Original Article: The Real Reason for the Global Financial Crisis…the Story No One’s Talking About
Comment: PDSimic
The fundamental point seems that the CDS, being an unregulated OTC instrument, could have been entered as a way to bet on a default of some reference debt obligation to which the “protection” buyer had no economic exposure. While this is outrageous, there is a good news too. The good news is that speculators, not having a real exposure to the reference debt obligation can not possibly claim any real loss in the case of default of either insurance company or the reference debt obligation. All they could claim is a loss of opportunity to profit enormously from a successful bet that should never been allowed in the first place.
The only liability left and acknowledged, to be subject of the government-assisted arbitrage, is a potential compensation for the premium already payed by the buyers. This, however, is something that could be resolved in a fair and orderly way, and would amount to unwind of the will-give-you-back-the-premiums-you-payed type. The total amount of money involved in reimbursing the insurance premiums payed so far by the buyers of the speculative CDS’s will be much, much smaller then the gigantic leverage involved in these CDS’s today.
Such an action by our government would drastically reduce the “CDS threat” that this article is talking about, as it would essentially eliminate a massive dollar-value-at-risk in the existing speculative CDS positions. The CDS positions left to live would be the ones where buyer of the insurance have for each dollar of insurance a dollar of actual exposure to the reference obligation. Such CDS positions would represent much smaller total dollar at risk value and while problem for insurance sellers in bad economy, would not be fatal for well capitalized insurers, or for the economy.
So, I would claim that solution to the CDS leverage problem is, in principle, simple, and boils down to the willingness of the government to cancel or unwind all the speculative CDS contracts that are not based on CDS buyers real economic exposure to the reference debt obligation. This should not be hard because the speculator CDS buyer has no real exposure to the reference obligation default, and therefore no real loss.The only loss for speculator CDS buyer is a loss of opportunity to make a huge profit.Such loss, obviously, should not be concern of the Main St. and should never be compensatede for by the taxpayers money.
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