If you are like me, when I hear the acronym TARP I can feel my sphincter tighten. I can feel , yes feel, my blood pressure rise. Angry can't possibly do justice to the way I feel about how our politicians have handled these thieves.
If we lied like they are and have, we would go to jail. I also know one of the main reasons why a 600 billion dollar problem turned into a multi-trillion dollar taxpayer problem and was the trip wire that started this nasty recession: Credit Default Swaps. It's the great multiplier of holes in a banks capital that we have had to fill.
Imagine my surprise, when I tripped across the following...
Ahead of a two-day hearing on derivatives, a bond analyst is warning that a proposed House bill to ban speculation in the once-obscure securities would annihilate the $31 trillion credit-default swaps market.
That caught my attention. As Jon Stewart loves to say "Tell me more"
"Proposed legislation to regulate credit default swaps to limit purchases of protection only to those with exposure to economic loss in the instrument being insured could have the unintended (or intended) consequence of collapsing this market," Bank of America Securities credit strategist Jeffrey Rosenberg wrote in a report....
Peterson's bill would make it a violation of the Commodity Exchange Act to enter into a type of credit derivative known as a "naked" credit default swap. In other words, the only buyers of those securities, which act as protection against the risk that an underlying corporate or sovereign borrower will default on its debt, would be those investors who must have "direct exposure to financial loss" on the underlying entity.
Oh noooo. Make my day . Your kidding right? They are going to stop the practice of allowing side bets on a mortgages going bad? Say it's so!
WASHINGTON, Feb 3 (Reuters) -A U.S. House of Representatives bill that would require clearing of most over-the-counter derivatives would destroy U.S. trade in credit default swaps because it bans "naked" swaps, a financial industry group told Congress on Tuesday.
I'm not going to do a long diary on the havoc these things have created in our financial markets. I'm just going to leave it at this: The Credit Default Swap got it's official start when JP Morgan started marketing them in 1997. They were originally invented in 1993. It was used on a limited basis until the sub-prime bubble started in late 2004. Since they were unregulated insurance that had been called swaps to avoid regulation, many banks bought the insurance on the mortgage loans they made where they knew the buyers would default. If they didn't know they were going to default then they are perfect candidates for a career as trash transfer engineer for parking lots and roads complete with a orange vest.
In addition to banks and buyers of mortgage backed securities, anyone was allowed to buy a swap, referred to as a naked swap, that didn't have any interest in the transaction other than seeing it go bad. It's conceivable that one security could have been bet on by dozens of people.
As a result of this "Invention" , foreclosure became the desired outcome. Everyone made out like a bandit , except the people that lost their homes. That was until Banks found out that the people they were buying the insurance from ( bets ) didn't have the capital. ( Unregulated - remember?). Suddenly Foreclosure didn't seem to be so hot as Banks capital began to sink and it began to spread from sub-prime into all mortgages (1 in 6 as of now) . Goldman Sachs understood Counter-party risk, so they made all the "naked" bets with AIG. Even though banks may not have been paid, it really comes down to who people bought the swaps from, so others did get paid. That's why loan modification is near impossible. People were/are still making money off those foreclosures.
You have to wonder why not one person took advantage of the 300 Billion dollar mortgage modification program the Govt set up. Not one and we are still going through thousands of foreclosures a day.
Word has it that when AIG was saved by Hank Paulson, who was CEO of Goldman when they were placing these bets, that Goldman Sachs got around 25% or more of that first 85 billion dollar check. Please Google this as the estimates are all over the place. No one can be absolutely sure because that first 350 Billion was as transparent as a brick wall.
So, is it possible that Hedge funds and trading desks won't be able to use these things to short a mortgage backed security?
The committee planned three days of hearings over the next week before discussing potential revisions to the bill and a possible vote to approve it.
The proposed legislation, a measure to limit speculation, mandates position limits on energy and agricultural futures contacts and allows regulation of look-alike OTC contracts. It also bans naked CDS and requires clearing of all financial OTC derivatives, although exceptions area allowed for specialized instruments.
A naked swap is one in which participants run no risk of loss.
See people really don't understand these things. Carol Malone(D) of New York who is on the financial services committee asked a key question in the November 18th hearing on TARP when Bernanke was testifying. She asked the following: " our tax money isn't being used to pay off these side bets, are they?" Bernanke answered in Greenspanese. Malone's time was up and since no one understood these things besides her, there were no follow up questions.
Like a malignant cancer, the crisis has spun out of control . These side bets which were close enough to the side bets that were made in the early 1900s that caused the bank panic of 1907. The participants realized it and were concerned they may become vulnerable to Criminal Liabilities. That's when their savior and the anti-Christ to all middle class people, Phil Graham stepped in and made in legal in the Financial Modernization act of 2000.
If they are successful in banning naked swaps, it would save taxpayers a shit pile full of money because we already spent 150 Billion on AIG because of these Swaps and I do believe that many of the fractures of the banks capital occurred because of them, which makes me believe we need outlaw all of them. It was this protection , that paid both interest and principal on those mortgages, that could very well have been the catalyst that turned Bankers into used car salesman with warranties on their wares of 30 seconds or thirty feet, which ever comes first.
This is a good start though and it made my day. Lets hope they follow through.