U.S. bill would restrict over-the-counter (OTC) derivatives with new regulations

July 30, 2009 by · Leave a Comment
Filed under: Industry News 

This is much needed.  In no way can we have financial instruments that equal ten times the globe’s GDP and not have it under strict regulation.  The reason is because these paper contracts were used to get more leverage which is fine when everything is stable but can be a total disaster when the economy goes south or the firms that have written these go bust and causes them to go to “full performance”.

These should not be on any off-balance-sheet transaction and any company holding them should have strict capital requirements just like any other form of insurance that protect the policyholder against the institution from defaulting.  If you read a book called “The New Monetarism” it has an interesting chart that shows an inverted pyramid with real assets at the bottom and OTC derivatives at the top and that represents global liquidity.   In this chart, these derivative instruments represented 75% of all the liquidity in the system.

News (Reuters):

U.S. financial regulators would gain the power to restrict holdings of over-the-counter derivatives under legislation to be considered this fall, the chairmen of two House committees said on Thursday.

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Bank nationalizations may not trigger credit-default swaps

January 22, 2009 by · Leave a Comment
Filed under: Opinion 

This may be true but what is being not said is that anyone who is nationalizing that bank will have to take over their own credit-default swap exposure as well and with the BIS (Bank of International Settlements) reporting there is over $500 trillion dollars of this paper running around, that would be quite a large amount of liability exposure to back.  These banks are insolvent in my eyes because of their bad decisions and they should go under and have have their assets sold to a prudent bank.  This is the way of the markets are we should let it take its course.

News:

Governments would need to take over all the assets of a bank and take charge of daily operations for a nationalization to trigger payouts on credit-default swaps, according to Bank of America Corp. analysts.

Simple nationalization wouldn’t be enough to settle the derivatives, which protect investors against a company defaulting on debt repayments, New York-based strategist Glen Taksler wrote in a note today. A collapse in share prices of New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc is stoking speculation the U.S. and U.K. will be forced to take full ownership of some financial institutions.

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Metlife and Hartford credit default swaps (CDS) premiums rise

October 2, 2008 by · Leave a Comment
Filed under: Industry News 

No surprise, risk is now being valued on an basis that is now more realistic compared to the risk that is in the market now. This trend will continue until it stabilizes at an appropriate cost of insurance compared to the risk the counter-party is exposing themselves too.

Release:

The cost of protecting insurers’ debt with credit default swaps rose on Thursday as concerns mounted about potential investment losses.

Insurers’ credit spreads have been widening for several days on concerns about their exposure to recent corporate collapses including American International Group, Lehman Brothers and Washington Mutual, said Rob Haines, analyst at independent research service CreditSights.

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