Eind september 2009 $36.000 miljard CDS uitstaande

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

'Financial Innovation' has now cost us $7 trillion, credit default swaps
with a face value of $36 trillion were outstanding 2nd quarter 2009

Bernanke: USING these instruments in a way that intentionally
destabilizes a company or a country is — is counterproductive, and I’m
sure the S.E.C. will be looking into that.

Eeeeeeh, dat is dus die organisatie die Madoff 9 jaar zijn gang liet
gaan, terwijl iemand herhaaldelijk aan hun deur klopte met informatie???

Groet / Cees

PS. Wat zou Bernanke gaan doen na zijn huidige termijn als chairman of
the Federal Reserve?

February 28, 2010
Fair Game
It’s Time for Swaps to Lose Their Swagger
By GRETCHEN MORGENSON

“USING these instruments in a way that intentionally destabilizes a
company or a country is — is counterproductive, and I’m sure the S.E.C.
will be looking into that.”

That’s what Ben S. Bernanke, chairman of the Federal Reserve, said last
week when lawmakers asked him about credit default swaps during his
Congressional testimony. Concerns are growing about such swaps —
securities that offer insurance-like protection and helped tip over the
American International Group in 2008 when it couldn’t pay mounting
claims on the contracts.

Now, there are fears that the use of these swaps may also help propel
entire countries — think Greece — to the precipice.

First, Greece employed swaps to mask its true debt picture, with the
help of Wall Street bankers, of course. And now it appears that some
traders are using swaps to bet that Greece won’t be able to meet its
debt payments and will face a possible default.

Mr. Bernanke is undoubtedly an intelligent man. But his view that it’s
“counterproductive” to use credit default swaps to crash an institution
or a nation exhibits a certain naïveté about how the titans of finance
operate now.

High-octane trading may be counterproductive to taxpayers, for sure. But
not to the speculators who win big when such transactions pay off. And
in the case of A.I.G., the speculators got their winnings from the
taxpayers.

The certainty that Mr. Bernanke expressed about the S.E.C.’s inquiry
into credit default swaps is quaint as well. If the past is prologue, we
might see a case or two emerge from that inquiry five years from now.
The fact is that credit default swaps and other complex derivatives that
have proved to be instruments of mass destruction still remain
entrenched in our financial system three years after our economy was
almost brought to its knees.

DERIVATIVES are responsible for much of the interconnectedness between
banks and other institutions that made the financial collapse accelerate
in the way that it did, costing taxpayers hundreds of billions in
bailouts. Yet credit default swaps have been largely untouched by
financial reform efforts.

This is not surprising. Given how much money is generated by the big
institutions trading these instruments, these entities are showering
money on Washington to protect their profits. The Office of the
Comptroller of the Currency reported that revenue generated by United
States banks in their credit derivatives trading totaled $1.2 billion in
the third quarter of 2009.

Congressional “reform” plans for credit default swaps are full of
loopholes, guaranteeing that another derivatives-fueled financial crisis
awaits us. According to the Bank for International Settlements, credit
default swaps with a face value of $36 trillion were outstanding in the
second quarter of 2009, the most recent figures available.

Credit default swaps are “a way to increase the leverage in the system,
and the people who were doing it knew that they were doing something on
the edge of fraudulent,” said Martin Mayer, a guest scholar at the
Brookings Institution and author of 37 books, many of them on banking.
“They were not well-motivated.”

Mr. Mayer has been critical of credit default swaps almost since they
arrived on the scene. In 1999, for example, he wrote an opinion piece
for The Wall Street Journal entitled “The Dangers of Derivatives.”

“These ‘over the counter’ derivatives — created, sold and serviced
behind closed doors by consenting adults who don’t tell anybody what
they’re doing — are also a major source of the almost unlimited leverage
that brought the world financial system to the brink of disaster last
fall,” he wrote, referring to the market turmoil of 1998. “The
derivatives dealers’ demands for liquidity far exceed what the markets
can provide on difficult days, and may exceed the abilities of the
central banks to maintain orderly conditions.”

Calling credit derivatives “the most dangerous instrument yet,” Mr.
Mayer concluded in his article that neither banks nor bank examiners
have any idea how to handle them. “The system is easily gamed, and it
sacrifices the great strength of banks as financial intermediaries —
their knowledge of their borrowers, and their incentive to police the
status of the loan,” he wrote.

Pointing to a study by the Federal Reserve Bank of New York, he said:
“In the presence of moral hazard — the likelihood that sloughing the bad
loans into a swap will be profitable — the growth of a market for
default risks could lead to bank insolvencies.”

How’s that for prescient?

His predictions having come true, I asked Mr. Mayer for solutions to the
problems that credit default swaps have created. He had several.

First, he said, those trading in swaps must be forced to put up more
capital to back them so that if a client asks for payment, the issuer
actually has the funds on hand to do so.

“This is an insurance instrument and it must be regulated on an
insurance basis with minimum reserves, instead of making deals that
don’t even have maintenance margin on them,” he said. “And I think it is
an instrument that insured depositories ought not to be allowed to hold
or trade.”

And yet United States commercial banks, those with insured deposits,
held $13 trillion in notional value of credit derivatives at the end of
the third quarter last year, according to the Office of the Comptroller
of the Currency. The biggest players in this world are JPMorgan Chase,
Citibank, Bank of America and Goldman Sachs.

All of those firms fall squarely into the category of institutions that
are too politically connected to fail. Because of the implicit taxpayer
backing that accompanies such lofty status, derivatives become
exceedingly dangerous, said Robert Arvanitis, chief executive of Risk
Finance Advisors, a corporate advisory firm specializing in insurance.

“If companies were not implicitly backed by the taxpayers, then
managements would get very reluctant to go out after that next billion
of notional on swaps,” he said. “They’d look over their shoulder and
say, ‘This is getting dangerous.’”

But taxpayers remain decidedly on the hook for future bailouts because
Congress has done nothing to eliminate the once-implied but now explicit
government guarantees backing large and interconnected companies. And on
derivatives trading, lawmakers’ moves have been depressingly incremental.

Mr. Mayer, for one, believes that credit default swaps must be
exchange-traded so that their risks would be more evident. He dismisses
the contention of big institutions in this arena that many credit
default swaps cannot be traded on an exchange because they are
tailor-made for particular customers.

“These are generic risks and can be traded generically,” Mr. Mayer said.
“You are not insuring against a very individual risk.”

AND what of the argument that increased regulatory oversight of credit
default swaps will crimp financial innovation?

“This insistence that you mustn’t slow the pace of innovation is just
childish,” Mr. Mayer said. “Innovation has now cost us $7 trillion,” he
added, referring to the loss in household wealth that has resulted from
the crisis. “That’s a pretty high price to pay for innovation.”

Couldn’t agree more. Too bad Washington doesn’t see it that way.

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