Wednesday, May 13, 2009

Pigman derivatives

The markets were down today on reports that retail sales are down still more and total unemployment is continuing up. There was a major bit of good news from the Obama Adm. but Wall Street may not be smart enough to see it as good news or they may even see it as bad news for them.

Obama is moving to curtail the trading of credit derivatives with Treasury Sec. Geithner asking Congress for quick approval of a whole host of regulations and restrictions. The most significant are a ban on "dark" market trading, requiring trading to be done on regulated exchanges and restricting the creation of these instruments to companies who can actually post capital reserves to cover losses. As it is, Mike Malloy could sell derivatives linked to any event such as whether the Pigman would explode on the air. Such bets are sold for as little as a fraction of a cent on the dollar. It’s all profit unless there is suddenly a large mushroom cloud of pork parts, then MMCorp will need a government bailout.

These practices are largely responsible for the current banking collapse. Any regulation of these abominations should effectively end them. Only "standardized" contracts would be regulated; that’s the ones that are issued by a third party for no legitiment reason. Contracts written for the purpose of insurance between two companies would not be affected. Contracts issued just to gamble would effectively become illegal since there is no way the companies running these ponzi schemes would ever meet the capital requirements to trade hundreds of trillions of dollars worth of these contracts.

There is no indication of what will be done with the 1000 trillion dollars or so of these contracts that may be floating around but it is possible that they will simply become worthless overnight. This would be bad news for some GM bond holders that were counting on forcing GM into Bankruptcy and then cashing their Credit Derivative Contracts.

If Obama really makes this happen; it will be the first real indication that we may get our country back. I may even change my ring tone to "Happy Days Are Here Again" instead of the "funeral march". Of course, the rest of the economy still needs to be restructured but this move is a real start.