Geithner - Not in favor of banning naked credit default swaps

[slipslidingaway]

Run time: 02:18 https://www.youtube.com/watch?v=gZ9rFHFekF8   Posted on YouTube: March 26, 2009 By YouTube Member: Views on YouTube: 0   Posted on DU: March 30, 2009 By DU Member: slipslidingaway Views on DU: 2395

 
http://firedoglake.com/2009/03/26/geithner-endorses-naked-credit-default-swaps/

"...Today Joe Donnelly (D-IN) asked Timothy Geithner a simple question -- why can't they ban naked credit default swaps?

DONNELLY: We saw naked credit defaut swaps cause extraordinary devastation to our economy and I know regulation is coming. do these naked credit default swaps provide any value added, or is this simply just gambling?

GEITHNER: Uh....I know there are strong opinions on this issue so I say this with some trepidation. My own sense is that banning naked default swaps isn't necessary and wouldn't help fundamentally in this case. It's too hard to distinguish what's a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome. If we could find a way to separate those two types of transactions from each other, we could do that...we would have done that a long time ago across a whole range of financial innovations but it is terribly hard to do.

And, uh...but we will listen carefully to any ideas in this area and understand why people feel so strongly about them...


.....In Dean Baker's primer on AIG, he noted that we still don't know what the government's policy of paying off credit default swaps has been -- did taxpayers have to pay off because a company was trying to protect against losses on a mortgage backed security, or simply because it was gambling that a bond it didn't hold would go bad? If the latter is the case, he said, "it is difficult to see how a failure to honor the CDS would impose a serious hardship." He also asks why we paid them at full value rather than their market value, and wonders if we paid them off before the underlying bonds had defaulted. "This seems like a straight gift to the banks," he said.

If Geithner thinks that naked credit default swaps have value and need to be preserved, it would be good for the public to know what happened with them in the bailout and what the government's policy will be about paying them off going forward.

I asked Dean what he thought about this, and he believes that at the very least, we should be taxing naked credit default swaps. "We tax gambling in Las Vegas," he says."

[girl gone mad]

1. Shocking!!

:sarcasm:

[populistdriven]

2. the usa has long been overly prudish

:wtf:

[slipslidingaway]

5. Yes :( n/t

[Ed76638]

3. Why the fuck is this fail our Treasury Secretary? n/t

[slipslidingaway]

6. Reminiscent of the Clinton Treasury when they fought

regulation, Summers, Rubin, Geithner and the new nominee Gensler were all part of the Clinton Treasury, although I've not seen any quotes on regulation from Geithner during that time.

[Brucie Kibbutz]

34. Because he's the only person on the planet that understands

all this. Or at least that's what we're told by Wall Street and the administration, anyway. :banghead:

[depakid]

4. "No we can't"

Mr. Gaithner rarely fails to impress.

[slipslidingaway]

7. Not sure how it is so difficult, if one wants to purchase a CDS

would it be that hard to determine if they hold any claim to the underlying instrument.

:shrug:

[depakid]

9. How about providing proof of ownership of the security before a sale is allowed?

[slipslidingaway]

11. Some discussion here....

In the case below if a suppier is concerned about collecting on their receivables have them pay in advance, business is not risk free and not every company should survive.


"...It is difficult to argue with the logic of Soros’ op-ed piece but Geithner also has a point regarding the difficulty of knowing the intent of a purchaser of a CDS. To make a ban on naked short selling practical, it would be necessary to force the purchaser to “prove” that some underlying exposure exists to the security covered by the CDS. This is simple enough when the purchaser is protecting against default of a bond that is held, but the exposure that is being hedged may not directly correspond to the underlying financial security.

For example, let’s say that someone has an ongoing business relationship, such as a supplier relationship, with a company that is in some financial trouble. In such a situation, the purchaser of a CDS may be hedging against the collectability of trade receivables. On paper, this purchaser would not own the underlying security protected by the CDS, but the CDS may in fact be a legitimate “proxy” to hedge the exposure of the trade receivables. There are obviously many other examples like this..."

[depakid]

13. Recievables are assets that can be borrowed against

So I don't see why it would be difficult to prove them up. I'm sure there are some exmaples out there- but that doesn't mean a general rule with exceptions can't be put into place.

[slipslidingaway]

14. I agree with you and believe they do not want a profitable

speculative instrument removed.

[vanbean]

42. Well, then if the receivables are paid, and they lose on their hedge, why should

taxpayers have to cover their loss. Sorry, but naked shorting and naked CDS purchases should be banned.

[tomm2thumbs]

8. not playing devil's advocate here at all, but maybe if they are thinking globally...

... a lot of investors will simply move to other country's stock markets if ours becomes so difficult to operate within - or they can't do things in our markets that are available throughout the globe. I'm not saying that is an excuse, but I can see how if the American system makes it more difficult to make profits, then why wouldn't a lot of investors in US markets (foreign and domestic) simply move elsewhere.

Again, I'm not defending the policy, just wondering outloud - for instance, the Japanese made better cars over time and were rewarded in market share - and if a shift in investing moves, for instance, to China or London because they offer better terms, it may end up hurting our country overall. I'm only speculating. I hate Wall Street's system of money making. I do consider it gambling.

[terisan]

10. Europeans wanted US to focus on international regulations first. nt

[slipslidingaway]

12. It is a valid concern and I do not have the answer, but these

instruments have only hurt our equity markets in the long run while the bankers made billions speculating.

Another reason for their use...

page 2

http://www.ghb.co.th/en/Journal/Vol4/10.pdf

"...These CDS were not used only as swaps against potential loan defaults but were allegedly used to skirt Basel II capital requirements to set aside reserves for “potential” loses. Many of these banks are now being bailed out by their governments.

By entering into CDS transactions, the European banks were reportedly able to show that they had unloaded most of the risk on certain
loans to AIG, thus freeing up regulatory capital.

This freed-up regulatory capital was used to issue more new loans to borrowers. These transactions skirted the new Basel II capital requirements by adding more leverage to their balance sheets and more liquidity to the market...."

[wuvuj]

21. I think the American financial disease...

...spread overseas and got even worse in some places? Iceland...Britain....Euro banks lending in Eastern Europe?

[chill_wind]

15. Toxic "legacy" credit default swaps won't be "regulated"

(Wall Street Manna)

Thursday, March 26, 2009
Toxic "legacy" credit default swaps won't be "regulated"

Here's the report on the new protocol for regulating credit default swaps.
http://www.paulweiss.com/files/Publication/f7388219-f76d-4e94-a0c2-76c2a96dd1af/Presentation/PublicationAttachment/b8fd2448-ee08-482c-91c2-7c3521c18e28/24Mar09CDS.pdf

You only need to know one line from this report, to understand how much nonsense this regulation of credit default swaps is. It's just noise to placate the public. Read page 3.

The Credit Event and Succession Event Backstop Dates will apply to historic trades only after June 20, 2009.

In other words, unless AG Cuomo subpoenas AIG credit default swaps, these contracts with AIG, and all the other CDS contracts written before June 20, 2009 will be "grandfathered in" and swept under the rug, and not be subject to scrutiny.

Sort of like the grandfathering in of naked shorts in Regulation SHO.

http://aaronandmoses.blogspot.com/2009/03/toxic-legacy-credit-default-swaps-wont.html

[slipslidingaway]

17. Thanks....

for this and the kick...will read it later.

[ihavenobias]

19. K & R # 5, thanks for the link! Here's another good one.

[slipslidingaway]

24. Thanks for the 5th, I saw that too late too recommend....

mind if I post the video in that link? This issue needs more attention IMO.

[ihavenobias]

26. Video in that link?

I just double checked and I don't see any linked videos in that article? To the point of this topic, Cenk had a great .

[slipslidingaway]

29. I meant post the Geithner video in your link in the E&A forum...

I just added it to your link. Thanks for the Galbraith link, I was getting there...

:)

[ihavenobias]

32. Oh, ok.

Of course, why I be against that?

:)

[slipslidingaway]

33. No reason....

silly question, done already.

:)

[chill_wind]

16. kick

[slipslidingaway]

18. Thanks for the R's n/t

[rateyes]

20. Not only should they be banned, but those existing right now should

be declared null and void. If you can't do that, then tax them at 95%.

[slipslidingaway]

23. According to Geithner it is difficult to tell which CDS contracts

guarantee an instrument that the purchaser holds from those that are just a bet for profit.

If true then we cannot ban or tax the instruments, there is nothing we can do???

:evilfrown:

[rateyes]

41. Load of crap. If the purchaser wanted insurance, he/she should

have purchased insurance. They are ALL bets, IMO.

[tbyg52]

22. W. H. A. T.??????????

If they are naked, they are not legitimate. Period. If they are naked, they are simply gambling. Period.

See, this sort of @#$% is why I spend so much time absolutely furious. I want to trust that Obama and his team are handling the bailout the best it can be handled, I really do. AND THEN ONE OF THEM SAYS SOMETHING LIKE THIS!!!!!!!!!!!!!!

Sorry, I do not normally shout. But this makes me really, really angry.

I've been wondering if OUR TAX MONEY has been spent to cover naked CDS's. I think I just got my answer.

Those things are why the dollar amount of this fiasco is more than all the money in the world. Just nullify every last one of them. Reimburse the premiums, maybe, if for some political or financial reason that has to be done. But no way one single one of them should be paid off, now or in the future.

[slipslidingaway]

27. I would like to trust as well, but that can lead to trouble :)) ....

"I've been wondering if OUR TAX MONEY has been spent to cover naked CDS's. I think I just got my answer."

You may be correct and since it is hard to tell one from the other, according to Geithner's statements, we'll probably never know.

:(

Even if they do represent insurance on a particular instrument, why do they get bailed out 100 cents on the dollar?

[rollingrock]

25. I'm in favor of banning Geithner

the level of corruption and incompetence of these Wall Street hoodlums is so staggering it boggles the mind.

[slipslidingaway]

30. Everything is under control :) n/t

[glitch]

28. @#$%@*?!K&Rnt

[slipslidingaway]

31. Thanks n/t

[Brucie Kibbutz]

35. It doesn't bode well when Geithner's answer can be summed up

as: "Well, it would take too long for me to explain it to you and you probably wouldn't understand it anyway."

I guess that's more of this "transparency" Obama has been bragging about. :eyes:

[slipslidingaway]

39. That's what we hear too often, guess we'll just have to keep

handing over the money.

:(

[Celebration]

36. Even though I don't agree with this

In fairness, I saw the whole interview, and he said the problem was when there was no capital to back them up. The problem was that AIG sold these things but had no reserves set aside for possible losses, as they do with legitimate insurance products.

So, it isn't as if he wants business practiced the same way. He wants there to be money reserved for losses on these.

But, having said that, I don't think his approach is good enough. But I thought I would mention it because he's not approving of the way business was done leading up to the crisis.

[slipslidingaway]

38. I only caught parts of the hearing....

but the idea that I can, in essence, buy insurance on your home and we have no way to monitor the situation is disturbing.

http://www.youtube.com/watch?v=jHVnEBw93EA

I've looked back at some of his speeches from the past several years and although he had concern over the size of the market he essentially said derivatives helped spread the risk to other parties. One theme was that there was almost nothing we could do other than to make sure the 'shock absorbers' were in place. The message here sounds similar.

Thanks.

:)

I mainly looked back to some samples from 2005, 2006 and 2007.

http://www.newyorkfed.org/newsevents/speeches/index.html

[aquart]

37. I, however, am.

[slipslidingaway]

40. Me too, not sure if anyone in Congress will pursue the issue :( n/t