Skip to comments.SEC head calls for transparency on credit default swap
Posted on 10/18/2008 9:13:28 PM PDT by NormsRevenge
NEW YORK (Reuters) SEC Chairman Christopher Cox has called on Congress to pass legislation that would make so-called credit default swaps more transparent, including requiring that dealers in over-the-counter swaps publicly report their trades and the trades' value.
Writing in Sunday's New York Times, Cox noted that the $55 trillion credit defaults market is more than the GNP of all the world's nations combined, and that credit default swaps "play an important role in the smooth functioning of capital markets."
But, he said, "our markets function best when they are highly transparent," while credit default swaps have "operated in the shadows," with "no public discourse nor any legal requirement for these contracts to be reported to the Securities and Exchange Commission or any other agency."
Having been bought and sold widely and in many cases anonymously," trapping large financial institutions "in a web of transactions," the swaps market has left government regulators with "no way to assess how much risk is in the system."
He concluded that giving regulators authority "to bring the credit derivatives market into the sunshine" would constitute a "giant step forwarding in protecting our financial system and the well-being of every American."
(Excerpt) Read more at news.yahoo.com ...
A complete collapse.
Almost all CDS transactions already go through a private clearing house.
aig management knew that all of those credit default swaps
in their london office were not properly covered.
Eliot Spitzer forced CEO Hank Greenberg out of AIG, and then the company went nuts with these policies.
Read this article about Joseph Cassano and his infamous credit swaps.
Thanks Eliot, for ruining our economy!
I wonder if the timing of Hank Greenberg’s ouster was coincidental.
I wish they had done this before they passed the 800 billion dollar bailout, and then spent more billions buying up bank stock.
If the firms that are on the hook for big CDS payouts were identified, then the financially viable firms would be able to borrow at low spreads and the CDS zombies could be put into chapter 7 where they belong.
In my book, this is years overdue.
Good work, SEC, closing the door after the horses have left.
Day late and a dollar short.
Of more concern to me would be transparent Carbon Market swaps and purchases. Let's see not just who is buying and selling but their back grounds.
the $55 trillion credit defaults market
what you talkin’ bout Willis?
I think we have a problem Skipper.
Everyone keep in mind these monies are maturity and don’t realise actual debt. The amount would be half whats actual.
The “net” notional is even less than that.
Suppose you buy $10mm of CDS, then sell $10mm of CDS on the same company. Since these are two, separate contracts, with slightly different terms, your “total notional” of CDS is $20mm, even though your risk is close to zero.
Unless, of course, your trades are with two different banks, and one of them goes under. Then your risk isn’t so close to zero.
Thanks for your input.
I had an entire paragraph written on this and dis-mantled it. All of the securities that are bundled and sold need to have over-sight over a certain limit. Selling AAA to Europe and then folding is fraud. Greed on rates sold this market and we will pay the price.
Question=> How are the mortgages related to “credit default swaps”?
“All investors ... are paying a price today for the lack of oversight” of credit default swaps, which Cox describes as being “like insurance contracts on bonds and any other assets that are meant to pay off if those assets default,” he stated.
I don’t know. Sounds anti-business to me.
CDS are credit default/debt default insurance, but they can’t call it “insurance” for legal reasons.
Related to mortgages, (maybe someone in the industry can weigh in on this) but as i understand it, CDS were added onto alt-a and subprime mortgage backed securities (MBS) to raise their credit rating to investment grade - so they would have a larger market.
Many of the CDS including those insuring MBS were written without any loss reserves (remember, not called “insurance” so not regulated like an insurance company). When they all went bad at once, the counterparties (AIG etc) didn’t have the money to make good the losses.
That’s right. In addition to “wrapping” the bonds with guarantees (which had been done for decades in the municipal bond market by so-called monoline insurers like Ambac and MBIA, enabling the rating agencies to give the securities AAA ratings), there were also explicit CDS contracts where the insurance companies sold protection on the parts that the banks couldn’t sell.
Another piece of the puzzle is that many of the insurers didn’t have to post collateral as the chance of loss increased, so long as their ratings (that word again!) were maintained.
“Another piece of the puzzle is that many of the insurers didnt have to post collateral as the chance of loss increased, so long as their ratings (that word again!) were maintained.”
Rating Agency fudging (and I am guessing out and out fraud/corruption) will probably be a big part of this before we are done.
On the wraps, Jim Cramer (I know, I know...) has estimated that AIG will have $400 billion in wrap losses that the taxpayer will have to make good. If that turns out to be true, then the cost of the AIG bailout may exceed the net cost of the Paulson Plan.
Are the sellers of these ‘bundled’ investment vehicles are the ones getting the bail-out money?
Will the buyers eventually get paid their investment plus interest?
Watching on FOXNEWS now, so it’s a little clearer
“Are the sellers of these bundled investment vehicles are the ones getting the bail-out money?”
Depends which bailout you mean: with the federal takeover of AIG the taxpayer is going to pay for the CDS written by AIG. For those the buyers of the MBS and CDS (usually, but not always the same entity) will get the AIG bailout money.
Paulson plan bailout money: my understanding that the intent was to buy MBS where the market had collapsed. The CDS contracts are specific to the particular MBS but I assume if the MBS is in partial or total default, the CDS would kick in and the writer of the CDS would owe the government.
For the CDS in default that came from AIG, the treasury will be on both sides of the CDS.
(This is becoming a 21st century version of “we owe it to ourselves!”)
You just nailed why this market creates so much systemic risk.
Get these things onto exchanges with some margin requirements and position limits, and a lot of the problem will go away.
There's absolutely no reason to keep a market this big OTC.