Here's How Financial Regulation Kills

Pressure builds over CDS settlements (Robert Cookson and Gillian Tett) February 21 – Financial Times: “International regulators are stepping up pressure on the financial industry to introduce a clearer system for settling contracts after a corporate default in the $45,000bn credit derivatives market. In particular the New York Federal Reserve and UK’s Financial Services Authority are urging industry associations such as the International Swaps and Derivatives Association…to introduce binding rules about how credit default swaps (CDS) contracts are settled in default. The moves come amid growing expectations that corporate bond default rates will rise sharply in the next couple of years. It also comes amid signs that some mainstream investors are becoming uneasy about the ability of the CDS infrastructure to withstand a wave of defaults – particularly as settlement procedures are still relatively untested. Settlement has become a particular concern because the CDS market has expanded so dramatically this decade that the volume of derivatives contracts can sometimes be ten times bigger than the underlying cash bonds on which the CDS are based.”

Reading between the lines (as one should) ... apparently the New York Federal Reserve and the UK's Financial Services Authority wish to turn the screws on the $45 trillion CDS market.

Where were these fine folks when this thing was being inflated like so many red, white and blue balloons at a political convention? Preaching the gospel of unfettered free markets?

Now, about this sudden wave of anticipated defaults: how was it unforeseen when the CDS market was $4.5 trillion? How about $450 billion?

Thus, one might rightly suppose this particular group of "distinguished" financial regulators probably are up to something less noble than appearances suggest. Are they not, in fact, demonstrating themselves equally as bankrupt as the game whose greater oversight they now call for? After all, is not their present concern way beyond fashionably late?

An existing set of "binding rules" already judges the actions of these so-called regulatory agencies. So, now they should be held to account. Indeed, the U.S. Constitution provides the very benchmark by which the utterly reckless lack of financial oversight up to this point deserves the severest scrutiny.

Considering the likelihood "that corporate bond default rates will rise sharply over the next couple of years" one must ask: how does increasing the risk of asset liquidation leading to business downsizing "promote the general Welfare?"

How does the added vulnerability of job loss brought about by financial de-leveraging "insure domestic Tranquility?"

The significant segment of the home foreclosure crisis brought about by predatory lending also comes to mind here. Allowing conditions that would lead to millions of people losing their homes hardly promotes "the general Welfare." Nor does this unfolding tragedy "insure domestic Tranquility."

Then, too, would any bailout of private institutions that have brought us to the point of economic perdition serve to "establish Justice?" One would hardly think so!

Worried Bankers Seek to Shift Risk to Uncle Sam (Damian Paletta) February 13 – The Wall Street Journal: “The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government. One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers. Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.”

Why would anyone listen to proposals put forward by "authorities" who have amply demonstrated their lack of foresight, given the wealth of historical precedent exposing the doctrinal frauds to which they adhere?

There is nothing hidden that shall not be revealed. The illusion of "credibility" our modern-day financial regulators possess is, indeed, a fraud because we see how willful action, or lack thereof (and timing is everything), all too well demonstrates the truth of how regulation kills...

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