Toxic Asset & Exotic Instrument Gravy Train (Derivatives)

[WhiskeyGirl]

And it is also important to acknowledge that the government's proposed regulations of CDS (if they ever pass) won't really fix the problem. Indeed, a leading credit default swap expert (Satyajit Das) says that the new credit default swap regulations not only won't help stabilize the economy, they might actually help to destabilize it.

And it should be remembered that the overwhelming majority of derivatives are held by just 5 banks. So the people behind the effort to reassure everyone that CDS are safe again are the too big to fail banks, desperate to restart the toxic asset and exotic instrument gravy train.

And the big financial firms and the government are both desperate to increase leverage, rather than allowing the deleveraging play out. See this, this, this, this and this.

As Nouriel Roubini said last month:

This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...

The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.

Perhaps most importantly, CDS sellers - like the big sellers of other financial products - know that the government will bail them out if CDS crash again. ... Indeed, the same dynamic that led to the S&L crisis also leds to last year's CDS crisis, and will lead to the next crisis as well. So - while CDS might be a particularly dangerous type of "weapon of mass destruction" (in Buffet's words), the financial looters will probably find some way to loot on the public's dime, no matter what happens to CDS, unless they are they are meaningfully are reigned in (or broken up).... Taking away a convicted murderer's gun might be a good first step. But if he is still free to cause harm, he may very well kill again.

read more here - http://www.washingtonsblog.com/2009/09/credit-default-swaps-are-still.html

No problem, Barney is on the job again...

Freddie/Fannie are safe...

[WhiskeyGirl]

As I have previously noted, credit default swaps are destabilizing for the economy. See this. And the models used to evaluate financial instruments - such as the Gaussian copula formula for CDOs - are inherently flawed.

Now, Princeton University economists and computer scientists have demonstrated that financial derivatives are also inherently vulnerable to fraudulent pricing.

PhysOrg summarizes Princeton's findings:

In a result that may have implications for financial regulation, researchers from computer science and economics have revealed potentially impenetrable problems with the pricing of financial derivatives. They show that sellers of these investments could purposefully include pieces of bad risk that no buyer could detect even with the most powerful computers.

more here - http://seekingalpha.com/article/179963-princeton-economist-computer-scientists-show-derivatives-are-inherently-vulnerable-to-fraud