Moon Kil Woong

Short Sale Ban: Learning From Mistakes

Dear Bodysurf:

The following comments are right that since CDS can be written without collateral backing them up. Basicaly this makes CDS the front for grand fraud (as opposed to petty - being only a few billion dollars). In essence, you package mortgages, slap a fully insured sticker you get selling another fraudster CDS insurance at too low a premium and then dump it on unsuspecting bankers. It doesn't take a brain scientist to get how this works.

The mortgage marketers get to dump junk morgages onto to banks as AAA. the fraudster who wrote the contract just disappear into the woodworks since they got premiums years in advance with no need to pay and plenty of reason to spend all the premiums (after all no collateral is needed). And the seller of the mortgage bond tells disgruntled junk bond holders to go find the CDS insurer if they want the money back.

Barring this, if the liability is found to default to the mortgage writer (an unfortunate event for the likes of Goldman etc.) the writer either goes belly up too, cries for government support, or denies all claims for one silly reason or another as they hope the claimant goes belly up first hiding under Base I accounting. If you recall, this gem was passed during the dot com boom and makes it impossible for anyone to see the off balance sheet transaction like CDS made by banks to help banks recover from dot com like busts. It also prevents any regulator from sussing out their bad deal since no one knows about it.

If you don't think this type of thing is happening take a look at AIG and Goldman, Bear Stearns, JP Morgan, Citibank, and Lehman. Those are just the biggest ones. It is hard for them to hide even under a big TARP.

They got their Christmas present at the cost of the rest of the public.

As Reagan put it, "If not us... who. If not now, when?" Now is a good time to start fixing this mess since the game is already up and not a lender under the sun is willing to believe a banker's balance sheet anymore. For the last half year everyone has been playing an easter egg game called, "find the $40+ trillion dollar CDS rotten egg amongst the forest of financial institutions." We don't really want to be doing this by Easter or 2009 will be looking extremely ugly indeed.