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  • Credit-Default Swap

  • What Does Germany's Credit-Default-Swap Ban Mean for You? Germany did something on Tuesday that I've been hoping would happen for three years: It outlawed naked short-selling and speculation on European government bonds with naked credit default swaps.

    The financial institutions that have been profiting from this type of speculation immediately went on the offensive.

    German officials justified the surprise, unilateral move by financial regulator BaFin by stating that the "exceptional volatility" in government debt - if accompanied by massive short-selling and naked CDS trading - could result in excessive price movements that would actually "endanger the stability of the entire financial system."

    To learn about the strategies you should employ because of Germany's move, please read on... Read More...
  • Heavy-Handed Politics Could Boost Bank Reform, Stock Prices and the Economy Defenders of Goldman Sachs Group Inc. (NYSE: GS) say the civil fraud charges the U.S. Securities and Exchange Commission has levied against the investment-banking giant are without foundation, and are politically timed to push President Barack Obama's bank-reform agenda.

    In his Cooper Union speech to Wall Street and the American public yesterday (Thursday), President Obama took pointed aim at opponents of his bank-reform agenda by stating: "Unless your products depend on bilking people, there's little to fear from these reforms."

    Whether or not the timing of the Goldman Sachs fraud case was politically motivated, or whether or not President Obama was referring to Goldman with his "bilking" comment, one thing is for sure: The president and his administration are taking the reform fight to the Street.

    At stake in this fight is the future of our capital markets, the health of the U.S. economy and the direction of the U.S. stock market.

    To see how the Obama bank-reform push could perpetuate the bull market, please read on...

    Read More...
  • Financial Reform: Three Ways to Fix Wall Street The financial-reform bill introduced by U.S. Sen. Christopher J. Dodd, D-CT, seems likely to pass both houses without all that much alteration.

    And that should immediately raise our suspicions. After all, the U.S. financial-services business has a very effective lobby, so if there isn't huge opposition to the legislation, it probably won't achieve all that much.

    It won't fix Wall Street.

    But there's another issue here: It's also not clear to me that we know just what we want the financial-reform initiative to achieve. By that, I mean: What banking-sector reforms would we implement in an ideal world, to reduce the danger from the sector while preserving the essentials of a free market?

    To see Martin Hutchinson's blueprint for fixing Wall Street, please read on... Read More...
  • U.S., Britain Say EU Proposals Will Damage Hedge Fund Industry The European Union (EU) on Thursday defended its sweeping hedge-fund reform proposals against criticism from the United States and Britain.

    British Prime Minister Gordon Brown met with French President Nicolas Sarkozy Friday in hopes of compromising on the proposed regulation.

    Many EU countries are determined to change the hedge fund industry, which is often murky. The use of derivatives, such as credit-default swaps have been linked to the downfall of Lehman Bros. and exacerbating Greece's sovereign debt difficulties.

    Read More...
  • Did Hedge Funds Conspire to Devalue the Euro? The Department of Justice is investigating whether several prominent hedge funds conspired to drive down the value of the euro as the Greek debt crisis left the currency vulnerable to sophisticated trading methods employing credit default swaps and other derivatives.

    Likewise, the European Commission yesterday (Wednesday) said it would examine trades in sovereign credit-default swaps (CDS) related to the Greek crisis, which has driven the euro lower and prompted officials to warn hedge funds against trying to profit from the region's debt crisis.

    The Justice Department's antitrust division "has opened an investigation into agreements among various hedge funds that trade euro contracts," including contracts to trade euros in the "cash or the derivatives market," a person familiar with the letter told The Wall Street Journal.

    Read More...
  • Credit Default Swaps Strike Again – This Time Driving Greece to the Brink of Default Credit default swaps (CDS) gained infamy in the early stages of the financial crisis as the murky derivatives that helped drive the likes of Lehman Bros and Bear Stearns into bankruptcy.

    Now, they're back, inspiring panic in the bond market and making it harder for Greece to borrow money. Already struggling to rein in its out-of-control deficit, credit default swaps could be enough to push the debt-ridden nation into default.

    Credit default swaps are credit derivative contracts that let banks and hedge funds place bets on whether or not a company, or in this case a country, will default. The CDS buyer makes periodic payments to the seller, and in return receives a payoff if the underlying financial instrument defaults.

    Read More...
  • Why the Volcker Plan Doesn't Go Far Enough I don't often agree with the Obama administration. So I have to say that I was surprised when I heard it had a plan to reduce the risk of another banking crisis. It wants to prohibit banks that are protected by deposit insurance from engaging in risky, proprietary trading, and it wants to break up some of the very largest banks.

    I made both those recommendations in my forthcoming book "Alchemists of Loss" (Wiley 2010). The book, written jointly with Kevin Dowd, a British finance professor, should debut sometime late this spring(we sent the manuscript to the publisher last weekend - what a relief!). But after I studied the Obama plan further, I realized that I shouldn't have been surprised - the idea's sponsor was former U.S. Federal Reserve Chairman Paul A. Volcker.

    Why Volcker's plan doesn’t go far enough... Read More...
  • Wall Street's Stranglehold on the Economy Is Choking Americans America's Founding Fathers were afraid of any concentration of power in the republic. They were particularly afraid that banking interests could hijack our fledgling democracy.

    And yet today, 234 years later, our Founding Fathers' worst fears have come true. Wall Street's stranglehold on the economy threatens our very prosperity, and the future of a truly democratic republic.

    It's high time we address the truth about Wall Street's tyranny and set a course for a more secure economic future - one that's anchored by a safe banking system, not a system rigged by banks.

    How Wall Street is Choking America? Read on... Read More...
  • With T-Bill Yields at Zero, it's Time to Beware of the "Bond Bears" There is some interesting action unfolding in the dark corners of the credit market.

    Although this exploratory sojourn takes us fairly far afield from our regular stomping grounds in the equity markets, it could have important implications for our investments. So grab a thinking cap, and let's go exploring.

    First, let's have some context. As you know, governments around the world have unleashed tons of stimulus spending over the last year. Against a recessionary backdrop, it's no surprise that tax revenue has plummeted while fiscal deficits have soared. Read More...
  • Open Letter to Timothy Geithner: Is Your Nose Getting Longer? Dear Treasury Secretary Geithner:

    I noticed you recently told the Japanese press that you intended to maintain a strong dollar, and that the Obama administration would bring the U.S. fiscal deficit back to a "sustainable balance."

    Tell me, don't you feel your nose extending like Pinocchio's when you tell these fibs to innocent Asians?

    The dollar is not strong. In fact, it's sinking to record levels of weakness, and it's going to stay that way, for three reasons: Read More...
  • Could Goldman Sachs Share GM's Fate? Investment banks have gotten fat off the land since 1982, when the great U.S. bull market got its start. Their business has multiplied many-fold, and their earnings have soared into the stratosphere, to a level far higher than any other sector. Now, JPMorgan Chase & Co.  (NYSE: JPM) has issued a report suggesting that investment-banking […] Read More...
  • Special Report: How the Government is Setting Us Up for a Second Subprime Crisis [Editor's Note: Shah Gilani, a retired hedge fund manager and noted expert on the global credit crisis, predicted this developing FHA debacle in a July 2008 Money Morning essay.] Is the government creating another subprime-mortgage bubble? The first time around, the three-headed federal serpent – the Bush administration, the Treasury Department and the U.S. Federal […] Read More...
  • G20 Leaders Meet to Rebalance World's Economy While Imposing Banking Reforms Leaders from the G20 nations, which represent 85% of the global economy, will hold an economic summit in Pittsburgh this week to determine how they can keep the economic recovery on track while rebalancing growth and imposing new regulatory restrictions on banks. U.S. President Barack Obama and his overseas counterparts will meet for the third […] Read More...
  • The Slow Death of General Motors By Martin Hutchinson Contributing Editor Money Morning U.S. President Barack Obama's firing of General Motors Corp. (GM) Chief Executive Officer G. Richard Wagoner Jr. may be the beginning of the final act of a long and sad drama – the slow death of GM. The company nameplate may soldier on in some form, but it […] Read More...
  • The Real Reason for the Global Financial Crisis…the Story No One's Talking About [Part I of a three-part series looking at how so-called “credit default swap” derivatives could ignite a worldwide capital markets meltdown.] By Shah GilaniContributing Editor Are you shell-shocked? Are you wondering what's really going on in the market? The truth is probably more frightening than even your worst fears. And yet, you won't hear about […] Read More...