Thanks masaccio – I really appreciate your explanations.

Strictly speaking shouldn’t bondholders with CDS want the bankruptcy?

In a bankruptcy they stand to lose most of their money (like I believe ford’s is trading for 20 cents on the dollar), but debt protected by CDSes should return 100%

On the other hand would they have ever been able to secure that debt without CDSes?

The bondholders owning CDSs get paid off in the event of a bankruptcy. They don’t get paid off in the event of a restructuring.

You certainly know how to cut to the chase.
I’m still astounded by the magnitudes difference between notional and gross.

And it’s bad enough that anyone was writing contracts to ‘bet’ on the collapse of GM. But worse yet that we have no idea who they are; one could be a drug cartel, another could be an arms dealer operating through a ‘hedge’ front. I make this additional point because IMHO, good biz people don’t operate the way that we’ve seen things play out.

On the other hand would they have ever been able to secure that debt without CDSes?

As I understand swaps (as in CDSwaps), one of the problems — apart from leverage — is that they require zero skin in the game.

I believe a recent Bill Moyers guest described it as ‘buying fire insurance on the house in the next suburb’. You can see how it might create incentives to commit arson. Not the kind of behavior that reasonably businesses pursue, but long the kind of predatory conduct pursued by criminals. Just sayin’.

call me a cynic but I read your post masaccio and had to post a diary;

Prepare for shiny object to distract us from torture memos!

So, those in power need to distract us from what needs to be done to those depraved individuals who committed crimes against our country.

Said shiny object and it will come in the form of economic or political catastrophe, they will obviously exploit a natural catastrophe as well if one arises

if our contempt for these torture memos remains strong, shiny object comming, this I guarantee

“Isn’t that the function of credit default swaps?”

Who could have imagined?

Another great post, masaccio, you explain these inner workings so well that your influence must surely be growing exponentially.

You’ve got my sincerest thanks.

And always, my absolute attention.

DW

It’s illegal gambling, pure and simple, which is why Phil Gramm had CDSs declared not games of chance in the CFTC deregulation, and Wendy went along.

Wow, Teddy – I’d forgotten about that but it’s an excellent point! Gramm deliberately had derivatives excluded from the ‘Bucket Laws’ that are used to regulate gambling.

Calling them ’swaps’ made them ‘not insurance’.
And putting them outside the ‘Bucket Law’ jurisdiction meant they couldn’t be investigated as gambling problems.

It worked quite well. Until it suddenly didn’t.

Phil Gramm had CDSs declared not games of chance in the CFTC deregulation

when did he do that?

thanks masaccio. is there any reason to allow CDSs to continue to be written as legally enforceable contracts?

Yes, bondholders with CDSs want bankruptcy, because they get paid off. I assume that a lot of lenders, both bondholders and banks which have loaned money to GM, have CDSs, and they have an incentive to stop any deal, including the current expected offer of an equity for debt swap.

This is an interesting problem. Some of it is that a purchaser of protection CDSs might decide to lock in a profit on a CDS. To do that, they write protection to some one else who wants to buy protection. They lock in the profit on the difference.

selise, I don’t think so. I haven’t seen any reason they shouldn’t be regulated and controlled as insurance. There are companies that insure bonds, particularly municipal bonds and revenue bonds, called monoline insurors. There is no reason CDSs couldn’t be replaced by that kind of insurance to the extent that a bondholder or a debtholder wanted to be protected against loss.

It should not be assumed that the swaps will be paid. Beyond AIG there isn’t much info on who was writing these things but you can assume that like AIG they don’t have the money to pay off. AIG paid off the swaps with big guys with our money, They did not as I understand it pay off littler holders, in full anyway.

Not only do the owners of the CDs want bankruptcy, they use naked short selling to drive the price down and FORCE bankruptcy and then collect their bets.

It’s all about the money and they (hedge funds) are buy CDS, drive the stock down and collect big time.

thanks. that sounds good to me too.

Deucedly clever, these folks.

Precisely what manner of ‘wealth’ do these clever folk produce?

What scintilla of ‘value’ do these folks add to society?

What ’service’ do they provide?

Of what practical ‘use’ are these so amazingly clever folks?

What ’skills’ or genuine ‘expertise’ do they possess?

What is their ‘talent’?

Help me please, for the answer, honestly, appears to be, “damned little”.

Have I perchance missed some redeeming quality?

Beyond the fact that they are somebody’s son, daughter, brother, sister, mother, father, uncle or aunt, perhaps they are saints?

What is the best we may think of them?

That, as criminals, they are more refined than most?

Well, they certainly raise a number of questions for me.

This was quite obvious as soon as I heard that the bondholders were unwilling to agree to a debt-equity swap. They’d rather see the company go down the tubes. We’ll cover them rather than let AIG or whoever else go down the drain.

These CDS contracts must be declared as not in the public interest and hence unenforceable. Instantly, before GM and others disappear down that hole. It’s simple, If you want insurance on a bond, buy a contract from the guys that knw how to do that. If you want to gamble, go to Vegas and place a proposition bet from the guys who can price that.

I think they will be paid, pretty much in full. From the don’t get paid off link:

CDS contracts require daily posting of mark-to-market collateral posting,” Taksler said. “Given that auto company bonds already trade in the $20s, the additional collateral posting prompted by a potential bankruptcy should be fairly small.”

Taskler is the author of the Bank of American research report.

Thanks, this is a really interesting twist, isn’t it?

What have you missed? Well, they work a lot of hours, and love expensive wines.

Ah, expensively drunken “berserkers”.

Of course!!

Virtue, redeemed.

Virtue is its own reward, yet, clearly they are not satisfied, poor thangs.

;~D

“Isn’t that the function of credit default swaps?”

Viewed in this light of intentionally crashing a company, they’re a way for an investor to cash out an illiquid investment now, rather than wait perhaps years for the corporation to again become healthy enough for anyone else to want to buy it out. Perversely, they turn bankruptcy into the path to solvency. And once investors figure this out, no corporation is safe.

In the past I’ve said we should outlaw naked CDSes, but now I’m thinking they’re too dangerous to live even if the CDS buyer has skin in the game.

Precisely what manner of ‘wealth’ do these clever folk produce?

What scintilla of ‘value’ do these folks add to society?

What ’service’ do they provide?

Quoth Gordon Gecko: “I produce nothing. I own.“

Well, that certainly explains the rise in the price of my favorite burgundies.

As a lawyer (which I gather you are too, masaccio), the whole issue of CDS’s and CDO’s seem like liberty of contract run amok. Again. The common law which is really the common law of 50 states plus a multitude of Anglo-American nations, cannot address the transnational problems created by these complex contracts. Again, why is there no effort by an authoritative government agency at least seeking to investigate these instruments and the problems they have created?

I think that was the 2000 credit reform act. Sorry, details at home, but they were in my Oxdown post of several weeks ago. I’ll look later.

Bob in HI

Bankruptcy via CDS is an example of the destructive consequences of vulture capitalism. Instead of bailing out the banks that would be required to pay off on these too-rich-to-fail insurance policies, the Feds would serve the public better by paying off the original loans in exchange for equity. That would eliminate the CDS that is hanging over the heads of both the insurer and the debtor.

Congress should then outlaw all Credit Default Swaps, and take steps to strictly enforce laws banning Naked Shorts. These transactions are nothing but predatory frauds.

I’d like to know the extent that the DTCC is LACKING documentation for all the phantom stock sold on the markets to hedge one way or another (up or down) since oh, say, 1996.

It’s been reported that the DTCC can’t possibly have record of it all, CDS or CDO.

And it’s been reported that the DTCC has ‘concealed’ or disappeared any records of many phantom short sells.

So, I’m not so taken by any info that COMES from the DTCC.

I believe them to lie, cheat and distort, as much as the hedge funds do, as much as any on The Wall do.

But I’m not an economist.

Deep Capture

I’ve noticed none of the econ heavy hitters in this forum have spoken much about Byrne and Mitchell’s work, and the work of others in that vein.

Nor, have they spoken much about McKenna’s thoughts regarding accounting firms dirty markups to Triple A ratings for stocks that were shorted phantom or not, and were NOT Triple A worthy by any means. We’re talking bundled up mortgage failures sold over and over again, just to start with . . . and who knows WHAT other dirty hedge funds that were phantomed and gamed that the DTCC never recorded but STILL hold that Triple A rating . . . . pure insanity.

And yet, not a lot of discussion from the big FDL econ hitters on those two subjects.

I inquire, pleasantly, and QUITE curiously, why not?

From what I read of both entities, there’s a whole lot of info and ‘wrong’ being outed that’s not picked up and run with . . . thanks in advance for any replies to same.

And as always, masaccio, your posts are a delight to read and learn from, as are the comments of the heavy FDL hitters in this forum . . . . regardless of the topic at hand.

When the financing industry’s products tear at the heart of the firms financed, does it not seem time to reform the finance industry and the products it sells – as well as the bankruptcy courts – as much as it may be time to restructure older manufacturing industries?

Just asking, Mr. President, cause I know the answer the Goldman Sachs Gang you’ve created would give us to every such question: “Of course not.”

Excellent point. Without that they might have gone belly up a long time ago.

Hmmm. There’s no (show text) or indication I was replying to post #2.
I was saying that without CDSs GM might not have gotten a loan and that could have caused them to go under at that time rather than now.

Another point about naked CDSs: just now some retailers like Walgreens and Wal-Mart are opening health clinics in their stores. Well, they’ve been known to take out insurance on their employees. What if they decide they want some insurance on their ‘patients’? Would you then trust them to supply health care for you? Naked insurance is illegal on property. Is it also on life?

Congress knows about them. There will have to be something on them in the financial regulations bill which they’re working on.

Congress should then outlaw all Credit Default Swaps, and take steps to strictly enforce laws banning Naked Shorts.

The SEC claims to have virtually eliminated ‘naked shorts’. I think law should ban it altogether. There shouldn’t be any opening for that at all.

On CDSs I think they have probably warned everyone to get rid of those and they’re trying to unwind the mess of deals in AIG, and probably other large firms, before doing a ban.

I feel certain most financial firms are listening very very carefully to what Congress is saying with regard to potential new regulations.

Thanks. DTCC is about all the publicly available information I can find. Mark-It is expensive, so I can’t cite it. Since these markets are private, we have to rely on self-reporting and assume there is some level of error. Still, it’s what we have.

As to the accounting profession, I haven’t thought much about their role in this, although there is one. It would take a lot of inside information to get accurate information about their roles in various companies. Remember, the responsibility for financial statements is on the company, and the accountants just see what they are shown.

phantom stock sold on the markets …

And yet, not a lot of discussion from the big FDL econ hitters on those two subjects.

I read some of that and wrote an e-mail to Pelosi. I’ve also seen an SEC hearing where it was discussed a bit. They know about it. The proof (of their intents) will be in the pudding (of their actions).

I’m less confident than you are CDSs will be banned. The big push is for a clearinghouse which would take on the counterparty risk. Some of the traders don’t really want the risk that this would entail, but it may be the Geithner/Summers approach.

The SEC claims to have virtually eliminated ‘naked shorts’. I think law should ban it altogether. There shouldn’t be any opening for that at all.

Nevertheless, there have been persistent allegations of naked short selling of precious metals derivatives on COMEX. Here’s a recent example where massive default was narrowly averted behind the scenes:

Did the ECB Save COMEX?

Even if these paper transactions proved legitimate, the sheer volume of PM derivatives trading dwarfs the sale of the actual metals they are based on. Many suspect that the unaudited reserves of the firms marketing gold and silver ETF’s come nowhere close to covering the outstanding shares that have been sold.

Mas, if you’ve not read Deep Capture, or McKenna’s blog about accounting firms . . .

They both name names, dates and details. Galore.

Spell it all out very well . . . . it’s lengthy reading, but it’s to the bone name and date and detail wise as to how this ship of fools sailed under the flag of deregulation of the banking and financial sectors since, Reagan and forward.

As you all know, Glass-Steagull repeal was the big one . . . . it all goes back to roughly, in OUR memories, to the S&L’s and Milken’s Junk Bonds . . .

Mark, you raise a great question.

If short sellers of hedge funds can short companies, they can short anything.

And if Walgreen’s now has patients and clinics, why not short sell that and hedge it against their demises.

I don’t know that the SEC has made illegal short selling, or naked short selling.

I’d sure like to hear more about THAT one from others in here . . . I thought it is a practice that’s ongoing.

And I’d like to know, legally speaking, where phantom stock selling and hedging stands to this day. I thought it was all still in play, I’ve not read of any LEGAL changes to prohibit it.

I assume that legal changes would have to come thru congress, and that would make it newly formed and passed REGULATION legislation?

I’m not an econ, and I might be missing all of this . . . which is why I value those in this forum . . . ;-)

Yep, the push for a clearing house Geithner wise is so that the banks DON’T have to reveal their insolvency.

And likely, same for a lot of investment houses. They are insolvent. Why? Their books are cooked, and don’t show the naked short phantom sales that they used to profit from.

I mean, what WOULD happen if it was open info that they are are insolvent? Based on phantom sales, hidden DTCC records, and false Triple A ratings from the accounting firms?

Now that’s the big picture I want to hear discussed from the heavy hitters and taken to our elected mofo’s who took lobbying money to PASS deregulation legislation that enabled the scenerio we are facing, that’s being whitewashed so far by the present administration.

*G*

I’m not sure if I have it exactly in order, but that’s the gist I THINK I’m pissed off about.

Bueller?

Lish, that’s the EXACT same pattern that’s taken place in so many other markets, among so many other products, among so many other companies.

You nailed it.

Phantom speculative buys and sells (both ways on the market index, up and down, for profits) that manipulate stock values and company values and leave a paperless trail that’s impossible to track.

Backed up by lack of regulation, DTCC fallibility (collusion, call it for what the fuck it is), and SEC and Wall Street thuggery. Bought by lobbyists and paid to our elected offals, er, officials, who WROTE and ENABLED the legislation to let it happen.

Bueller?

Thanks, Masaccio – excellent post