Thursday, January 29, 2009

Congress trying to reign in credit default swaps

House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. The draft, distributed by e-mail from the committee, would also force U.S. trades in the $684 trillion over-the-counter derivatives markets to be processed by a clearinghouse. Hearings on the draft will be held next week.

So what did Wall Street have to say?

The proposal “would radically shrink” the market, said Scott MacDonald, head of research at Aladdin Capital Management in Stamford, Connecticut, which oversees $16.5 billion in assets. “While it’s important that there’s a drive to return to some degree of plain-vanilla in financial products, this would be considerable overkill.”

Why would they say that? Is it because we have $62 trillion of unregulated derivatives out there? Or is it because of this:

As much as 40 percent of profit at Goldman Sachs Group Inc. and Morgan Stanley comes from OTC derivatives trading, according to CreditSights Inc.

Without transparency you have outrageous profits, and room for games. Why should Wall Street want regulation?

They have the taxpayer to back them up!

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