Wednesday, November 17, 2010

Oh boy, more Republican CDS bullcrap coming down the pike

Here we go again. The Republican, Wall Street CDS casino is about to ramp back up and destroy the world economy. This time it won't be CDS bets on US sub-prime housing debt that sends shock waves reverberating through the world markets. It's going to be bets on Irish, Spanish, and Greek bank debt.

What am I talking about? Back in the late 90s, Republican Phil Gramm created a monster mechanism that allows anyone to place a bet on any debt instrument. Worse, anyone can underwrite that bet. There's no capital requirement. There are few regulations. There is no oversight. There is no exchange on which these CDS bets are traded. No one in the world has a clue who owns and who underwrote these bets. You could even wind up with unlimited bets against a small amount of debt. The debt going bad might be an insignificant financial event, but the bets going bad could cause financial armageddon. It's one hell of a forked up situation, brought to us by Republicans who believe in free markets. Republicans like North Carolina Senator Richard Burr.

These CDS bets brought us a $180 Billion taxpayer funded rescue of AIG. The morons at AIG went around the world underwriting bets on sub-prime housing loans. Although only $2 Trillion of these loans were outstanding, companies like AIG underwrote $25+ Trillion in bets against this $2 Trillion. AIG didn't have to put up any capital. They just went out there and underwrote the bets and collected the premiums. And when those bets blew up, AIG lacked the money to pay off. So, in walked the US Taxpayer. Yep, it's one forked up situation.

The worst part of this mess? Since there's no formal exchange and no formal capital requirements, not a single person in our world has a clue who is at risk on either side of these bets. So, when something being bet on has a likelihood of coming to fruition for payoff, there's no telling who is at risk of going out of business. In other words, your mother may have underwritten $6 Trillion in bets against Greek Bank Debt. She may have collected $500 million in premiums. That would explain her spending spree recently, eh? But when that Greek Bank debt goes bad, she'll be on the hook for $6 Trillion. You knew about that, right?

Here's the problem. Ireland is in financial trouble. The debt of Irish banks and the country of Ireland is about to go bad if someone doesn't step in and help. The European Banks are on the hook for $650 Billion in Irish debt. But no one has a friggin clue how much of this debt they have protected from loss by buying CDS "bets" against the Irish debt. And even worse, we don't have a clue who underwrote the CDS "bets" that the European Banks own. You might call a plumber tomorrow to fix your toilet, but find out he's out of business because he sold CDS protection to a European Bank, and now he's bankrupt.

This CRAP has to stop. The theory behind this financial instrument was that it would spread risk around the world. Instead, it spreads massive uncertainty when its evident that these bets will pay off in size. No one has a clue who winds up taking a financial hit. Every investor in every company even remotely connected to these bets winds up running for an exit. The cascading selling causes financial panic around the world. Our pension funds, IRAs, 401 Ks, 529s, Coverdales, and just plain savings wind up taking a hit. Confidence in our financial markets erodes. Confidence in our world economy erodes. Consumers pull in their horns. Recessions persist.

Republicans created this damn, POS financial instrument. It almost brought down the world economy when it got AIG in trouble, more than 3 years ago. And here we sit today and we're no closer to getting a resolution to this POS problem. Just WTF are our elected representatives doing in Washington DC about this crap?
  • Stop the casino.
  • Get rid of the betting parlor.
  • Put a complete halt to CDS instruments.
Or ....
  • Absolutely require that they ALL be traded on an exchange, and be backed by significant, tangible capital.
  • Require that all public companies owning or selling these instruments make full and complete disclosure of their CDS risks.
This issue is one of the most important among all that needs to be addressed. But no one in Washington is talking about it. Little is being done. And what little action is being taken is progressing at a snail's pace. But what should we expect? We elected a lawnmower salesman and sent him to represent us in Washington DC. Republican Senator Richard Burr is out of his league when it comes to critical issues like this CDS problem. The man is clueless. And he's getting nothing done.

When your savings go up in smoke, and you're reading about chaos in the world financial markets brought to us by CDS on Irish, Greek, and Spanish bank debt .... well, you have only yourself to blame. You sent a landscaper to Washington to protect us. He doesn't even know how to use a shovel.

North Carolina deserves better than Republican Senator Richard Burr.

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