One week ago, Congresswoman Maxine Waters (D-CA), introduced H.R. 3145, or the Credit Default Swap Prohibition Act of 2009.
We’ve tried to refrain from commenting, but since we keep being reminded of its existence…
For those of you unfamiliar with Ms Waters’ previous output, see here for her call to nationalise US oil industries and this WSJ story on her links to Tarp-recipient OneUnitedBank and here for her endorsement of Fannie Mae and Freddie Mac’s leadership – in 2004 (quote: “We do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr Frank Raines”).
Back to CDS. According to the press release, Ms Waters introduced H.R. 3145 because of “concerns that the Obama Administration’s plan would require central-counterparty clearing but provide exceptions to supervision over customized credit default swaps.”Consequently:
Congresswoman Waters offered H.R. 3145 to put a total prohibition on the practice. “Credit default swaps are one of many contributing factors to this current economic crisis,” said Congresswoman Waters. “Though the Obama Administration has proposed sweeping reforms to the financial regulatory system, in this instance I believe they did not go far enough. Cracking down on this practice, in total, by preventing all credit default swaps, will be imperative in bringing stability to the market and in preventing a similar crisis in the future.”
To reiterate: “preventing all credit default swaps” = “imperative in bringing stability to the market and in preventing a similar crisis in the future”.
Unsurprisingly, AIG looms large in this bill:
Congresswoman Waters was inspired to write H.R. 3145 in part by the situation with American International Group (AIG), which wrote credit default swap contracts where both parties involved had exposure to the underlying reference asset, usually a securitized package of subprime mortages. These swaps ended up causing the company’s downfall, costing thousands of jobs and billions in taxpayer dollars.
Ms Waters also invokes Soros and Munger in support of the “prevention”:
Leading financier George Soros has called credit default swaps “instruments that should be outlawed” and has compared these swaps to “buying life insurance on someone else’s life, and owning a license to kill.” Charles Munger, Vice Chairman of Berkshire Hathaway also believes credit default swaps should be eliminated, calling their prohibition “the best solution.” Munger has also noted that “it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”
And in case you weren’t clear on the gist, section 7A makes it explicit:
“It shall be unlawful for any person to enter into a credit default swap or contract.”
So in the spirit of H.R. 3145, FT Alphaville hereby proposes that the US Congress also ban regulators, the Federal Reserve and fiat currencies. We also urge the lawmakers to reinstate the gold standard, make house prices rise, eliminate counterparty risk, improve the marks on structured products and outlaw any negative sessions for the S&P 500.
Ta.
Related links:
Playing the blame game in CDS markets – FT Alphaville
Anatomy of a panic? The collapse of Morgan Stanley – FT Alphaville
What is it with politicians and CDS? – FT Alphaville
Derivative Thinking – FT Alphaville
An excedrin moment for CDS dealers – Streetwise Professor