Support Bill Banning Credit Default Swaps

Congressman Peterson is sponsoring a bill to address the Credit Default Swap problem. As Bloomberg writes:

House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. The document, distributed by e-mail by the committee staff in Washington, would also force U.S. trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse.

“This would basically kill the single-name CDS market,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. “Given the small size of many issuers’ bonds outstanding, this would make it practically impossible for the CDS market to exist.”

(See also this FT article).

Peterson’s bill would ban “naked CDS trading” (that is, buying CDS when you don’t own the underlying asset, which is the only valid business purpose for CDS’s).

Because CDS are a large part of what caused the financial crisis, I urge everyone to contact Congress to support the bill.

As soon as the bill is assigned a number, I will post that information here.

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  • http://www.blogger.com/profile/13156080225918567393 The Grey Tiger

    This is a start , I would support a bill banning all CDS, ALLThrow in all kinds of derivatives while your at it.

  • http://www.blogger.com/profile/16501573081442399062 Patrick

    This is just plain stupid. What exactly do you think banning all CDS would do?? (other than just forcing companies & bankers to find other less efficient means of transferring risk)We should be requiring better disclosure (not less as many are calling for – ie, banning mark-to-market). Banks should be required to bring this stuff on-balance sheet and make full disclosures, but banning the instrument straight away will do nothing but make the credit markets less efficient. Seriously, this is the type of populist nonsense that got us into a lot of the trouble we're in in the first place.

  • http://www.blogger.com/profile/13156080225918567393 The Grey Tiger

    Please name one populist idea that got us into this mess.

  • http://www.blogger.com/profile/13156080225918567393 The Grey Tiger

    And please show me where the credit markets of the past 10 years have been efficient. Only if you call driving us into a deep depression efficient. Slicing and dicing mortgages to 10 times the value of actual mortgages is a good thing. Show me where a 1000 Trillion dollars worth of derivatives is a good thing. What did they build other than a few bank accounts. I think stupid is those who insist this gambling is a good thing.

  • http://www.blogger.com/profile/14126712311972905360 Joshua

    I’m with Patrick. This is ridiculous. Credit default swaps serve to free up additional bank capital and allow for further investment. The last thing we need right now is a measure the decreases liquidity in the market. Surely, there have been problem with the CDS market, but banning them altogether wont do a thing. As we’ve already seen, financiers are smart enough to find another way to accomplish the same thing if we simply ban the derivative altogether. Instead, the government (and the industry) should embrace a clearing house model that will increase transparency and allow banks to get the benefits of credit default swaps while limiting the downside to the economy as a whole.

  • http://www.blogger.com/profile/13156080225918567393 The Grey Tiger

    Would you like to play mark the CDS’s to market. How’s 0 sound to you. The argument that they made more capital available to banks, is that why we had to bail them out with tax dollars.

  • http://www.blogger.com/profile/13869620354370187096 Rohan

    He’s talking about their original use. Their original use allowed banks to hedge against credit risk, making it so that they could make more loans. The misuse was in using them to short securitized loans. The Peterson Bill prevents this by forcing a protection buyer to have financial stake in the original asset that the derivative was spawned off of. The article’s author is wrong in saying that their only use is in naked shorting.

 

 

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