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Monday, October 20, 2008

Credit Default Swaps

I have blogged quite a few times about need to create transparency in accounting to build trust. One area I haven't dived into is "Credit Default Swaps".

Lifted right from Wikipedia:
Credit Default Swaps (CDS) is a swap contract in which a buyer makes a series of payments to a seller and, in exchange, receives the right to a payoff if a credit instrument goes into default or on the occurrence of a specified credit event, for example bankruptcy or restructuring. The associated instrument does not need to be associated with the buyer or the seller of this contract.

Basically a bank, insurance company, mortgage dealer, or any other financial company pays a different company to "accept the risk" that if the underlying financial instrument fails, that "different company" makes good by paying off the default.

It is estimates that the CDS market for all liabilities is 55 TRILLION dollars. Read that again, it is more than all the countries GDP combined. The CDS market is UNREGULATED. Which means the SEC and for that matter, any government in the world, has almost no vision to the health or disaster the CDS market may be facing.

On Saturday, the SEC head calls for transparency in the "Credit Default" swap.
Normally I would applaud this as a step in the right direction, if it wasn't for one nasty problem, timing.

Why the heck would the SEC call for transparency NOW of all times?
My Spin: The SEC realizes that CDS is in trouble, and if it collapses, the SEC wants to be in a position to show they where trying to address it before it collapsed.

If the SEC really had an interest in transparency, the time to act was years ago. And once again, quote me on this, it will become transparent only AFTER the CDS market collapses. To bolster this line of thought, a US Treasury Official stated the US Situation is quite grim, hoping to rebound in 2010. (notice not 2008/2009)

So I'll add to my diatribe about transparency for accounting & MBS by adding CDS market needs to be transparent.

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