Tim Reason, CFO.com | US
September 23, 2008

Risk

Naked shorting of securities has little risk. The SEC has not enforced this and the short gets the cash in his account and this is maintained in his account so that he has enough to cover the liability of being short.


With a CDS, the seller gets only a portion of the liability in cash. The liability is not booked honestly and these have been hidden from shareholders. As the value of the underlying asset goes down, the liability increases. Once the premium is eaten up as the underlying asset drops and the management takes out their bonuses, the CDS seller has nothing to cover the remaining liability. Friday, the cost of insuring MS unsecured debt was 25% upfront and 5% per annum to protect the debt for 5 years. For a cost of 4K, adjusted for inflation, a person would be guaranteed to recoup 10K (more likely 5K adjusted for inflation) 14K in and 5K out.. what a deal.

The only way that these sellers can recoup is if there is huge inflation and that is exactly what Paulson is doing for them by printing money.

What is truly sad is that this bailout came because AIG was failing and Goldman Sachs was owed 20 billion that would not be paid if AIG went under. Why isn't anyone discussing the conflict of interest of Paulson and Goldman and this bailout?

Paulson didn't try to increase liquidity by changing the mark to market rule for valuing the securities that banks hold. This was a no cost solution, but he balked at that idea. He didn't have the amount of the CDS market as it is unregulated. The LEH outstanding after netting was 2% of the estimated 400 billion estimated liability. The 60 trillion CDS market after netting probably compares to the 2% at LEH that had to change hands.

So the taxpayer has to insure this 1.2 trillion so that the CDS holders get paid.. What a deal! No doubt that those who hold the CDS have been booking them at full value so that they keep their liquidity and can cover their other losses. Not being able to collect would likely bankrupt them.

The guaranteeing of subprime assets and those who sold the CDS was criminal negligance.. not just on Wall Street, but those in Congress who supported legislation that created the wanton giving away of credit to those who couldn't pay. Striving to give everyone the "American Dream" results in a world nightmare.

Posted by Mary Helburn | Oct 12, 2008 9:44 AM ET

Donýt we already have "dead janitors insurance"?

"Imagine that anyone can buy any amount of life insurance on any unrelated individual, without their knowledge or consent."

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Don?t we already have "dead janitors insurance"?

And didn?t Sen. Phil Gramm promote the "Texas Teachers Retirement Fund" take out life insurance on teachers without the teachers knowledge or consent with the beneficiary being the retirement to pay for un-funded liabilities of the retirement fund?

Posted by Kerwin Tschetter | Sep 25, 2008 3:00 PM ET

Does Cox Finally Understand?

Selling America Short

Imagine a world in which anyone can buy any amount of fire insurance on any building, regardless of its value or ownership. Imagine that anyone can buy any amount of life insurance on any unrelated individual, without their knowledge or consent.

The economic incentives in such a world guarantee that many buildings will burn, and many will die, to the financial benefit of those buying the insurance policies where they have no risk of actual loss.

Wall Street and the SEC have created such a world. Credit default swaps allow a party to reap a financial reward when a company fails. Shorting the ABX index allows a party to reap a financial reward when asset values of certain financial instruments decline in value. Unlimited shorting of stocks, without restraint as price declines, magnifies both the speed and magnitude of the price decline. Purchase of puts sends a stock price lower as the option market makers sell unlimited, unregistered, un-issued shares into the market.

Where the capital markets once functioned as a source of financing for new business ventures, Wall Street and the SEC have turned the capital markets into an unregulated, rigged casino where gambling and asset destruction are the main attractions. Economic incentives now heavily favor the destruction of investment capital, rather than the creation of additional capital.

What can we expect to be the logical result of the past 8 years of SEC and Wall Street corruption of our capital markets?

Posted by Marion Polk | Sep 24, 2008 10:02 AM ET