More on Dexia and casino banking
Here is an interesting article on Dexia from the NY Times. It doesn’t mention the dubious loans but questions why all trading partners of failing banks, like Dexia, should get everything paid out in full. Why are the derivatives paid out to trading partners?
Walker F. Todd, a research fellow at the American Institute for Economic Research and a former official at the Federal Reserve Bank of Cleveland, makes an interesting point when he says that governments are setting a troubling precedent by bailing out a company and pay its trading partners in full, as occurred with A.I.G. and as might occur with Dexia.
“In the short run, it would help if the authorities would say they refuse to provide publicly funded money for the payoffs of derivatives,” he said. “This is like using public funds to support your local casino. It is difficult to see how this is good for society in the long run.”
This is an important point to keep in mind these hours are the European Union is struggling to finalise plans for recapitalising European banks. Or, as Matt Taibbi puts it: ‘Wall Street isn’t winning. It’s cheating.’
When banks were being saved left right and centre in the autumn of 2008, it was heard all over the political spectrum that this was all emergency measures – and of course, banking shouldn’t be about privatising the profit and nationalising the losses. This isn’t heard any more, expect from Occupy Wall Street and other similar movements. Yet, this seems to be about to happen again.
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This is a travesty
* derivatives need regulated aggressively (clearing house, openly reported, standardized, exchange regulated)
* derivatives such as CDS should be treated and regulated as an insurance product.
With these conditions if a bank fails derivative holders will be made whole, not by the tax payer but by the exchange trading the relevant derivatives (i.e. indirectly those that created and trade the product)! This spreads the risk evenly and properly over the people using these instruments rather than the taxpayer.
D_Boone
28 Oct 11 at 10:47 pm
I’ve been preaching this for years. A CDS is an insurance instrument, not a security, and should be regulated and treated as a security. As for other derivatives, they’re investments. Why should there be any more of a guaranteed return on them than there is on any other investment?
Knute Rife
31 Oct 11 at 3:49 pm