On Credit Default Swaps and OPEC’s $300 Billion Dollar U.S. Stimulus Package

I came across an interesting idea this morning from none other than Ben Stein (see the link below). Mr. Stein suggests that a resolution to the Credit Default Swap (CDS) mess may be too just declare these contracts null & void because they were illegal insurance contracts as most of the parties involved had no insurable interest. This would negate all but those contracts held by people who actually held debt securities of the defaulted company, which is a tiny fraction of the amount of CDS’s outstanding on any entity. All the others simply return any premium collected plus interest and everybody’s happy. I really do look for the government to attempt something along these lines depending on how the unwinding of the Lehman Bros. CDS settlement goes. The thing I find most amazing in this process is how few people actually realized how large this market was. In reality, the only people who knew were those in large investment banks who worked in that area of finance. The Treasury and SEC apparently didn’t have a clue. I’ve talked with some fairly large and sophisticated mutual fund managers and they didn’t know either, primarily because they are equity investors who never tread in the arcane world of fixed income investing. This market is going to be an area of intense regulatory focus for the foreseeable future and I, for one, feel it is much needed.

http://finance.yahoo.com/expert/article/yourlife/115733

There was an interesting article in Barron’s today that picked up on my thoughts on the benefit of lower energy prices. The gist of the article was that the recession may not be as long or as deep as many of the gloomier forecasts. Forbes’s economics staff, which is very good, based this on: 1) Lower energy prices (a price of $90 on Crude oil would produce an estimated savings of $300 Billion dollars over the course of 12 months. If the price holds at the current level of about $80, it would be about $340 Billion. Forbes estimates that this would translate into a 3.5% per quarter boost in consumer spending). 2. Inventories were very lean going into the crisis (unlike most recessions). 3. Capital spending was also subdued during the last expansion (which is why many corporate balance sheets are so strong) and finally, 4) Net exports are likely to continue to boost growth. I’m sorry that I could not produce a link, but Forbes is religious about their distribution rights.

Have a great day today!

Greg Staub, CFA