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Greece, credit default swaps, and the SEC
Thursday, February 25, 2010
In reading about the many problems confronted by the Greek government in trying to, somehow, become a bit more prudent with the nation's finances, it quickly becomes clear that credit default swaps and other credit derivatives have been and still are playing major roles.
Word comes in this Reuters report that the SEC is now taking an active interest in these products that one former Fed chairman used to speak glowingly about.
SEC examines destabilizing effects of CDSIn this report it is learned that the notional value of the derivatives market now stands at about a half quadrillion dollars (yes, that would be almost $500 trillion) and that elected officials in Washington, thus far, are making little or no progress in moving forward with any kind of regulatory reform.
Securities regulators said on Thursday they are examining the potential abuses and destabilizing effects of credit default swaps, a financial instrument that can be used to speculate on an issuer's credit worthiness.The Securities and Exchange Commission comments come after Federal Reserve Chairman Ben Bernanke said regulators were looking at how Goldman Sachs and other Wall Street companies helped Greece arrange derivative deals. The SEC would not confirm or deny it was investigating Goldman's role in Greece.
"As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices," SEC spokesman John Nester said.
3 comments:
If there's $500 trillion lying around in derivatives, why haven't we experienced back-breaking inflation yet? Does the money not really exist?
This is just the notional value of the derivative contracts - this money does not actually make it out into the economy to have an impact on consumer prices.
Derivatives are a de facto insurance product. That is, $500,000,000,000,000 worth of insurance has been issued. The financial sector cannot possibly pay off on this amount of insurance, so the financial system would crash if significant payment was required. This is the reason offered for the AIG type bailouts. The taxpayer made good on the bad AIG derivative insurance AIG issued, so that other derivative insurance holders would not panic and ask for non existent collateral.
The system is completely unstable. In effect, derivative writers are collectively charging premiums for fake insurance. A big con game to give money to the financial sector. The taxpayer winds up bailing out the con artists to "save the system".
It is also the reason stock prices, home prices, bond prices, etc... are being centrally planned. Rapid changes in the price of any of these would require payment on derivative insurance that is beyond the financial sectors' ability to pay.
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