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alstry (36.08)

Unintended Consequences Should Be The Intention

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July 24, 2009 – Comments (6)

July 24 (Bloomberg) -- A ban on “naked” trading in the $26.4 trillion credit-default swaps market being considered by U.S. lawmakers would have the unintended consequence of making it more expensive for companies to borrow, traders said.

“It will inevitably lead to higher costs of funding across all U.S. corporations, significantly reduce liquidity in credit markets, and further widen the opacity” of other instruments that rely on credit swaps for pricing, said Tim Backshall, chief strategist at hedge fund adviser Credit Derivatives Research LLC in Walnut Creek, California, in an interview yesterday.

THAT WOULD NOT BE UNINTENDED CONSEQUENCES.....that would be pricing debt to actual risk.  It would prohibit the practice of selling toxic debt and rating it AAA.  It would force the market to do actual research and due dilligence on the fundementals of the investment.

In the last ten years, we infected our economy with so much bad debt, primarily because the purchasers thought they were "insured" regardless of default, that the insurance/swaps became the driver of the market and not the debt.

It didn't matter if companies really made money or not, they just had to make it look like they weren't going to default.  Innovation was stifled and assets were misallocated.

Once the debt started defaulting, we learned more insurance existed than the assets of those playing the game and the whole house of cards started to implode.

Soon you will realize this has been a game of high stakes gambling, not investing.  The true financial conditions of many of our companies are no where close to current perception.  You can only game the system for so long before the system games you.

A while back I stated, if you can't trust the data, nothing matters.  Pretty soon you are going to understand just what that means.

Just look at California's "balance budget."  Much of it came from siphoning off much needed money that belonged to cash strapped cities and counties.  If the state needs the money, don't the cities and counties need it as well?

Balance the state's budget and bankrupt a city?  And balance the budget knowing that conditions are much worse than contemplated?

We are facing very serious issues going forward.  Our nation built an economy on an illusion of debt supported by swaps.  Now that the debt is defaulting, we are rapidly learning there is not much of an economy behind it.

6 Comments – Post Your Own

#1) On July 24, 2009 at 9:13 AM, leohaas (31.97) wrote:

"THAT WOULD NOT BE UNINTENDED CONSEQUENCES.....that would be pricing debt to actual risk.  It would prohibit the practice of selling toxic debt and rating it AAA.  It would force the market to do actual research and due dilligence on the fundementals of the investment."

Wow. I cannot believe it. Finally a statement by alstry with which I can agree wholeheartedly. The ban on naked CDS trading is an absolute must.

For those who do not understand why, let me give you a comparison. Suppose you are allowed to insure someone else's house for way more than it is worth, wouldn't that be a great incentive to hire an arsonist? That is exactly what naked CDS trading is doing: buying insurance on something you do not own, and this insurance is in no way tied to the value of the insured property. When will this kind of insanity end?

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#2) On July 24, 2009 at 9:18 AM, alstry (36.08) wrote:

Why do you think Alstry has been the screaming blogger? 

He knew the whole game was fraud and was just trying to wake people up......

When the insanity ends, the foundation for a future begins.

 

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#3) On July 24, 2009 at 9:25 AM, alstry (36.08) wrote:

The longer it takes to restructure, the greater the frustration as conditions in the real world will mathematically deteriorate:

NYTimes:

WASHINGTON — Years of state and federal neglect have hobbled the nation’s unemployment system just as a brutal recession has doubled the number of jobless Americans seeking aid.

In a program that values timeliness above all else, decisions involving more than a million applicants have been slowed, and hundreds of thousands of needy people have waited months for checks.

And with benefit funds at dangerous lows even before the recession began, states are taking on billions in debt, increasing the pressure to raise taxes or cut aid, just as either would inflict maximum pain.

Sixteen states, with exhausted funds, are now paying benefits with borrowed cash, and their number could double by the year’s end.

States don't have money to pay current demand, and demand is going up while tax receipts are evaporating.......where do you think we will be in six months???

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#4) On July 24, 2009 at 9:55 AM, alstry (36.08) wrote:

This guy seems pretty reasonable:

 http://watch.bnn.ca/the-close/july-2009/the-close-july-23-2009/#clip196526

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#5) On July 24, 2009 at 10:03 AM, Mary953 (77.10) wrote:

Alstry,  Thank you for a thoughtful blog that I can add to the index. I appreciate your explanation. It does seem that much being done economically  is "difficult" to explain unless you can control the questions being asked.

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#6) On July 24, 2009 at 10:05 AM, lquadland10 (< 20) wrote:

grass roots effort to reinstate exective order 11110

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