By: Jeff Sanford
Okay, I’ve finally got the password and the permission to go ahead with this new blog. And so here we go—a dedicated attempt to chart the emergence of the new financial services industry that is necessarily going to grow out of the mess we’re in now.
Of course, we’ve got to get through the mess at hand first. And it looks like we’ve got a way to go yet on that point. CB Online editor Samson Okalow suggests keeping an eye on upcoming settlement dates on credit default swaps on Lehman Brothers debt, an excellent idea.
These swaps are basically default insurance, and there is a major chunk of change to be paid out on the $125 billion in Lehman debt that went down with that good ship (up to 90 cents on the dollar apprently).
That’s a mighty bit of cash set to shift from institution to institution on October 23rd, a major settlement date for these contracts.
But let’s take a moment to learn a lesson here. As we are all now well aware, the credit derivatives market developed over the last decade as an opaque, non-transparent, over-the-counter market, where no one has a clue who is counter-party to who on what terms and why.
Warren Buffett has long warned of the danger of this, as have many others. But as Buffett put it on the Charlie Rose show last night, the economy is a patient in cardiac arrest prostrate on the floor of the hospital. And part of the reason the we’re now tempting economic brain damage was the collective decision to let this derivatives market develop in such an opaque manner.
A good idea floating around in these days of “regulatory rethink” is that credit derivatives should be traded on an exchange and in a more transparent manner so that we know where the landmines are. It’s a basic idea, and had we implemented this earlier we might not be in the dismal state we’re in. So let’s not pass up the chance to learn a lesson here: A key idea going forward is that a little transparency is a good thing. It avoids credit market heart attacks such as the one now threatening to take down western finance.
2 Responses to “ Time out for a lesson in transparency ”
Fraud is legal. That is the message that I and millions of others have listened to over the last few years. I have been scammed by the provincial and federal government in Canada and by a major bank in the UK and now, surprise surprise, we have all been taken by the secretive and greedy in the US. Transparency is a brave concept but will it be real? Surely the way forward is not to ensure we can peek at dubious deals but to outlaw them in the first instance. Deregulation allowed this industry to exist, therefore regulation can and should stop it.
By Rick Lambert on Oct 16, 2008
Rick is entirely correct. Fraud in Canada is a free ride for criminals. White collar fraud is the least prosecuted crime in the country, and the odds of prosecution in Canada are one million to one. (based on Globe and Mail quoting Canadian Securities Administrators about there being “ONE MILLION FRAUDS” against Canadians, while Canadian Business Mag editorial last Oct showing only one prosecution in Canada.
Fraud is a free ride in Canada.
see http://www.investoradvocates.ca and http://www.investorvoice.ca for further examples and research
By larry elford on Oct 29, 2008