Credit Default Swaps: If I were a Lawyer !

The untangling of the credit default swap scandle is going to be a daunting task for the government and the new LLC's that were created to unwind the crisis. The Fed has created three entities during the matter named Maiden Lane I, II, and III . They were created as Limited Liability Companies to help detangle what should have been considered illegal speculation using CDS. The name Maiden Lane derives from the Fed of NY's address on that street.

The whole process of using credit default swaps in the same token as a sort of insurance to make one whole again on unexpected loss is nothing new and is perfectly legal. However, the process of insuring the loss usually involves not just making one whole again , but making one whole on their equity investment. in essence speculators were allowed to pay a premium ( some will call a side bet ) with no vested interest and therefore no equity stake on their personal balance sheets. One might ask ,if no equity stake was determinable then how was the price of the premium arrived at. That is where the illegality issue plays in.

The architect of credit default swaps installed a provision of allowing outside unvested parties to buy default swaps which were the inherent defect in the scheme. These parties were allowed to be be made whole on the underlying assets value rather than on their vested equity which was usually zero , so in essence were allowed to be paid in full for nothing but a small premium. Zero. Zilch ! By definition this looks like more than easy betting and looks more like money laundering from the authors perspective. Two points of illegality stand out here. One from the insurer/ cds sellers point of view and one from the buyer/cds insured. At the time of determining the premium price to pay , either the buyer misrepresented his vested equity in the asset ( we'll use company XYZ in this scenario ) or the insurer was allowed to accept an unjustified premiun on , no equitable asset. Wouldn't it seem obvious to anyone with half a mind that this should be illegal. It is illegal by definition, however because of that inherently flawed provision mentioned above ,it is not illegal by law! So how then could the Fed and it's lawyers make multiple parties whole on their equity stakes without leaving anyone in doubt if they were paid in full? Read the easy scenario below, leaving all parties rightfully paid!

Company XYZ is worth 1 million dollars. Counterparty A owns 3/4 of the company with a "true" bought in vested equity stake of 750,000 dollars, while Counterparty B owns 1/4 of the company and has a bought in vested equity stake of 250,000 dollars for a total of 1 million. When the company defaults both parties want to be made whole on their vested equities because they have already relinquished the premiums. However , Counterparty C also paid a premium on the company and wants to be paid but never had a "true" vested equity stake. In essence, Counterparty C should not even be considered a ( counterparty ) in the legal sense because of the fact it is a fake or " naked " credit default swap. The simple solution is to to pay off the vested equity to counterparty A and B because of their differing premiums they have already relinquished and since Counterparty C's vested equity stake was zero then he should be made whole on his equity which would then be zero. Counterparty C's only vested interest was the premium and should thus receive the amount of premium back in return. Since Counterparty C's money was tied up while he couldv'e received bank bearing interest than the premiums paid in by Counterparty A and B could easily pay back the premium of C plus interest leaving all parties whole on their "true" equity stakes and leaving taxpayers off the hook.

The only problem with this scenario is that many Counterparty C's in the real world crisis and in the 2000 .dotcom crisis have already been paid unjustly on their unvested bets and are probably living in a country like Panama. The real bulk of the inflationary amount of dollars no longer lies in the money used by the Fed to "shore up" and replace the illegally used insured reserves, deposited by "savers" to make the "bets", but now remain with the accounts of these "betting" people and whenever they spend , the real inflation slowly hits the economy across the global scale wherever they might spend their unjustified earnings. A few of the people who made big profits off being unvested counterparties can be found in the middle of the embedded video below.

in the opinion of the author, that flawed provision allowing "outsiders" with no vested interest to bet , looks more like an intentionally placed money laundering loophole ! If I were a lawyer, the people who profited and that cds money trail would be my first place to look. This was more than just great speculation !

 Remember Geightner being grilled by congress in the beginning of the year ? In an earlier session, Congressman DeFazio questioned Geightner on whether the payouts to counterparties ,for 100 cents on the dollar, were actually rightful counterparties or non-vested swap holders. Geightner declined to answer !   American taxpayers could've been let off the hook by negotiating less return on the dollar if these were actually non-vested swap holders!

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