Friday, Mar 27, 2009
Geithner too afraid to bite the bullet; Depression develops apace
The Hill: Geithner unwilling to ban credit default swaps
Treasury Secretary Tim Geithner said that he likely will not ban one of the key financial instruments that led to the collapse of AIG and a number of other institutions.
Geithner said it would be too difficult to distinguish under the law what is a legitimate business risk versus what constitutes a major gamble.
Posted by devo @ 08:52 PM (341 views) Add Comment
1 Comment
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1. icarus said...
The focus on CDSs takes the attention away from the real problem - the interaction of CDOs, CDSs etc.and lack of regulation. The inherent problems of CDOs are magnified when unregulated institutions are allowed to "insure" them with CDSs. AIG sold CDSs without having the funds to pay up if the bets went wrong, thus potentially bringing down the investment banks whose assets burned down but couldn't collect on the insurance. Goldman Sux was such a bank and this is a major reason for bailing out AIG.
As for naked CDSs, that's pure gambling with no function regarding increasing the efficiency of capital allocation. As Matt Taibbi put it, they offered "investors" the opportunity to bet that somebody ELSE's house would or wouldn't burn down, or that somebody ELSE would or wouldn't die in a given timeframe. It was a bookmaker taking the bets of punters who wanted to short the housing market or bet that CDOs were basically toxic. For a while the bookmaker won and paid himself handsomely, but then the losses hit - AIG's credit rating was downgraded and leverage worked in reverse, then the crash blew a massive hole in the scam. The bookmaker kept his winnings and the taxpayer rode to the rescue.
If you concentrate on one aspect of the whole mess you can easily conclude that in principle there's nothing wrong with CDOs or CDSs etc but that's like saying there's nothing wrong with guns or bombs. When they're not regulated they tend to get into the hands of sociopaths who go on a rampage using both
As for Geithner he's a Goldman-Paulson clone, but that's another story.