Credit Default Swaps

Do you know about "credit default swaps"? They sound like a financial mega-disaster waiting to happen.

Essentially, I take out an insurance policy on your house (or something else I don't own) so I get paid if it burns down, except that I know the company who sold me the policy can't afford to pay on it so, if it happens, I go merrily to court and sue everybody in sight.

Mostly they're used to insure bonds. They're unregulated and non-transparent; most of them do not appear on institutional balance sheets since they have no definable value (you can't mark them to market since there's no market). In fact, nobody really knows how many of them there are but it is estimated at over $50 TRILLION. Can you imagine what happens when a couple of those big companies (like Lehman Bros. and AIG) go belly up, default on their bonds, and the CDSs start to fall like a row of dominoes? Even the mighty U.S. Government isn't big enough to guarantee them--the entire U.S. GDP is only about $15 trillion; in fact the whole world's GWP is in the same range as these babies.

This may be the final straw of deregulation and big-boyism that breaks the international-financial-system camel's back. When Obama takes office, it had better be one of his urgent priorities to shut this shit down.

Here are my proposed remedies:

(1) You can't insure something you don't own (where the hell did that come from anyway? If you don't own it, you've got no risk.)

(1a) That sort of includes--it ain't legal to double up (and triple up...). I don't think it's legal to have six redundant policies on your house, is it? (Much less on MY house.) If it is legal, it shouldn't be; it's an invitation to fraud.

(2) They all need to be registered. Sure, that increases the cost--so what? If you're worried about the asset, insure it.

(3) They all need to be carried on the books. But how to value them? How about the cost of the premium? That's what the insurer thinks they're worth--not really much of a brain teaser there.

(4) The insurer has to keep a reasonable capital margin. I don't know if that's 2% or 1% or 0.25%, but it sure ain't 0%.