Despite the negligible evidence that credit default swaps are actually at the core of our problems (horrendous loans explain most of it), it looks like the anti-CDS crowd is making progress. The first bill to effectively ban CDS has been introduced in the house:
Bloomberg: House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. The document, distributed by e-mail by the committee staff in Washington, would also force U.S. trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse.
“This would basically kill the single-name CDS market,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. “Given the small size of many issuers’ bonds outstanding, this would make it practically impossible for the CDS market to exist.”
We argued earlier this week that vilifying credit default swaps and derivatives in general is pointless and misguided, but let’s give Peterson the benefit of the doubt. Let’s say our mess is all about derivatives, and not about bad lending. Fine. But does he really think that CDS will be at the centre of the next crisis? Or is this law just the classic closing the barn door one horse too late?