Home -> Law Blog Directory -> Legal Commentary Blogs -> Economics of Contempt

Legal Commentary

: Economics of Contempt

Obama Administration on Credit Default Swaps

By Anonymous

At least the Obama administration (Tim Geithner really) recognizes that a CDS clearinghouse won't magically heal the financial markets, and won't even touch a huge segment of the CDS market. Contemporary politics being the three-ring circus that it is, I suppose that's all you can really hope for. Stephen Labaton writes in the NYT:

The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.
...
Officials said some credit default swaps with unique characteristics negotiated between companies might not be able to trade on exchanges or through clearinghouses. But standardized or uniform ones could.

?We want to make sure that the standardized part of those markets move into a central clearinghouse and onto exchanges as quickly as possible,? Mr. Geithner testified. ?I think that?s really important for the system. It will help reduce risk and the system as a whole.?

But then Labaton starts to have problems with, ummm, logic:

The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments. American International Group, one of the largest issuer of such swaps, never had to post collateral and nearly collapsed as a result of issuing a huge volume of such instruments that it was unable to support.

Wait, AIG "never had to post collateral" on its credit default swaps? Then why did the government give them all that money?

No, AIG nearly collapsed because of collateral calls on its CDS positions. You can't have it both ways.

Full post as published by Economics of Contempt on January 24, 2009 (boomark / email).