Bold solution proposed by Alan Lammey. His take is that credit default swaps, which is insurance (a type of hedge) against the failure of a business or industry, should only be paid in full to those who have a stake in that industry (i.e. own substantial stock). Ethically and morally, this makes sense. Consider you own beachfront property in the Gulf, and you purchase insurance against hurricanes. You have collateral (a house) and you want to lower your risk. If you lived in the midwest and wanted to buy hurricane insurance on other people’s property in the Gulf Coast, I’m sure there are reasonable laws against that. Apparently if you are rich enough and place a big enough bet, you can profit from such a calamity.

Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities, or in other words, CDS’s that are based on REAL HEDGES.

The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full. And folks, that’s the biggest issue. Unless Geithner changes his stance on this, we are doomed financially in this country.

Let me say that again, in case you missed this point — because it’s one of the most important points I’m making here:

Tim Geithner has made it clear that these leveraged wagers should be paid in full. And he is advising this to President-elect Obama.

My answer to this view is that those who participated in the speculative CDS market, needs to be put into bankruptcy. Sounds like a simple solution to a complex problem, but I do believe it would work.

Long but worth a read. I agree with about 90% of the article, and especially the part about letting the speculators get pennies on the dollar on their investment. A lot of rich people will be pissed but the real economy will not be hindered by this outrageous debt, and our sovereignty will remain intact. Hat tip (Conservative Cajun).

Interesting take on credit default swaps
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