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Sovereign CDS Trading to Be Probed by European Union

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posted on Mar, 2 2010 @ 05:53 AM
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Sovereign CDS Trading to Be Probed by European Union


www.businessweek.com

March 2 (Bloomberg) -- Michel Barnier, the European Union’s financial services commissioner, said the European Commission will investigate trades in sovereign credit default swaps in the wake of the Greek debt crisis.

European leaders have said trading in the contracts, which pay cash if the company or government they relate to defaults on their debt, fuels speculation that can distort market perceptions.
(visit the link for the full news article)



posted on Mar, 2 2010 @ 05:53 AM
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CDS, or credit default swap, is a rather interesting phenomena. While doing background research on this topic the other day, I couldn't find anything worthwhile reading, making today's find a coincidental one.

Financial markets have always interested me and it is slowly turning out that the rich few whom are in charge of the our financial system, have been very creative in finding ways to exploit our system as much as possible. It doesn't really matter to them that it is us, average Joes, consequently are saddled with the burden created by their hunger for personal greed.

Simply said a naked CDS is the following:


A naked CDS is one where the buyer has no risk exposure to the underlying entity; hence naked CDSs do not directly hedge risk per se, but some suggest are merely speculative bets that actually create risk.source


CDS is the reason why financial institutions such as Bear Stearns collapsed. These hedge-funds speculated on the weak brothers among banks and won their bet when Bear actually collapsed, at our expense as our governments bail out these banks while those individuals behind the hedge funds make huge profits on these collapses.

This is why these sharks are now focusing on Greece. They are essentially responsible for the severe state Greece is in now. In other words, they have exploited the weak aspects of the Greek economy (such as its deficit) and made a great deal of money while the Greek people are suffering badly.

These sharks act emotionless for the mere reason to make profits and they do it legally.

While doing research on who was behind the creation of CDS, I found the following article:


As I have previously shown, speculative derivatives (especially credit default swaps or “CDS”) are a primary cause of the economic crisis. They were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.

According to top experts, risky derivatives were not only largely responsible for bringing down the American (and world) economy, but they still pose a substantial systemic risk:

* A Nobel prize-winning economist (George Akerlof) predicted in 1993 that CDS would cause the next meltdown

* Warren Buffett called them “weapons of mass destruction” in 2003

* Warren Buffett’s sidekick Charles T. Munger, has called the CDS prohibition the best solution, and said “it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it”

* Former Federal Reserve Chairman Alan Greenspan – after being one of their biggest cheerleaders – now says CDS are dangerous

* Former SEC chairman Christopher Cox said “The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis”

* Newsweek called CDS “The Monster that Ate Wall Street”

* President Obama said in a June 17 speech on his plans for finance industry regulatory reform that credit swaps and other derivatives “have threatened the entire financial system”

* George Soros says the market is still unsafe, and that credit- default swaps are “toxic” and “a very dangerous derivative” because it’s easier and potentially more profitable for investors to bet against companies using them than through so-called short sales.

* U.S. Congresswoman Maxine Waters introduced a bill in July that tried to ban credit-default swaps because she said they permitted speculation responsible for bringing the financial system to its knees.

* Nobel prize-winning economist Myron Scholes – who developed much of the pricing structure used in CDS – said that over-the-counter CDS are so dangerous that they should be “blown up or burned”, and we should start fresh

* A leading credit default swap expert (Satyajit Das) says that the new credit default swap regulations not only won’t help stabilize the economy, they might actually help to destabilize it.

* Senator Cantwell says that the new derivatives legislation is weaker than current regulation

Who is Blythe Masters?

She is the JP Morgan employee who invented credit default swaps, and is now heading JPM’s carbon trading efforts. As Bloomberg notes (this and all remaining quotes are from the above-linked Bloomberg article):source


This shows once again that a perfect free-market mechanism does not work. JP Morgan chase invented CDS for the mere purpose of feeding their hunger of greed. The same reason why these banks sold sub-prime mortgages and are paying ridiculously high bonuses. A free-market economy is only sustainable as long as it does have some form of regulation, but I am afraid the lack of regulation has made the situation so severe, that it cannot be fixed anymore.

One last side-note: it is very ironic that Soros calls CDS 'dangerous' as he himself is involved in this dirty business very much.

Nevertheless, it should be banned as soon as possible, but I am afraid that the hedge-fund lobby is too strong to actually realize this proposal.




www.businessweek.com
(visit the link for the full news article)



posted on Mar, 2 2010 @ 09:05 AM
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Any financial instrument that allows the bearer to control the market with zero or very low risk to themselves is dangerous. Naked CDS are the worst of them all. Side bets between people that a business will fail.


I wonder what the odds are running for some of these CDS? *smirk*



posted on Mar, 2 2010 @ 09:13 AM
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I follow enterprisecorruption.com sometimes and this weeks top blurb was about this. Good guess on his part I guess.



posted on Mar, 4 2010 @ 04:17 AM
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NEW YORK–The U.S. Department of Justice has launched an investigation into whether hedge funds might have acted together in betting against the euro, a source familiar with the situation said Wednesday.

The Wall Street Journal said the department asked hedge funds, including SAC Capital Advisors LP, Greenlight Capital Inc., Soros Fund Management LLC and Paulson & Co., to retain trading records and emails relating to the euro.

The euro has come under selling pressure during the Greek debt crisis, losing more than 10 per cent since November, and the newspaper said the request, dated Feb. 26, coincided with its article describing gatherings of hedge fund managers where the euro was discussed.


source

Good news, and please refrain from nationalistic remarks: the stability of both the Euro and the Dollar are in our interest. Due ti globalization our economies are so much intertwined that the downfall of one has disastrous consequences for the other.

I hope they will prosecute these greedy sharks. Unfortunately, I think not much will come out of this.



posted on Mar, 5 2010 @ 12:40 PM
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The meeting was held amid pressure from France, Germany and Luxembourg to crackdown on what they see as hedge funds using credit default swaps to push Greek government bonds and the euro lower.

"It was a useful meeting and it will feed into preparation for rules on derivatives that we will propose in the Summer," a spokeswoman for EU Internal Market Commissioner, Michel Barnier, said.

"There was an exchange of views. We have not yet decided whether to hold another meeting. We will continue talking to stakeholders," the spokeswoman said.

Traders fear regulators will introduce emergency measures like banning "naked" selling of CDS or where the buyer does not own any of the underlying asset.


source

Good to see they are finally trying to stop these greedy practices from spinning further out of control. Capitalism does not work without regulations.




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