Is the Crystal Ball Clearing? | 148 comments (147 topical, 1 editorial, 0 hidden)

Re: Is the Crystal Ball Clearing? (4.00 / 3)

You don't have to have an "insurable interest" in order to buy CDS.

One way people have proposed to fix the CDS problem is to change the law so you need to deliver a defaulted bond in order to collect on your CDS. That would still allow people to buy CDS to speculate/hedge on the fluctuations of the CDS spread, but you could only collect the payut if you actually own a defaulted security, which you would exchange for the CDS payout. The CDS seller would then have the job of collecting "recovery" on the defaulted bond.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:43:30 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (4.00 / 3)

Yes, but then they'd invent another "instrument" that didn't have such limitations and trade those instead.

We're at the stage where the financial industry has to be told what it can do and everything else is illegal

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Mar 12th, 2012 at 05:07:44 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 1)

There's a term for that.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 05:10:52 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (4.00 / 4)

aka regulated market mechanism capitalism, increasingly it seems to be the the only sort compatible with democracy.

I like the way neolibs invent pejorative terms for sensible things they dislike

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Mar 12th, 2012 at 07:05:26 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 0)

Yes, the terminology is highly tendentious. I encountered it for the first time in the otherwise excellent This time is different: 800 years of financial folly by Reinhart and Rogoff.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 07:36:15 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (4.00 / 2)

In addition to financial repression we need a nastier big brother which I would call financial smothering. Apply financial smothering to the entities that most vociferously protest financial repression. A great way to re-size the financial industry back to something we can live with.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 12th, 2012 at 11:15:37 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 1)

I wonder when Reinhart is going to bother to notice modern monetary theory.

by rifek on Mon Mar 12th, 2012 at 06:42:11 PM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (4.00 / 3)

I actually think a model in which CDS can be bought and sold freely but you can only collect the CDS payout by delivering a defaulted bond, would "work" because it would satisfy the needs of both "credit hedgers" and "credit-spread-market hedgers".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 05:41:42 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 0)

Insurable interest is the most basic requirement for any functioning insurance market. Else it is ripe for abuse.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 12th, 2012 at 11:17:24 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 1)

If you're not careful, that can lead to a real mess. Here in the US we probably will never sort out all the "show me the note" issues on mortgages and end up just drawing an arbitrary line.

by rifek on Mon Mar 12th, 2012 at 07:00:11 PM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (4.00 / 2)

That is why you have central property registries and notarised transactions.

If you don't have central registries and notarised transactions, then you are guaranteed to have a mess, irrespective of what instruments you allow to be traded.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:30:57 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 0)

Except that the notes are not typically recorded or filed.

by rifek on Tue Mar 13th, 2012 at 02:39:05 PM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 1)

In that case you do not, in practise, have a central registry of deeds and property.

Breaking such registries is one of the things right-wingers do, because they neither understand nor care to understand the institutional basis for prosperity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 03:27:32 PM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 0)

Notes have no effect on title. Only mortgages and deeds of trust do, and those are recorded or there are consequences. But those are just collateral instruments and don't show evidence of the underlying debt. Notes, CDSes, and other securities don't have recording systems to readily determine who holds them.

by rifek on Wed Mar 14th, 2012 at 02:52:42 PM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 1)

The whole point of having exchanges rather than simply trading over-the-counter is to have a paper trail of who owns what. If the exchange does not keep track of who owns what securities, then it's not doing its job. And tools that do not do their jobs should be replaced or discarded.

Of course, alphabet soup derivatives are typically traded over the counter rather than on exchange. But that's a bug, not a feature.

In Denmark, notes are notarised and placed in a similar sort of central registry as deeds and titles. But then again, in Denmark, everything is noted and registered and recorded in a central registry somewhere.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 16th, 2012 at 05:39:28 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 0)

If a CDS were actually treated like an insurance policy, it would not be tradeable. The CDS could only be held by the buyer of a named beneficiary, and the payment obligation could be transferred only under highly regulated conditions. But then no one would score an endless series of commissions.

by rifek on Fri Mar 16th, 2012 at 10:06:15 PM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (none / 0)

You need to prevent people from shorting them, because that creates credit risks against the short-seller as well as the original issuer.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:21:59 AM EST
[ Parent ]

Re: Is the Crystal Ball Clearing? (4.00 / 2)

Insurable interest is just one side. Assignment of policy obligations and premium streams in the other.

by rifek on Mon Mar 12th, 2012 at 06:36:03 PM EST
[ Parent ]

Is the Crystal Ball Clearing? | 148 comments (147 topical, 1 editorial, 0 hidden)

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