Tuesday, March 9, 2010

Why Is This So Difficult?

From the WSJ:

German Chancellor Angela Merkel called for fast action against credit-default swaps Tuesday, as European Central Bank governor Christian Noyer said they should be traded through clearing houses under the control of a supervisor.

Clearing houses should be set up in each of the largest currency zones where CDS are traded...under the control of each zone's supervisors," Mr. Noyer said at a press conference in Paris. The clearing should "take place at conditions that would make the recourse to the central bank possible in case of need," Mr. Noyer said.

European policy makers over the past week have highlighted the role of market speculation in exacerbating problems faced by Greece, questioning whether investors should be able to benefit from its troubles.

Credit default swaps are derivatives, nothing more, nothing less. They are not satanic creations meant to doom mankind to an apocalyptic future. They are simply options on bonds -- that's it. When options first came out we had the same reaction. 40 years year, options are now standard risk management tools.

CDS need to be traded on a public exchange -- all of them. They do not need to be abandoned; they need to be regulated -- just like options or futures. Period, end of story.

This really is not that complicated people.