Why haven't we made "naked credit default swaps" illegal?

First, a definition:


Credit Default Swap:  A "swap" (trade) designed to transfer the credit exposure of fixed income products between parties.


Or there's this definition:


A specific kind of counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit riskfrom a third party, and the counterparty in the credit defaultswap agrees to insure this risk in exchange of regularperiodic payments (essentially an insurance premium). If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. Inturn, the insurer pays the insured the remaining interest on the debt, as well as the principal.


Good luck with a definition of a credit default swap.  Trust me on this.  Google "credit default swap" and go through the list, see if you can understand it.  


Here's the best, simplest definition I could find:  The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. 


What it boils down to is a giant ripoff, designed by JP Morgan and company:


The first CDS contract was introduced by JP Morgan in 1997 and by mid-2007, the value of the market had ballooned to an estimated $45 trillion, according to the International Swaps and Derivatives Association - over twice the size of the U.S. stock market.


And as anyone who has read anything by Matt Taibbi of Rolling Stone magazine would know, these are a) not really, officially "insurance" at all and so b) are not regulated by the Federal Government.  The banking community created a $45 trillion dollar market and has kept it away from any regulation which would be fine but if this market crashes, as it nearly did in 2008, it could take down not just the US markets but the world's.


So here's what's been going on, and what a "naked credit default swap" is, as told by that same Matt Taibbi, on his blog (link below):  


In insurance...you can’t buy policies on someone else’s property. But in finance, you can buy credit default protection on anything, whether you own the underlying property or not. This is called a naked credit default swap. So if Bank of America is holding a billion dollars in mortgage-backed securities, Goldman Sachs can actually buy swaps on all of those MBS, even though it doesn’t own them. Your problem with this is that you don’t understand it because you think it doesn’t make sense, and that’s because it doesn’t make sense – a naked CDS is totally indistinguishable from gambling, but it’s legal. There was an ill-fated attempt by Byron Dorgan to outlaw naked CDS in the negotiations for the Dodd-Frank bill, but that attempt failed. 


So, other than the fact that Goldman Sachs is inside the White House and has been for at least decades and the fact that the banking industry virtually runs, if not owns our government, why have we not made "credit default swaps" and especially "naked credit default swaps" illegal?  It's a great question.  CDS's and the banking industry nearly wrecked our economy and they're still running the game.


Why are you not mad as hell?


And why aren't you raising hell with your Congressman about this?


(Well, other than the fact that we're all just trying to keep our jobs, not have our unions wrecked by the Republicans, keep up our payments on our homes and our outrageously-high health care, etc., etc.)


Final note:  If you want to get a great, enjoyable, even fun, if sick read that will also tell you where America has been economically for the last decade or so and where we likely still are, go get Matt Taibbi's
 book Griftopia:  Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America.  You'll be very glad you did.


Links:  http://www.rollingstone.com/politics/blogs/taibblog/mailbag-friedman-naked-swaps-and-madoff-20110228
http://www.investopedia.com/articles/optioninvestor/08/cds.asp
http://en.wikipedia.org/wiki/Credit_default_swap
http://www.rollingstone.com/politics/news/exclusive-excerpt-america-on-sale-from-matt-taibbis-griftopia-20101018
http://www.randomhouse.com/catalog/display.pperl/9780385529952.html

Are you paying attention?

We really could fix this.

We need to get true campaign finance reform, folks, and pay for campaigns so corporations and their lobbyists and money don't, for starters.

We need to make money to any and all government representatives illegal.

Finally, we need to shorten the campaign season to 3 to 6 months, tops, for all.

Do you know who Phil Angelides is?

If you don't, you'd better learn.

Do you know what the Financial Crisis Inquiry Commission is? (Hopefully it's self-explanatory).

The thing is, this commission has started meeting already. They began this week.

Mr. Angelides heads up the commission.

They're looking into the banking/mortagae/loan/investment nightmare that led us down the path to a near collapse of our economic system, both here in the US and around the world.

And I'll tell you, this is going to go on for some time and we'd better all be checking in virtually daily on this thing, to see what new revelations there are.

We need to know what happened in this crisis.

We need to know who did what.

We need to find out what was done illegally.

We need to find out what was done that should be illegal.

And we need to find out how we can avoid this greedy, stupid mess so we don't do it again.

To hell with catharsis. We need information, laws, regulations and solutions.

Ayn Rand be damned.