Unintended Consequences Should Be The Intention
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.
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