Credit-default swaps are masquerading as financial products

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My Sunday Washington Post Business Section column is out. This morning, we look at CDS — how they became such a dangerous aspect of the financial firmament.

The print version had the full headline Credit-default swaps are masquerading as financial products. They should be regulated as insurance products. (The online version is merely Credit default swaps are insurance products. It’s time we regulated them as such.).

Here’s an excerpt from the column:

“Despite the CFMA’s horrific fatality toll, it has never been overturned. Parts of it were modified by Dodd-Frank regulations, but not the insurance exemptions. Today, these swaps are cleared through exchanges or clearinghouses — but they are still exempt from all insurance regulatory oversight. Which is bizarre, because they are little more than thinly disguised insurance products, with the CFMA kicker that there is no reserve requirement.

Which brings us more or less up to date — and onto more topical issues, such as Greece. Two weeks ago, the International Swaps and Derivatives Association said that “based on current evidence the Greek bailout would not prompt payments on the credit default swaps.”

That is an odd statement about a tradable asset — based on evidence? Typically, an option or futures contract expires, and it either is in or out of the money. Any tradable asset — stocks, bonds, futures, options, funds, etc. — settles on its own. There is a market price the asset closes at, a total volume of sales, and a final print for the day, month, quarter and year. No interpretation is required. Why on earth would anyone need a committee ruling for a trade?”

The full column goes into the tortured history of CDS.

The Post had a little fun with the dead tree version — here is the art work:
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click for ginormous version of print edition

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Source:
Credit default swaps are insurance products. It’s time we regulated them as such.
Barry Ritholtz
Washington Post, May 11 2012
http://www.washingtonpost.com/business/credit-default-swaps-are-insurance-products-its-time-we-regulated-them-as-such/2012/03/05/gIQAAUo83R_story_1.html

Washington Post, May 11 2012 (PDF)

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