Well, we have to decide who “wins” and who “loses,” anyway, now that we’ve decided not to let the free market operate freely. My compromise supports the integrity of bond insurance and does not support other functions of CDS. Agreed, it’s arbitrary. The alternatives appear to be:

1. A meltdown of the $62 trillion CDS obligations as the deleveraging and defaults proceed. JPM’s $8T is a fraction of what’s to come. Oh yeah, we’re still living in the fantasy world that the Central Banks can prevent further deleveraging…HAHAHAHA.

2. Paulson guarantees all CDS obligations to be “backed by the full faith and credit of the U.S. Government” (like everything else). Why not? It seems like the obvious next step.

My problem with #2 is that when all currency becomes dollars and all debt becomes Treasuries, then the benefits for America of having a special currency and a more credible debt instrument disappear. All this, just to get through a classic credit contraction!!

thanks for sharing.

perhaps a glimpse into future possibilities???

here’s another…

http://www.grameen-info.org/

Sort of. Zopa (www.zopa.com) is (or was, I haven’t looked recently) a loan market matching bank, where you lend to a specific borrower, for a specific term. So, no MT.

si si si,

EXCEPT for one rather formidable obstacle.

JPM has $8T in notional CDS exposure.

that’s 8,000,000,000 dollas.

of course, they’re playing market marker. now let’s assume they played good market marker and balanced out their risk. they’re still making the spread on every transaction, yes?

correct me if i’m wrong, but under your proposal, they don’t get to collect the spread if the contracts are deemed null & void, correct?

how much do you think the spread is on $8T of CDS?

how ever much is the size of your obstacle.

(and behind that hurdle are smaller hurdles, BOA, CITI, etc.)

Of the $400 billion in Lehman CDS liabilities, “only” $128 billion was actual insurance for real owners of Lehman bonds. The remaining $272 billion represented pure speculative plays (or some ninth-level-of-hell complex counter-counter-party pseudo-hedging, which is operationally the same thing).

Get out your calculators: What’s the leverage when $170 million in premiums was paid by these speculators on the gamble they would receive $272 billion if Lehman defaulted? Do they have a right to get fabulously rich at the expense of the world economy? No wonder they banned short-selling for a while; with this kind of potential returns at stake, you mortgage the children if necessary to short Lehman).

The compromise resolution is to validate the $128 billion in CDS obligations that was real bond insurance (there’ll still be some bailing out necessary of the insurers who can’t pay up), but CANCEL the $272 billion in CDS obligations to the non-bondholders (they didn’t have that much skin in the game in the first place).

Make a clear, firm, absolute policy that henceforth all existing non-bond-insuring CDS are WORTHLESS JUNK that shall NOT be paid. Problema resuelto!

That is precisely correct sir, and it is the reason why they will lose more. This time they are selling risky assets when they should buy them, and buying treasuries when they should sell them.

Correct course of action here is to do the opposite of Joe Public and Sovereign funds:
Buy stocks, and sell dollar, and sell treasuries.

To understand why, read posts from Friday to today, on these blogs:

http://marketwarnings.blogspot.com/2008/10/european-union-to-guarantee-interbank.html

http://marketwarnings.blogspot.com/2008/10/financial-crisis-ifm-warns-system-on.html

Sovereign funds and Joe Public share this in common: they are SCARED of risky assets at the BOTTOM, and CONFIDENT in risky assets at the TOP. The opposite of what they should do.

we are experiencing the worst financial crisis after 1929, and this seems the obvious consequence of years of living above their possibilities by the US citizens, i.e. of a massive US current account deficit and negative savings. Crises, as hangovers, may be helpful to restore integrity. But what if integity will not be restored after this crisis? In other words, what if, say in two years time, the US financial system will be bailed out but still characterized by a massive external deficit? I would not be so confident, as you are, the the CA deficit will shrink by more than the IMF predicts.
http://thedailyeconomist.blogspot.com/

is there any banks that exist today to your knowledge that apply these principles?

“For the activity of the banks as negotiators of credit the golden rule holds, that an organic connection must be created between the credit transactions and the debit transactions. The credit that the bank grants must correspond quantitatively and qualitatively to the credit that it takes up. More exactly expressed, ‘The date on which the bank’s obligations fall due must not precede the date on which its corresponding claims can be realized.’ Only thus can the danger of insolvency be avoided.”

Since Theory of Money and Credit was first published in 1912, I think this refutes any suggestion that preventing, or at least regulating, maturity transformation is a new and untried one. It may be untried – but at least it’s not new.