The Sovereign CDS Fraud and the Market for Fake Insurance

May 26, 2011


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At the end of my interview with Reggie Middleton this week, I brought up an issue that interests me greatly, and one that I find somewhat ridiculous.

The issue has to do with the credit default swap market for sovereign debt. Considering that AIG wasn't able to make good on its CDO insurance policies, and had to be bailed out by the taxpayer, the idea that other private institutions would be able to make good on insurance claims against the default of actual nation states seems absurd to me.

In point of fact, I would like to expose the most recent spike in US government CDS as an example. Speculators and financial reporters alike are pointing to the increased demand for credit protection against a US default as a sign of pessimism about the US fiscal situation. This may be true, but the insurance that the speculators are buying is utterly worthless. If the US were to default on its debt, not a single major bank in the world would survive. The entire global financial system would grind to a halt. Credit would freeze, and people would immediately begin to barter for all goods and services for some indeterminate period of time, after which, a new financial system could be slowly erected on the ashes of modern capitalism.

Credit default swaps on sovereign debt are fake insurance. No where is this more obvious than in the case of US government CDS. The very notion is absurd. I have made the point before that it is equivalent to issuing life insurance policies on yourself. People can trade these insurance contracts so long as you are alive in order to express market expectations on the likelihood of your demise, but if you actually die there won't be anyone on the other side to pay out the claim. In other words, the contracts are worthless as insurance, which is supposedly their primary purpose.

Therefore, sovereign CDS are just a means by which banks and hedge funds can speculate on the fiscal and social deterioration of nations. They have no intention of holding onto the contracts indefinitely in anticipation of a default, as was the case for those shorting the mortgage market in the United States between 2005-2008. In this particular case, speculators were willing to pay monthly premiums with the expectation that the issuer would eventually have to make good on the non-********ing loans that the CDS was supposedly there to insure. In the case of sovereign CDS, the speculators buying these derivative contracts are doing so with the intention of recouping losses in premiums from the subsequent sale of the insurance contract after a more than commensurate rise in its price. In other words, sovereign CDS are insurance contracts in name only. Their real ******** is to provide a market for banks and hedge fund to gamble on the likelihood of national defaults. It's that simple.

For all we know, the same bank that has 2 billion euros in exposure to sovereign debt around the world could be issuing 10 billion dollars in insurance against the default of the same countries whose debt it owns. In fact, it could be a syndicator and broker for these loans as well. Imagine this for a moment. In theory, the modern financial world allows for someone to market and sell a product to others, that it also buys for itself, and then also writes credit protection on. This is like marketing 20 new development properties, buying 2 of the 20 and then ensuring the default of another 10 properties just like the 2 that you already own. What happens if the entire development facility catches fire? Well, you already own 2 of the buildings, and now you have to pay claims out on another 10. But what if you bought insurance against the two buildings that you own in order to mitigate your risk? Well, even if the person who issued the insurance for these two buildings could make good on the claims (and assuming that you are not the issuer of your own insurance policy!), you are still 8 houses in the hole. Are you confused yet?

This entire market is smoke and mirrors. It exists only in the mind of those who believe in unicorns and flying horseshoe crabs.

Miniatura de Adjuntos

 

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a ver, que se pase el magnanimo egolatra a decir que los cds son buenos y que no tienen culpa de los que esta pasando.

sin acritud

son armas de destruccion masiva, y estan haciendo honor a su apodo.

Sería posible que por ejemplo la UE ahora comprará masivamente CDS de la deuda Griega y luego declarará el default???? Habría pasta para pagar las cantidades aseguradas??? Quien las tendría que pagar???? Podría hacer lo mismo el gobierno Español o Portugues, por poner un ejemplo???? Sería el default el fin del juego .....???? Y que ganas tengo que cogerme vacaciones ...

Al igual que es posible que un alcalde, o alcaldesa a la que podemos llamar por ejemplo Rita, ignore un barrio, para echarlo a perder, con servicios tercermundistas, inseguridad y demás, para así "expulsar" a sus vecinos por cuatro duros para poder edificarlo todo y sacarse unos cuartos generosos... Pues la respuesta es si.

Si puedes ganar lo que no está escrito, y tienes la capacidad de hacerlo, ya solo es cuestión de ética.

Los CDS son la excusa para inflar los precios de la deuda soberana, es un arma letal de destruccion social.

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Es que si compras CDS de tu pais estas tirando el dinero, por que los bancos crearon estas aseguradoras especificamente para esto y la pasta ganada con sus emisiones habra desaparecido seguro y la aseguradora se delarara en bancarrota sin pagar un duro. Como dice el autor del articulo, el mercado de los CDS es un mercado de humo=estafa.

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Lo subo porque con la prima de riesgo de los PIIGS por la nubes es muy interesante que se lea este aporte.

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