Kabuki on the Potomac: Reforming Credit Default Swaps and OTC Derivatives

Institutional Risk Analyst ^ | 05/18/09

[TigerLikesRooster]

Kabuki on the Potomac: Reforming Credit Default Swaps and OTC Derivatives

May 18, 2009

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We gratefully acknowledge contributions for today's comment from members of the Herbert Gold Society, an informal group of current and former employees of the U.S. Treasury and the Federal Reserve System.

Despite bringing the world economy to its knees and costing taxpayers hundreds of billions of dollars in bailouts for events such as Bear Stearns, Lehman Brothers and American International Group (NYSE:AIG), the Masters of the Universe who run the largest Wall Street firms of have learned not a thing when it comes to credit default swaps ("CDS") and other types of high-risk financial engineering. Indeed, not only are the largest derivative dealers fighting efforts to reform the CDS and other derivative instruments that caused the AIG fiasco, but regulators like the Federal Reserve Board and US Treasury are working with the banks to ensure that a small group of dealers increase their monopoly over the business of over-the-counter ("OTC") derivatives.

Why such a desperate battle for the OTC derivatives markets? For the world's largest banks, the OTC derivatives markets are the last remaining source of supra-normal profits - and also perhaps the single largest source of systemic risk in the global financial markets. Without OTC derivatives, Bear Stearns, Lehman Brothers and AIG would never have failed, but without the excessive rents earned by JPMorgan Chase (NYSE:JPM) and the remaining legacy OTC dealers, the largest banks cannot survive. No matter how good an operator JPM CEO Jamie Dimon may be, his bank is DOA without its near-monopoly in OTC derivatives -- yet that same business may eventually destroy JPM.

[TigerLikesRooster]

A financial H-bomb not disarmed, still alive and ticking.

[ButThreeLeftsDo]

OK.....everybody pony up ten bucks and lets’ get this FReepathon over....

Thanks.

[Uhaul]

Haven’t learned anything. Heck, they have learned they can rape the American public and the American public will pay for them to do it again.

[GOPJ]

Thanks for the ping.