Ban All Credit Default Swaps

Last Friday's Financial Times had an article about a dangerous new practice that banks are trying to foist onto corporate borrowers. The international banks want to price loans against the credit default swaps of a company on a variable, floating basis. That article points out that this would give hedge funds and speculators the power to destroy any company they wish.

The raiders could short its stock and them float the market with orders to buy credit defaults swaps of the company. As are no natural writers of these alien instruments, the price would rise explosively, and then the interest rates on the company's debt would skyrocket. And that would crush the company's earnings, in turn crushing its stock price. Payday for the raiders ... created for themselves.

A natural money machine for bear raiders. Of course we know they have already done this for those extremely credit sensitive institutions, viz. the banks and investment banks.

The solution to this is an internationally agreed edict that outlaws these contracts from any nation in the financial system.

Credit insurance - true insurance - can still exist and be available for commercial transactions only. Those would be regulated as insurance by the states or a future national insurance regulators.

To paraphrase the writer of the Financial Times article, since credit default swaps are "weapons of mass destruction" in financial transactions, let's not permit the banks to weaponize them and proliferate them to the raider community.

PS: I read the EU is blocking the French plan to add capital to its banks to increase lending. Amazingly stupid of the EU. The EU and the ECB are so far off the marks on this crisis that I wonder if the EU can truly survive.

Word of the Day

"Firman" - noun [$10] from Persian
Firman means 1. an oriental sovereign's edict; 2. a grant or permit.
Sentence: Derivatives needs to be regulated strictly and financial institutions should be required to obtain a positive firman before entering into or trading any type of derivative.