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Saturday, November 15, 2008
G-20 Wants Quick Action on Credit Default Swaps, But Bush Talks Them Into Toothless Regulation

Credit default swaps were one of the core agenda items at the G-20 meeting this weekend.

Specifically, CDS are the focus of one of the four "Immediate Actions by March 31, 2009" to which the G-20 agreed:



"Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes."


(2 of the other 3 urgent action items involve keeping credit rating agency's honest; and the last one involves ensuring that financial institutions have sufficient capital).

The members of the G-2o also "request our Finance Ministers to formulate additional recommendations" to "Strengthen ... the resilience and transparency of credit derivatives markets and reduc[e] their systemic risks, including by improving the infrastructure of over-the-counter markets".


In fact, it was President Bush who pushed the approach of oversight and regulation - instead of banning - of CDS:


While pledging to work together on beefed-up regulation of murky investment tools such as credit default swaps, which lie at the heart of the current crisis, the summit said it was crucial not to go too far.

Again reflecting Bush's demands, the G20 said it would strive for new regulation that is "efficient, does not stifle innovation, and encourages expanded trade in financial products and services."

In other words, America's financial elite - the very people who allowed the exponential expansion without oversight of CDS and other " murky investment tools"- pushed for an approach which would would not hold accountable those who created the CDS hurricane in the first place . (Paulson and Greenspan were obviously big derivatives cheerleaders. But the U.S. Congress aided and abetted this mess, as did some of Obama's top economic advisors; and see this).


Bush and company pushed an approach which is so incremental and toothless that it will probably not prevent future catastrophic failures stemming from CDS which are already out there.


This is similar to the Neocon approach to the Iraq war debate. Any Neocon talking head asked about how we got into the Iraq war says "let's not talk about the past, let's talk about what we should do now." This is a way to try to escape blame for a massively illegal war and to try to change the subject away from getting out of Iraq, towards some mythical successful end-game.


Similarly, America's financial elite are trying to talk about the "future" of CDS and how to "safely regulate them", instead of talking about who got us into this financial mess, and how to cancel the suckers before they drag the global economy down into a black hole.


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Friday, November 14, 2008
CDO-Related Credit Default Swap Crisis on the Horizon?

According to the Financial Times:



"[There is a] New wave of CDOs at risk of default .


Synthetic CDOs, the risky and complex debt products that are based on pools of corporate credit derivatives, are under increasing pressure after suffering a wave of default-related losses on top of general credit market deterioration.''

See also this article from Bloomberg.

There are huge volumes of credit default swaps written against collateralized debt obligations (CDOs), the specifics of which have not been made public.

Rising CDO defaults could very well lead to massive new CDS problems, sparking off another round of company failures.


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Leading Economist Warns of Food Riots

When top trend forecaster Gerald Calente predicted riots and revolution, many people shrugged and thought, "he's gone off the deep end".

But leading economist Nouriel Roubini is also now warning of food riots, and blaming it on the Fed and Treasury's policies and bank priorities:


We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy. ... Whether the zombie banks are kept on life support by the central banks and taxpayers of the world is highly relevant to whether the zombie bank executives pay themselves outsize bonuses and their zombie shareholders outsize dividends with taxpayer money. It appears sadly irrelevant to whether the banks perform their function of intermediating credit and commercial transactions in the real economy along the supply chain. The bailout cash and executive and shareholder priorities do not seem to reach so far.

***

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti.


***

The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.

***


Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.

Everyone along the supply chain should worry about their children going hungry.

When that happens, everyone in governments should worry about the riots.

The above-quoted article is free to subscribers, and you can sign up for a free trial to Roubini's website. While I don't agree with all of Roubini's prescriptions, he is one of best economists anywhere in terms of diagnosing the severity of economic problems.
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Congress Yells At Treasury Over Bailout . . . Nothing Changes

Congressmen Kucinich, Issa and Cummings let the head of Treasury's bailout program, Neil Kashkari, have it today.


Here's Kucinich:



Here's Issa:



Here's Cummings:



The spleen-venting might have felt good, but it is likely that nothing will change. Indeed, Congressman Cummings begged Kashkari to stay on into the Obama administration.

Many people - including some congress people and Senators - said when the bailout was being debated, giving Treasury authority over the bailout based on the government's claims of dire economic threat was just like giving the White House authority to wage war against Iraq based on claims of a dire threat of Iraqi-lined terrorism.

We were right.

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Bush, Cox and Bernanke Call for Regulation of Credit Default Swaps

If you've been paying any attention, you know that credit default swaps are one of the major factors for the current economic crisis. Even the derivatives cheerleader-in-chief, Alan Greenspan, admits they are a problem, and they should have been better regulated.

Now, the SEC, Fed, Commodity Futures Trading Commission and even President Bush are pushing regulation of CDS.


As Bloomberg writes:


U.S. regulators said at least one clearinghouse for the $33 trillion credit-default swap market will be running by year-end after they agreed on a plan to regulate the entities.

***

The Fed, Commodity Futures Trading Commission and Securities and Exchange Commission signed memorandum of understanding today that they said will provide consistent oversight of the clearinghouses and the credit-default swap market. The group laid out guidelines they said would provide more public information on potential risks and also lessen the chance of systemic losses.

****
"Bringing transparency to this market is vitally important,'' SEC Chairman Christopher Cox said in a statement today. "The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis.''

The accord signed by the Fed, the CFTC and the SEC "establishes a framework for consultation and information sharing'' for the new entities, according to a statement.

Indeed, CDS will even be a topic of the G-20 meeting this weekend: "George W. Bush yesterday said the G-20 meeting in Washington tomorrow would discuss regulation for credit default swaps and other financial instruments".

Why Now?

Why are Bush, Cox, Bernanke and the boys calling for regulation of CDS?

Well, it is certainly partly because they get that CDS are a large part of what caused the economic crisis. But that was obvious a long time ago.

The real reason is that many people are increasingly furious that CDS have helped bring down the world economy, and are increasingly demanding that the CDS "weapons of mass destruction" be canceled and rescinded (based on fraudulent misrepresentation of how "safe" they are), or declared worth a nominal amount (say $1 each). People are also calling for the heads of the politicians who let this happen.


Indeed, the pressure to grab the bull by the horns has become so great that the U.S. government is being forced to try to look like it is doing something about CDS.

Too Little Too Late?

I'm glad that our "leaders" are finally addressing CDS. But they've waited until the world economy is in shambles before even mentioning them.

And I am not convinced that it will be enough.

Given the mess that Bush, Cox, Bernanke and the rest have gotten our economy into, their repeated actions in helping their corporate buddies at the expense of taxpayers, and their ongoing political theater yelling at horses to get back in the barn after they let them out of the barn in the first place, I assume that this regulation effort won't be very effective, either.
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