcry would force the issue. Certainly opening up such parties to class action civil litigation, if not criminal liability.
Beat me to it. I owe you a coke ; )
I’m not crazy about the dynasty thing either. It is ironic to consider, however, that she is the niece of Senator Edward Moore Kennedy, who, when he ran for his first elective office at the age of 29 was indignantly confronted by his primary opponent with the accusation that “If your name were Edward Moore, you would not be here” (or words to that effect). Additional irony points for the accuser being Edward McCormack, nephew of the then Speaker of the House John W. McCormack, and sitting Attorny General of Massachusetts based on that relationship.
How’d that work out?
Just sayin’….
A CDS is a contract which apparently specifies that ONLY bankrtupcy will trigger the CDS. A bailout preventing bankruptcy delays that, so the CDS just hangs out there until the bankruptcy happens.
May I buy a CDS (insurance policy) from you that pays off when the sun doesn’t come up tomorrow (a disaster if ever there was one, bankruptcy of the day)? If the sun comes up then it (obviously) won’t pay off. If the revolution of the planet is somehow delayed a bit, so it comes up later, then it still doesn’t pay off, but we have to wait until a bit later in the day to know this for certain.
We see CDSs in the market place and we see the notional amount real human beings have placed in them. How much was being ‘bet’ privately off-market before the CDS officially existed?
How long has this been goin’ on?
Did WalMart have an interest in the failure of KMart?
Does one large oil company have an interest in the failure of another?
Does one sector of the economy have an interest in the failure of another?
Every dollar spent at any company other than yours if a dollar you don’t get.
Does every company have an interest in ALL other companies failing?
Competition at it’s worst.
In this particular Broadway stage presentation of _The_Sheep_And_I_ someone has to play the sheep — that would be the American public.
BTW, if Bush’s allies/cronies are winning when GM fails, as I think they hope to do, then it won’t matter whether Congress passes a bill to bail them out because Bush will veto it. He’s already said it isn’t wise to give money to companies likely to fail. Of course “likely” is in the eyes of the beholder.
One of Al Qaeda’s publicly state goals is to destroy the American economy. Now it’s happening and Zawahiri has claimed credit. But, funny thing is, we’ve been analyzing it and it would appear American bankers and a few politicians have done all the work. So, it looks like Al Qaeda is run by some Americans who have some very strange plans.
Weird huh?
Precisely. As an addendum, note how much larger the sums that could be generated in the shadow market are than the sums in the markets for actual goods and assets. Somebody might think there’s a big surplus that could be generated as a reward for the erstwhile frontline captains of industry.
GM CDSs are a “death pool,” and Corker and Shelby are in a position to withhold the medication GM needs to survive a while longer. The people who benefit are those who have drawn (or bet on) near-term death times. It’s simple as that.
who are those people?
Bullseye.
So, I am curious as to whether or not Homecomings financial (subidiary of cerberus and GMAC) subprime lender is purposely misapplying payments on it’s customers or whether or not this is just sloppy accounting? Is it the servicers that are in charge of applying payments? Why are there literally thousands of complaints about them not applying payments accurately or legally? Are they purposely doing this, or just inept? See class action lawsuit pdf brief on web page. http://www.homecomingsfinancialclassaction.com/
Many, many people have had this problem. Was this part of the gambling? Or is this totally seperate?
massacio, if you return here, i wonder if you might look at my interpretation of all this and tell me if it is fairly accurate or if i have any glaring errors? http://michaeljjames.blogspot……again.html
i sure would appreciate it. (my blog is just something i do for family and friends, maybe 10 readers, tops.)