SEC Chair Schapiro Slaps Swaps

In an letter to the Washington Post, SEC Chair Mary Schapiro calls for the need to regulate swaps, some of which you may have heard before as credit default swaps, or CDS. Boiling down what her criticisms of the financial reform legislation, her recommendations come down to:

  • All securities-based swaps should be regulated as securities; all commodity-based swaps should be subject to commodities laws.
  • Apply TRACE, a public disclosure & tracking system for debt securities, to swaps.
  • Use clearinghouses and exchanges in transactions for swaps.

Greece and Swaps, the saga widens

Earlier we posted derivatives at the heart of the Greek crisis. Now the story widens and the saga continues.

First, Bloomberg reports Goldman Sachs, Greece Didn’t Disclose Swap. In other words Goldman Sachs helped Greece hide it's debt, mortgaging it's future in the process and also didn't tell anyone they had done so.

Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

More on New York Fed and AIG

On January 27, Tim Geithner will testify before Congress on the AIG 100% payout scandal. Today the NY Fed was ordered to turn over documents to Congress. (see subpoena).

The New York Fed asked Habayeb to “stand down” from negotiating with counterparties, according to an Oct. 31, 2008, e-mail he wrote to AIG CFO David Herzog. Herzog replied that AIG should “get back with Goldman” about the change in plans.

Before the New York Fed took over the talks, AIG tried to persuade banks to accept so-called haircuts of as much as 40 cents on the dollar, according to people familiar with the matter.

Wall Street Journal Outlines Goldman Sachs Glorified Ponzi Scheme with AIG

The Wall Street Journal has an investigative piece outlining how Goldman Sachs Fueled AIG Gambles. It appears Goldman Sachs acted as a middleman for even more CDSes from other banks.

Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman.

In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades.

Systemic Risk Insurance? How about don't let banks drive drunk!

In a paper The "Surprising" Origin and Nature of Financial Crisis: A Macro Economic Policy Proposal (obnoxious PDF big brother - be wary of this link, these bastards have this paper loaded with copy protections as well as image beacons, pretty stupid if it's supposedly a public document!)

The paper first identifies one of the main causes of the financial crisis as aggregate risk in systemically important financial institutions. Bloggerspeak translation: Derivatives, all of those asset backed securities, CDOs, and so on, which were put together like a house of cards, designed on faulty models and slapped with AAA credit ratings when they should not have been.

Finally, the Justice Department Investigating Credit Default Swaps

Bloomberg is reporting Credit-Default Swaps Probed by Justice Department:

The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.

“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.”

The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter

Are CDS an assignable contract?

If they are and say private investors in the PPI Investment Fund purchase toxic assets that have a CDS attached then conceivably a private investor can gain a windfall profit. Assuming Treasury allows that but something tells me they would allow it.

Can this be?


This is The Economic Populist Admin. I am putting the answer to this question in the post so it goes out into the RSS feeds.

The answer to the question of are Credit default swaps are assignable is yes.

Financial Sense, Frank Barbera:

AIG Rewards Derivatives Employees $450 Million Even Though Derivatives Brought Down AIG

Derivatives. You know that shadow banking system that is considered the main cause of the financial meltdown?

You know those not even understood financial vehicles which have caused billions in write downs?

Well, AIG wants to pay the people who create and trade these vehicles $450 million to retain them.

American International Group Inc., the insurer that nearly collapsed because of losses on credit- default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation.