Now you and me and the Commercial Banks are cannon fodder. Corner Office Players at the Money Centers will roll in the dough, but their institutions are going to be on the stretchers for years ala Japan.

credit or interest swaps are two flavors of the same confection, and the fact that one or the other is more or less necessary, or a greater or lesser portion of the total risk/liability/smoking crater is really beside the point. call it financial engineering, call it insurance, call it gambling — it doesn’t work because nobody can see it work.

there’s also the poignant fact (for me at least) that kabuki (a stylized performance in which players wear masks and, as part of the genre, must deliver speeches from stereotyped positions within a ritually defined stage) is not the problem here. go ahead, legislate otc’s — then derivatives will become custom contracts again … “customized” by computers. (orwell’s 1984 novel writing machines with a capitalist twist.)

the fundamental problem here is the culture of credit and debt. the culture of credit and debt created egregiously excessive and historically abrupt (60 years) global wealth. return increases with risk, so risk will always rise in the search for return. thus speculative bubbles are inherent in free markets, unless they are regulated into distribution systems. attempting to mix (or tolerating the coexistence) of free markets and regulated distribution systems only creates black markets, another term for bubbles … or for “custom” derivative products outside the otc exchange accounting.

Yes. I also believe Larry Summers had Harvard buy some IRS while he was President there. They lost money when Bernanke lowered rates to zero and were forced to pay the banks to get rid of the swaps.

A note of irony for that future historian.

one # is bigger than the other, even after assuming ‘double-counting’ of ‘both sides’ of the trade..

Good points all round. That was one of the questions I had about Kirby’s letter — if we’re talking about IRS, one would think (maybe) that the swaps would be part of a hedge, esp if they were in a trade involving any kind of Treasury. Is Kirby’s concern that they aren’t hedged? Or would that likely be the case given the seeming inability of certain players to use derivatives AS hedges, rather than to increase leverage and blow themselves up.

So, qua “derivative”, CDS’s are a bogus product, since hedges cannot be deduced from the valuation itself to supply a sanity check on the valuation–this being the very meaning of incomplete markets. Since their valuation rests, further, on an assumed pricing (“risk-neutral”) distrubution only tenuously connected (“equivalent measures” is the probabilist’s term for the connection) to the econometric one of history, historical data cannot, by definition, be used to judge their reasonableness either.

So neither other market data nor past history can be used to guage the reasonability of CDS pricing–and this is so on the very logical, quant-fin grounds used to justify the pricing in the first place.
By contrast to interest rate swaps, which are highly derivative and hedgeable, they are thus complete “trust me” products.

Of course, naked CDS’s are also in may ways equivalent to the old, subsequently-outlawed bucket shops which helped exacerbate the Panic of 1907 and would now be illegal were it not for an express exemption from the anit-bucket shop laws by the Commodity Futures Modernization Act. The non-naked CDS’s pose moral hazard issues in preventing negotiated resolutions of reorganizations rather than forced Chapter 11 with a Chapter 7 imminent. They have no rationale as a derivative and no socially defensible purpose other than as fee-makers for Wall Street and as high stakes gambling conduits (with taxpayer backstops for the politically well-heeled).

I sure hope all these economically useless but fee generating voodoo schemes get outlawed.

you do a valuable Service by providing your Insight, to the general Weal, FOC.

As you know, many pay, quantities of Paperbacks, for similiar intel.
~~

clawback,

ya think? you, just, might be on the right track..might want to, you know, do some Research..

Thanks in advance for any help.