GregT

Bad Bank and Draft Bill Spook CDS Traders and Wall Street

In the very big picture, the purpose of banking and Wall Street is to provide financial instruments and funding to the parts of the economy that need it and deserve it. In providing this funding, our financial industry should make a profit.

What has happened however, is that our financial industry is making profits without actually helping the economy. In fact, many of the financial instruments recently created have hurt the economy. It is one thing for a corporation to use credit default swaps to insure their own risks. It is quite another thing for investment houses to use credit default swaps when they are not insuring any underlying risk. The second use is pure speculation and provides no benefit to the American economy. Furthermore, since this "insurance" is unregulated, there are no requirements that the companies selling CDS's have adequate reserves to pay for defaults as they happen (e.g. AIG).

The net result is that taxpayers have had to fund these losses which never even provided a benefit to the economy to begin with.