Credit Default Swap Contracts Should Enrage Public

Credit default swap contracts are beginning to be better understood by the American public. Those who understand the details of CDS’s are becoming outraged at the audacity of the banking and hedge fund managers who gamed the system by making risky bets camouflaged as AAA rated investments under the cover of CDS’s.

In addition, the public is saying “enough” to a government that has been throwing billions of Dollars at those institutions that used the cover of CDS financial instruments to justify making over sized risky investments. When the underlying investments soured they demanded payment from institutions, like AIG, that were happy to collect up front premiums from writing contracts and serving as counterparties for CDS’s. So happy in fact that they wrote CDS policies far beyond their ability to pay should payout ever be required. To say that risk was mispriced is a gross understatement.

The more that the public understands the use of CDS’s the more they should be enraged. So far AIG has soaked up at least $160 billion of bailout funds and a good bit of that taxpayer money is flowing right out the back door into the grubby hands of those banks that made the over sized risky bets. The banks, like Bank of America, have even used part of the bailout funds to pay huge bonuses to their managers. It is an unholy system that rewards bad behavior and penalizes not only current but future generations of Americans.

James Howard Kunstler is an American writer who has set forth in readable and thought provoking detail where all of this financial meltdown, poor economic management, and misallocation of America’s resources is likely to take us. A portion of one of his posts is given below. James Kunstler thinks that the American public may soon move from shock to rage and a call for prosecution. Read his material and then see what you think.
=======================================
March 9, 2009
Forget about “Recovery” by James Howard Kunstler

I maintain that there are countless constructive tasks waiting to occupy us on a long national “to do” list for rebuilding a national economy, but they are way different than the ones currently preoccupying government and the mainstream media. The Obama White House, Congress, and The New York Times are hung up on exercises in futility — “rescuing” banks and insurance companies that cannot be rescued (because they are hopelessly trapped in “black hole” credit default swaps contracts), and re-starting a “consumer” binge that was completely crazy in the first place, based, as it was, on a something-for-nothing standard-of-living.

Meanwhile, if the buzz on the blogosphere is a measure of anything — and I think it is — then a new consensus is forming out there about where to start doing things differently. Unfortunately after less than two months in office, President Obama finds himself awkwardly behind-the-curve on this. It begins with the understanding that a general bank rescue is hopeless and, going a step further, that the people who caused the train wreck of “innovative” securities have to be prosecuted. The public’s collective voice on this is muted but growing. It has been muted by the general air of blackmail that the banks have used to enthrall policy and opinion — the “too big to fail” idea — in effect holding the nation’s future for ransom.

============================
For the completion of this article visit the James Howard Kunstler website under the “The Clusterfuck Nation Chronicle”, March 9th, 2009 posting. You will quickly determine that we have a Long Crisis to try to deal with.