profiting from the demise of America
There has been a lot of talk about the cause of the financial crisis. At the root of the crisis were bulk packaged real estate loans called Collateralized Debt Obligations (CDO’s). These securities were bought and sold in bulk traunches in private markets. Despite all the talk about financial reform, this is the way it is still done today.
Emerging from the rubble of the crisis was one of the primary financial weapons of mass destruction – the Credit Default Swap. The CDS can be used defensively, or offensively. The CDS can be constructed to insure or speculate against any kind of debt instrument including the CDO.
The credit default swap sounds complicated and mysterious, but it isn’t. It can be viewed as an insurance product or a speculative weapon…but it is an option. The buyer of a credit default swap is buying insurance that the underlying debt will not default, and ownership of the underlying debt is not required. So you can effectively insure or speculate against debt you don’t even own.
If a default occurs, the price of the credit default swap rises dramatically. The seller of a credit default swap is selling that insurance. This is what bankrupted AIG…selling improperly hedged naked credit default swaps and then having the underlying debt default or nearly default without the necessary capital to pay off the insured.
So all that said, the weaponizing attribute of the credit default swap is that you don’t have to own the underlying debt in order to buy or sell the credit default swap on that debt. This is a so called “naked CDS”. It’s “naked” because the buyer or seller does not actually own the underlying debt, is not using it as insurance or for hedging purposes, but purely for speculation.
Further compounding the issue, these instruments are traded in private, so despite all the talk in Washington about “transparency”, there is no transparency regarding who is buying, and who is selling.
So despite all the talk about the the importance of transparency by politicians, regulators and media pundits, it’s all still done in secret inside the corrupt, “too big to fail” entities that now call themselves banks. As a trader or speculator, if you have deep enough pockets, you can buy credit default swaps on debt of cities, municipalities, states, and governments without any position size limit.
Using the credit default swap as a speculative weapon to destroy…
Assuming you are a financial entity with deep enough pockets or maybe one of the “too big to fails” backstopped by the US citizens, you could buy credit default swaps on any city, state, municipality or even an entire country you wished to destroy, and just keep buying until you caused the price of the debt to be so low and interest rate so high that the entity is forced into default. You can do it all in secret too. Recently accusations have been made public regarding Iceland and Greece and the use of the naked CDS to destroy and plunder the countries by US banks and hedge funds. Furthermore, US institutions who helped Greece hide their debt are the same ones who have attempted to profit from its financial destruction.
This presents an ethical and moral dilemma, because large US trading houses euphemistically called “banks” backstopped by the public have the ability and the financial wherewithal to cause the bankruptcy of any entity they wish, including US cities, states and even the US federal government. All that would be required is by relentless buying of the credit default swaps until the underlying debt is forced into default. This clearly establishes the large US banks and trading houses as the ultimate power broker, able to demolish a city, state or national government by pushing buttons on a computer in secret with no oversight, and absolute power.
America has been bankrupted by this too big to fail organized crime ring that runs the banking system, the politicians and the media. So now what? The large proprietary trading houses that call themselves banks, the ones who are “too big to fail” and effectively are bankrolled by the citizens, don’t have to go down with the ship. Quite to the contrary, these institutions and the people behind them have tools available to profit from the demise of America (or Greece or any other country), and even to create the circumstances for that demise. Furthermore, they will do that while being backstopped by the American citizens. Meanwhile, the people’s representatives, bought and paid for several times over by these same big money interests, will act as passive co conspirators in the bankruptcy and destruction of America.
“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.” – Senator Dick Durbin 2009
Filed under: Financial Terrorism, collapse, economy
Naked Credit Default Swaps Are “Like Buying Fire Insurance On Your Neighbor’s House — You Create An Incentive To Burn Down The House”
I have repeatedly argued that naked credit default swaps should be banned. See this and this. Savvy commentators like Wolfgang Munchau and Yves Smith are saying the same thing.
Banks Bailed Out By American Taxpayers Are Paying Us Back By Shorting Our States and Cities
Tuesday, April 27, 2010
Americans bailed out the giant banks. So how do the too big to fails re-pay the American taxpayers?
By betting that American states and cities will fail.