Got Gold?

Structured finance and Derivatives Diva Janet Tavakoli has an extremely important and scary piece in the Huff Post.

http://www.huffingtonpost.com/janet-tavakoli/washington-must-ban-us-cr_b_489778.html

As if we needed any more further reasons to buy Gold. I agree with Tavakoli that not all credit derivatives be banned. They shouldn't and it would be a pain in the ass to do so. Where I have a problem with her is that sovereign CDS shouldn't be banned as well. This is because CDS is a real time credit risk monitoring system. This will keep governments in the future from running up debt like Greece did. Greece was not done in by CDS. AIG was not done in buy people buying CDS on AIG. Greece was done in because they spend and ran up huge deficits. The net notional amount of naked CDS against Greece sovereign debt is only some $9B. This is against some $300B in Greek outstanding debt. The simple reason we are talking about sovereign debt problems are because of the CDS market. The CDS market has put a flashlight and is holding accountable these government officials. The reason that many governmental officials want them banned is because they don't want to take any responsibility for their ludicrous fiscal/monetary actions. If there was no sovereign CDS market, Greece would be up to $500B in debt at the moment. Japan would likely go to 400% debt to GDP with out oversight and accountability. I have said that CDS results are 100% as designed. They work perfectly as long as the counter parties can pay. My thing is they should be regulated and traded on an exchange so that we know who the nitwits are. They should not be listed as swaps. These are insurance contracts pure and simple. There is nothing wrong with naked CDS as long as the counter parties and sellers have the funds to pay up when hit with claims.

The whole simple idea of buying CDS against US Treasury debt default is a mute point. If the USA ever defaults, settling the trades are the least of everyone's worries.

Tavokoli would have been better suited by just saying that CDS will never be banned unless the entire credit system goes into a death spiral. In this case we can just start all over, until then just by GOLD!