It's not enough. Naked swaps are the equivalent of financial gang rape. As soon as hedge funds, investment banks, and big-time short sellers sense that a bond is flailing, they can pile on with as many derivatives as they like to make millions in what are, in effect, side bets in a craps game. Today, electronic trades take five milliseconds, according to the New York Stock Exchange. The carcass will be picked clean long before any bureaucrat gets regulatory authority to shoo away the vultures. The central-counterparty market only applies to standard, rather than "customized," derivatives. So if you're savvy enough to put a few bells and whistles on your swap, you can still push it through the dark, digital, over-the-counter alleys, far from the gaze of prying regulators. We're just as vulnerable as we were in the dizzy days of AIG, JP Morgan, Lehman, and Bear Stearns.
The truth about naked swaps is that they're as sordid as they sound. To be clear: They're the costliest, riskiest form of gambling on Earth. Only a few economic patricians can play: hedge funds, banks, pension funds, insurance companies, and governments. But, as we learned the hard way in 2008, just about everyone, including the system itself, loses when they win.
Chris Whetzel
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Washington's soft-core approach to the epic financial fraud that caused the crash remains hard to understand. As Bill Black says, "When you don't prosecute, things don't get better."
They're not getting better or safer. Credit is still tight as a tick. The financial industry is expanding its use of exceedingly complex derivatives. The mortgage market, the source of the raw material for mayhem, remains unchecked. The FBI said this summer that mortgage fraud is "rampant" and growing, with suspicious-activity reports (known as SARS) on a pace to exceed 70,000 in fiscal 2009, up from 63,000 in 2008 at the height of the crisis. A growing source of exploitation involves reverse mortgages marketed to the elderly.
People want justice. They've lost savings, homes (or the value of homes), jobs, and retirements. Foreclosures continue to rise. People can't believe that the mega-grifters who pulled off mortgage, securitization, and derivative frauds walk the streets with lined pockets. And the venal "experts" who issued bogus ratings that deodorized subprime cesspools should be in the dock. But it almost seems as if Bernie Madoff's 150-year sentence for a scheme that had nothing to do with Wall Street's meltdown is supposed to cover all the crooks, and that we're supposed to be satisfied.
