Geithner Likes It Naked
Joe Donnelly asked Tim Geithner whether we ought to eliminate naked default swaps. Geithner said that it’s too hard to distinguish hedges from gambling. Donnelly pointed out that we’re taking money out of truck drivers’ pockets and waitress’ pockets to pay off Wall Street’s gambling debts. Ultimately, though, Geithner said we don’t need to–and that it would be very hard to–do that.
I guess the truck drivers will still be asked to pay off rich men’s gambling debts.
It shouldn’t be so tough. You pass a law that declares that activity to be classified a gambling and regulated as such. Do it now, while the congress might be afraid to publically support their banker friends.
Boxturtle (My question: Could that be done via regulation under existing law?)
But what’s gambling? What covers a naked CDS? Can a supplier buy a CDS on GM to shield itself from a default during the 45 days between delivery and payment? Would a CDS have to be written on that specific obligation or could the supplier buy a CDS on general GM debt that lists supplier non-payment as triggering default? Can people who buy GM cars buy a CDSs to cover the possibility that their warranties will be voided? Again would it have to be that specific of a CDS? Could GM buy a CDS on a supplier to help shield it in case a supplier goes under and it needs extra cash to pay an existing supplier to make overtime inducing extra production to meet GMs needs? Would it need a specific CDS for that? Or is the nakedness on the seller’s side? The uncollateralized nature of the CDS? Adequate capital requirements should be written into CDS. This doesn’t have to be regulated, it should be common sense. The hypothecation and rehypothecation does need to be tightly regulated, but that isn’t really related to the gambling part.
Why people bought AIG CDSs that didn’t have collateral pledged is beyond me. It shouldn’t have been difficult for the counterparty to realize that if AIG didn’t have collateral in their CDS then AIG was likely selling other such CDSs which could take down AIG. It’s this willful ignorance that makes the bailout so infuriating.
You had a large number of good questions, but they’re all based on the premise that there is a “good” CDS and a “bad” CDS. I’m saying call ALL CDS gambling and let the Las Vegas Gaming commission regulate them and the bookies sell them.
If you want protection, buy legit insurance. Pay the premiums. If you get burned, eat the deductable and file a claim.
Boxturtle (Are you gaming the system if the system IS gaming?)
Exactly. CDSs were created to make bad investments look good.
I guess we disagree on that. I say that as they were implemented they were actually worse than gambling, they were tools for regulatory capture.
I think the idea of insurance against general defaults makes sense, and the mechanism of CDS ( the contracts and market nature ) supplies hedging that can help markets. I also think that rather than calling them gambling they should be regulated as insurance. People originating CDS contracts should be regulated as insurance providers.
Well, that is the thing as I see it. If it is really a form of insurance, then it should be structured, regulated, and subject to oversight, all out in the public sphere just like insurance. Instead we have the back room poker scenario going, and, apparently, supported by the freaking treasury secretary of all people. If it is too complex for the average person to comprehend, and it is performed out of public regulation and view, it should be prohibited as a part of society’s financial tool kit.
I do not see the difficulty in asking someone taking out insurance to show that they actually own what they are insuring. Give me a break Geitner. If there is actually going to be capital requirements for those isuing this insurance that is based on real loss potential then those with a legitimate reason to buy the insurance could be frozen out because of capital limitations. Once again the insiders would have the power to help friends.
Who can explain the difference between “naked” CDS and fully clothed CDS?
“naked, skin, swaps” when I listen to these hearings I feel like I am in Vegas
Hearing is back up
If the truck drivers and waitresses are going to have to pay off management’s gambling debts, then management ought to give them a pay raise first. And then management can try living on what they previously paid said truck drivers and waitresses.
In practice, what distinguishes Class Warfare from the Cold War?…besides the spelling?
go Bernie (on Cspan3 a real Rep for the people of Vermont for all of us, Asking for how much who what where when
FWIW, Blub had an interesting way to distinguish this a thread or two back: s/he claims you can look at the paperwork and figure it out by the trail.
If so, not good for Geithner’s response.
And Rubin… clearly staying out of sight, as is Summers. Wonder whether either of THEM have any thoughts? Paulson? Maybe the committee could subpeona those 3 for their thoughts…
a million for your thoughts