Here is the 60 Minutes special on Credit Default Swaps for anyone who missed it.
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Obnoxious, regulation is never the answer. What caused the housing crisis...regulation! Back in 1977 the Democrat controlled House, Senate, and Presidency passed the Community Reinvestment Act, which mandated that lenders give out a percentage subprime mortgages. This combined with people not being too smart and being cheap (OH! I can get a 30 year 4.75% adjustable rate vs. a 5% fixed adn prices are at historical lows!) where does the interest rate going to go in the next 30 years...I would imagine up since they were at historical lows!!! Although Wall street should retain a certain % of funds for CDS (therefore a NYSE situation for CDS/derivative). I don't think outlawing or limiting the trading of derivative products is the answer. The liquidity/hedging that CDS provides- essentially the opposite of interest rate swaps is essential to market functioning. There is no way that outlawing CDS (which I believe this program is heading towards) would be possible without destroying a large sector of the derivative financial product market. It is so obnoxious when the government and LAW professors insist on regulating something that they have admitted they have no idea about.
So what do you do? -I work for an investment banking firm. Oh okay; you are like my brother, he works for Edward Jones. -No, a college degree is required in my profession
CDS's obviously provide crucial liquidity/hedging tools for the markets, but the argument that "regulation is never the answer" is completely asinine. Establishing a clearing house and centralized market for CDS's would not mitigate or "outlaw" their effectiveness. Look at the options market -- the establishment of the CBOE and OCC created MORE liquidity by providing investors with confidence in the markets.
And if the 1977 CRA really caused the sub-prime crisis, then how do you explain the following?
"CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity 'largely came to an end by 2001.' In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the 'tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.' CRA, Yellen says, 'has increased the volume of responsible lending to low- and moderate-income households.'"
http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subp…
Also, on the CRA, it causes banks in every community in America have been forced to hold a portfolio of bad loans so many lenders tried to increase the lending fees associated with mortgage loans. But this is discriminatory according to groups like ACORN (yes they were here before Obama ballot falsification). One of their boasts is of having "predatory lending laws" passed in numerous states which outlaw such fees therefore prohibiting banks from protecting themselves. These are essentially price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But this is now illegal! Therefore the so-called predatory lending laws therefore force the banks to "eat" the losses. This is undoubtedly a contributing factor to the bankruptcy of the numerous moregage lenders. Then of course there is the issue of the Fed’s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values. This created a further problem for the financial institutions that are victimized by the CRA because they are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers were no longer qualified, by a long stretch, for conventional mortgages based on their incomes. So they were legally obligated to give out the sub-prime mortgages when it was neither financially healthy or wise to do so. Of course there was the issue of the credit rating system, but overall regulation destroyed our economy- NOT DEREGULATION!!!
So what do you do? -I work for an investment banking firm. Oh okay; you are like my brother, he works for Edward Jones. -No, a college degree is required in my profession
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