Sure, court challenges will come. But the CDS “market” isn’t regulated by much of any law to begin with, so it’s much closer to Funny Money than Federal Resereve Note.

When these firms played the CDS market, they were gamblers, and now they’re begging the loan shark to cover their bad bets. They issued CDSes like John Lovett signing napkins as IOUs: “I’m Picasso, dammit!” There was never full faith or credit behind them to begin with.

You’re actually committing a fallacy of reification here. Why fear annulling this market? Is your concern that the CDS market won’t revive after old CDSes are annulled? Because that’s many orders of magnitude less important than the proposition that the whole sector of financial services won’t exist after CDSes are annulled. Given the choice between going to zero, and getting the CDSes and CDOs off their balance sheets, I think you’ll see just about every one of these companies breathe a profound sigh of relief as the USG and other governments relieve them of these obligations. Once they’re gone, you will no longer have the entire financial system locking up in insoluble insolvencies. You’ll see maybe a handful of companies fail.

I’m not a lawyer. But I don’t see how Congress can simply invalidate existing CDS contracts without eliciting a lot of very legitimate court challenges. (Of course, if a company goes into bankruptcy, the judge could invalidate the CDS contracts that the company had entered into, but that’s a special situation).

However, I suppose that Congress could impose a special tax on any company that is a party to a CDS contract. If the tax rate were high enough, everyone would just get rid of the darn things. That would solve a lot of problems.

‘The Subprime Three — Rubin, Summers & Greenspan’, April 28, 2008
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=275

‘The Vigorish of OTC: Interview with Martin Mayer’, June 12, 2008
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=287

Spread the Wealth: Bigger Is Not Better in Banking
http://us1.institutionalriskanalytics.com/pub/IRAStory.asp?tag=317

Finally, regards Treasury Secretary Hank Paulson, Geithner et al., we encourage readers to peruse the report in the Columbia Journalism Review, “Goldman’s Backdoor Bailout A call for transparency in the taxpayer rescue of Wall Street.” Note the citations for Mark Pittman at Bloomberg News, another excellent source on the allegations against Paulson that the Treasury Secretary favored his former employer in the bailout negotiations and in the bailout of AIG (NYSE:AIG).

http://www.cjr.org/the_audit/goldmans_backdoor_bailout.php

If and when the Congress does its job and looks into allegations of favoritism and worse to the benefit of Goldman Sachs (NYSE:GS) and the Paulson Treasury’s conduct of the bailout, we may start to see the US recover some of its lost credibility in the financial markets. More than anything else, the new President needs to pick people whose credibility is unassailable and who have no connection to the past errors and omissions that got us into this mess.

That means, Mr. President-elect, we need to see some fresh faces and new names, people who do not have conflicts and face other possible liability due to past actions, otherwise we can stick a fork in this bird. We like what we’ve heard so far from Barack Obama about dealing with the financial crisis and, for example, not rewarding the Fed’s failures with greater regulatory responsibility, but can the President-elect put aside the baggage of the past and really effect change?