Randy Miller

Stupid Is as Stupid Does: The SEC and CFTC Legalize Electronic 'Gambling'

I believe federal law enacted ca 1999 excludes CDS from enforcement of state gaming laws. The smart play here is to get all the CDS out in the open, change federal law so that naked CDS are subject to gaming laws, unwind the CDS we have now, and go on from there.

I am somewhat concerned that the insurance type of CDS is so inexpensive. If I own a building that is a firetrap, no sprinkler system, poor wiring etc, I should have to pay through the nose for insurance. But for companies in deep trouble, such as Lehman, you could buy CDS on Lehman bonds for a few cents on the dollar, and then gotten 91 cents on the dollar on settlement day in October.

If I bought insurance on a firetrap of a building for a small premium, there is no incentive on my part to make the building safer. So if I can get CDS on a CDO for pennies on the dollar, there is little incentive to assess risk correctly. In the case of AIG, I think the guys in Financial Products were fraudulent in assessing risk, merely getting as much money in premiums as possible to enrich themselves.

I hope these guys are all getting fitted for handcuffs, but if in fact they broke no laws, they should never be allowed to have a job in the financial sector again.