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Thursday, January 29, 2009

USA Draft Law alters Credit-Default Swaps

Credit Default Swaps are financial contracts that trade are NOT regulated, unlike Stocks, Bonds, Options, Futures, etc. CDS contracts are the "wild west" of finance.

CDS has been blamed for the AIG issues, and other financial institutions. Like any financial instrument that is unregulated, it gets abused, severely. The government bringing CDS into regulation is a HUGE step to actually avoiding world wide implosion.

I won't represent what is the correct answer, except that near zero regulation is not the answer. CDS contracts for example, do not trigger companies that create CDS contracts need to secure a % of financials. Translation: Financial companies can take on RISK with near Zero "reserves" if they are wrong in the "bet" made. When the economy took a u turn, companies over exposed crumbled.

CDS contracts have been blamed to be written "naked" (no counter party interest), like a "naked short". A naked short is illegal, as it "unfairly" punishes companies. Naked CDS contracts argueable are the EXACT same abuse, but since these instruments are not regulated, its permitted. If CDS contracts where regulated like other instruments, the current situtation would not be as bad.

The Obama government, as expected is ramping up the announcements on all fronts on how to avoid world wide financial disaster.

There exists a US Draft law to outlaw much of CDS contracts as they are created currently. I really don't have an opinion how bad or good the proposed changes are. I'll assume that par for the course, its probably over-reactionary by individuals with agendas. I don't expect the market to soar because of the bill being proposed. However its definately worth paying attention to the evolution of the bill and what it looks like the day it passes into law. That day could be a great reactionary day.

The series of news events will hopefully yield the expected upward movement of the market. Thursday may be a pullback, however I would expect by next Wednesday, the market will be higher.

Gold is at an extremely high risk for continued downward pressure. These changes could demolish Gold as fear subsides and hope springs. Gold miners will get hurt also, but hopefully not as bad.

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