Posted on 10/31/2011 7:17:34 PM PDT by Razzz42
Jim Sinclair’s Commentary on the article that follows.
If called on to perform they will fail. It is that simple. It is the essence of the OTC derivative. They work if no one calls on them to work.
It has always been so. [End Comment]
[Article Begins] The European sovereign debt crisis stands as the latest in a long line of similar crises. Argentina in 2001. Russia in 1998. Mexico in 1994. The list goes back into history. Debt crises are about as natural as earthquakes, but this time there is something different — and possibly more dangerous.
The European nations are linked in a network of debts, as Bill Marsh recently illustrated in the New York Times with a beautiful piece of graphic art. Greece and Italy are prominent; Ireland, Portugal and Spain lurk ominously nearby. France and Germany seem exposed, too, as does the U.S.
The image is like a complex wiring diagram for a ticking debt bomb. Yet what it shows may be less important than what it leaves out: a largely invisible network of ties among institutions around the world, which could ultimately cause global financial chaos.
This hidden network has been created by institutions that buy and sell unregulated credit-default swaps. These are essentially insurance contracts on bonds; in the event of a default on the bond, the seller of the swap promises to pay the buyer the bond’s value.
Credit-default swaps are mostly arranged “over-the-counter,” not traded on any exchange or recorded by any central information repository. This explains why Marsh’s map couldn’t show the links they create...[More at link]
(Excerpt) Read more at jsmineset.com ...
dire.
The upside to this is that these are concentrated in the too big to fails. This time, though, it doesn’t matter. They’ll go down, and we’ll finally be rid of them. Whatever damage their death causes is minor compared to the misery they cause the financial system by continuing to drag this on.
Anyway, all the debt's gonna hafta be renegotiated from one end of the globe to the other. It'll keep 'em busy for a decade or more. When it's done, it'll be one big machine and nobody will be able to write a check without some imbecil in Brussels knowing about it.
What a country!
It was The Commodity Futures Modernization Act of 2000 (CFMA) signed into law on December 21, 2000 by President Bill Clinton that has sent the economic wrecking ball sailing. This combined with the Gramm-Leach-Bliley Act, recinded the Glass-Steagall Act of 1932. It was this United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. President Clinton left office with legislation that virtually left Wall Street investors with a free license to run the derivatives market any way they wanted. It was like opening a five lane freeway with no speed limits. It was these derivatives, especially the credit default swap, which were at the heart of the financial crisis of 2008. The effects of the collapse of the housing market was amplified by the credit default swap market. It is time we put a blue flashing light on these economic vehicles and get some sanity on the highway with new regulations.
Your post sounds like one that belongs in a leftist website. I trade OTC derivatives for a large investment bank. Deregulation is good. Sometimes I wonder how some “free”pers can be so against capitalism.
Everybody wants to interfere with my business. You won’t catch me lobbying for onerous regulations on the industries of my fellow freepers.
NOT THAT WIRE, HABIB!
sarc off>
This is going to go off like a jihadi work accident. Some socialist sandbox is going to run out of other peoples’ money and all this is coming down.
Except for when it isn't.
Which inevitably turns out to be the case when personal accountability is separated from one's business decisions.
Deregulation is great if the taxpayer does not have to pick up the tab for the bad bets the banks and investment firms. In effect we had capitalized profits and socialized losses and the taxpayer took in in the butt. Yes I support deregulation. What happened was not deregulation as market forces were not allowed to act. If market forces were allowed to act those that placed bad bets would pay, not the taxpayer.
what is your view in the role of swaps with lehman and AIG failures?
.....’Investment’ ‘Bank’ now there’s an oxymoron. Past and cancelled regulations would have prevented ‘investment banks.’
I take it you would have no problems following insurance regulation that any other time would oversee CDS along with most other types of SWAPs. Of course, that would hurt your commissions since SWAPs would require adequate funding making it tougher to assemble a viable contract.
You could always take an offshore job and continue in a black market skirting any troublesome regulations...if the rule of law ever comes back in vogue.
OTC derivatives are used by producers and consumers to price market scarcity, real or perceived. It is largely a function of our free financial system (which includes derivatives) that we haven’t had REAL crises such as food shortages or other things causing mass death. Remember that derivatives, to an extent, take the place of the bureaucrat in determining production plans.
It is the OTC derivative that gives the farmer price certainty over a number of years. It is the OTC derivative that locks in fuel prices for airlines. The examples are endless. New over-the-counter derivatives are created every day by market participants - some very complex - but all designed to serve some market participant’s need.
The fact is that wherever there is something good in the economy (e.g. derivatives), government will try to get its grubby hands on it and make it less effective. Don’t blame the OTC derivative for any crisis - blame government/Fannie/Freddy/Barney Frank/Community Reinvestment/etc. The bailout was not the fault of the banks - it was the fault of government for giving the bailout. By the way, my firm received no bailout.
I am confident from the picture you give, that only the free market system will devise a stronger OTC derivative system resilient to economic downfalls. So far, whatever government does only adds fuel to the fire.
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