Posted by Karl Denninger
Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these “financial weapons of mass destruction” levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull’s-eye.
She then continues with information I was unaware of:
U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.
OK, that’s enough.
Congress must ban all credit derivatives that are not:
Sold over an insured interest, that is, if you don’t own the bond you can’t buy the “insurance” AND
Are not sold by an entity with proved, marked to market night ability to cover each and every contract sold.
That is, these things must be treated as insurance and regulated as insurance.
What we have now are literal hundreds of trillions of dollars of fraudulent paper contracts to pay a sum that the writer does not have, written for speculative (or worse, regulatory avoidance) rather than hedging purposes. These contracts are destabilizing, they are impossible to perform on without government backstop (as we saw with AIG) they are being sold at dramatically less than their true economic value (otherwise we wouldn’t have had to bail out AIG) and they’re being sold and used for either speculative purpose or worse, as a means of fraudulently avoiding regulatory constraints.
Congress must act to stop this crap now.