Tuesday, October 6, 2009

Credit Default Swaps still going strong

One year ago today I blogged a post about Credit Default Swaps.  These have widely been blamed for the financial crisis.  "The instruments themselves are at the heart of this mess," said one expert at the time.

A recent Bloomberg article begins, "A year after the bankruptcy of Lehman Brothers Holdings Inc., credit-default swaps have lost their stigma for disaster and are contributing to the growing confidence in the credit markets."

Some opinions from the article:
“A functioning credit-default swaps market contributes to more efficient extension of credit” by giving investors and lenders confidence that the industry won’t implode, said Alexander Yavorsky, a senior analyst at Moody’s Investors Service in New York. The consequences of Lehman’s failure “were astronomical, broadly speaking, but the CDS market worked well,” he said.....
(A heroine addict needs to shoot up every day too.  This gives the adict "confidence" to continue his self-destructive lifestyle.)
“The only market that I know of that seems to have worked virtually every day has been the CDS market,” Eraj Shirvani, chairman of ISDA and Credit Suisse Group AG’s head of fixed income for Europe, the Middle East and Africa, told reporters yesterday at the industry group’s regional meeting in New York....
(No matter how bad things get, the market for drugs never shuts down.)

 George Soros says the market is still unsafe. The 79-year- old billionaire investor said in an interview that credit- default swaps are “toxic” and “a very dangerous derivative” because it’s easier and potentially more profitable for investors to bet against companies using them than through so- called short sales.
I don't know about you, but I'm inclined to listen to Soros, one of the few guys who anticipated the whole  meltdown.  On the other hand, why would anyone pay any attention to what anyone associated with either Moody's or Credit Suisse has to say?   Why does Bloomberg even bother to quote these people?  Rating agencies like Moody's are under investigation today because they failed to inform investors of the true risks.   Credit Suisse Group lost billions. 

So what's being done?

New York Attorney General Andrew Cuomo began investigating whether credit-default swaps were manipulated to spread rumors about financial companies and drive down stock prices, a person in his office who asked not to be identified by name said at the time. 
 (Doesn't sound like that investigation was too serious.)
President Barack Obama said in a June 17 speech on his plans for finance industry regulatory reform that credit swaps and other derivatives “have threatened the entire financial system.”
(He gave another speech).
U.S. Congresswoman Maxine Waters, a California Democrat, introduced a bill in July that tried to ban credit-default swaps because she said they permitted speculation responsible for bringing the financial system to its knees.
(Lots of bills get introduced.)
 The Obama administration sent Congress proposed legislation last month that would require the most active contracts in the $592 trillion over-the-counter derivatives market to be backed by clearinghouses and traded either on an exchange or on regulated systems.
(They waited until August -- one whole year -- to introduce legislation that would regulate, not prevent the trading of CDS, and not all kinds of CDS at that!)

 The story ends on this depressing note:
'The industry is starting to feel the future is not looking as bleak as it was in terms of what regulations would be imposed,' said Jeremy Jennings-Mares, a partner in the capital markets group at Morrison & Foerster LLP in London...."

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