“Reform” of Credit Default Swaps and OTC derivitives.
This article from The Institutional Risk is somewhat long. Most here will not find it a congenial way to spend a holiday. But if you want to understand the macro environment of the early 21st century, it is required reading.
Its thesis is two-fold: 1) CDS swaps were useful and appropriate when one party had an economic interest in the underlying and was using them to layoff risk, but beginning with a new law in 2000 the game changed and the unregulated derivatives market ran amok creating illusory profits for the likes of Goldman, JPM, AIG, Bear, and Lehman. 2) Today’s reform is a sham intended to continue the practices of the past 9 years and tighten the monopoly of Goldman, JPM, and a few others. Without the “profits” from these practices the big banks would not be viable, but while necessary to to prop up JPM and Goldman in the short run, they do not compensate for the real risks, and the dangers to the system continue.
Geitner and Bernanke are portrayed as the real bad guys, though I fail to see how Paulson and Congress are any better. Perhaps there are things behind the scenes which make them less culpable. Having said this, the article is not about assigning blame. Rather it is a starburst over a dark trail warning of dangers to come.
Thank you for your posts.
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