Is it time for SWAPs to go away? (Automatic Earth)

It’s Time for Swaps to Lose Their Swagger
by Gretchen Morgenson

• Using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that." That’s what Ben S. Bernanke, chairman of the Federal Reserve, said last week [..]
  
• Greece employed swaps to mask its true debt picture, with the help of Wall Street bankers, of course. And now it appears that some traders are using swaps to bet that Greece won’t be able to meet its debt payments [..]
  
• [..] in the case of A.I.G., the speculators got their winnings from the taxpayers.
  
• [..] credit default swaps and other complex derivatives that have proved to be instruments of mass destruction still remain entrenched in our financial system
  
• Congressional "reform" plans for credit default swaps are full of loopholes, guaranteeing that another derivatives-fueled financial crisis awaits us.
  
• Mr. Mayer has been critical of credit default swaps almost since they arrived on the scene. In 1999, for example, he wrote an opinion piece for The Wall Street Journal entitled "The Dangers of Derivatives." "These ‘over the counter’ derivatives — created, sold and serviced behind closed doors by consenting adults who don’t tell anybody what they’re doing — are also a major source of the almost unlimited leverage that brought the world financial system to the brink of disaster last fall..."
  
• Calling credit derivatives "the most dangerous instrument yet," Mr. Mayer concluded in his article that neither banks nor bank examiners have any idea how to handle them.

Time to outlaw naked credit default swaps
by Wolfgang Münchau 

• I cannot understand why we are still allowing the trade in credit default swaps without ownership of the underlying securities. Especially in the eurozone, currently subject to a series of speculative attacks, a generalised ban on so-called naked CDSs should be a no-brainer.
  
• Ben Bernanke, the chairman of the Federal Reserve, said last week that the Fed was investigating "a number of questions relating to Goldman Sachs and other companies in their derivatives arrangements with Greece". Using CDSs to destabilise a government was "counter-productive", he said. Unfortunately, it is legal.
  
• What constitutes default is subject to a complicated legal definition.
  
• A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble.There is not one social or economic benefit [..]
  
• [..] the case for banning them is about as a strong as that for banning bank robberies.
  
• A universally accepted aspect of insurance regulation is that you can only insure what you actually own.
  
• CDS are not classified as insurance but as swaps, because they involve an exchange of cash flows.
  
• [..] nobody in their right mind would use the swap-like characteristics of an insurance contract as an excuse not to regulate the insurance industry.
  
• [..] naked CDSs allow investors to hedge more effectively. This is like saying that a bank robbery brings benefits to the robber.
  
• Christine Lagarde, the French finance minister, was recently quoted as saying: "What we are going to take away from this crisis is certainly a second look at the validity, solidity of sovereign [credit default swaps]."
  
  Münchau: A second look? I wonder what they saw when they looked the first time.

How Greece's Crisis Could Impact America
by Ann Pettifor 

• [..] heavily indebted economy is the canary in a coalmine of sovereign debtors that includes Spain, Portugal, Italy, Ireland, Britain and the United States. As long as the Greek canary keeps singing, people in Europe and the United States need not fear going up in smoke. But Greece's struggling government is threatened by a financial instrument widely used by speculators to discredit government bonds, and undermine the country's weakening creditworthiness.
  
• First: regulators could insist that those that sell Credit Default Swaps join the ranks of other insurance companies,
  
• Second, regulators could ensure that those buying Credit Default Swaps show proof of an insurable interest: