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Jul 23

Frank would ban naked swaps trading

Posted by Ron F in RiskRegulationObama AdministrationFinanceDealsBanks

Ron F

I see that Barney Frank is open to the arguments we made here, and that's reassuring given the disaster that naked swaps created via AIG.

And I really can't fathom the criticism that Tim Backshall of Credit Derivatives Research is making here. That is, how does requiring that one party to a swap have an insurable business interest in the underlying debt prevent them from hedging their holdings?

After all, that is the very definition of hedging. Anything else is speculation, and led to the taxpayer bailout of Goldman Sachs and a number of European banks through AIG's federal takeover.

And as we point out in our piece, speculation isn't necessary for the purpose of hedging. It's time that distinction be made clear again. It used to be, and as far as we can tell, the credit markets didn't suffer for it, as Dean Baker pointed out to me in an earlier piece on an earlier piece of legislation.

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John Goff
written by John Goff, July 24, 2009
It's about time. I know derivatives traders argue vehemently that speculation is part of the market. Then again, what else are they going to say? They make billions of such speculation. What does it really add to the market?

These guys would be better off just going to Vegas. All they crave is the action.

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