Articles Posted in Credit Default Swaps

Germany and France are calling on the European Union to accelerate its plans for proposals to put restrictions on credit default swaps and ban naked short selling of bonds and some stock. French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote a joint letter to the European Commission last month.

The two leaders noted that strong market volatility was making it necessary to question certain financial methods and that improving the transparency of short-selling positions on shares and bonds was important. Just this May, the German government unilaterally decided to ban the naked short selling of certain stocks and bonds. Sarkozy and Merkel are also pressing for swift resolution of the differences between the European Parliament and EU member states over a new banking supervision scheme. Disputes regarding the amount of power new agencies will have to oversee banking, securities, and insurance industries have yet to be resolved.

The EC welcomed the letter, saying that the German and French leaders were voicing support for its work, and noted that the “final phase of completing our proposals” is under way. Commission spokeswoman Pia Arenkilde-Hansen also noted that the EC is working with key stakeholders to tackle the issue of derivatives. She did however, point out that member states have “divergent positions” when it comes to short selling. The EC has not yet found a consensus.

The EC acknowledged the need for urgency but insisted that rushing the proposals would be a mistake.

Related Web Resources:
Merkel And Sarkozy Want EU To Ban High-Risk Trading, World News, June 11, 2010
EU leaders ask for short selling, CDS rules, Business Week, June 17, 2010
European Commission
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US Senator Susan Collins (R-Maine) has introduced a new bill to regulate investment-bank holding companies, credit default swaps, and other financial instruments that state and federal regulators have yet to regulate. Collins says the bill, called the Financial Regulation Reform Act of 2008, seeks to restore public faith in the US financial system in the wake of current credit difficulties-problems that have led to plunging home prices, a decrease in consumer sales, an increase in foreclosure rates, and significant losses in retirement savings.

Collins says the new legislation will get rid of any gaps in the government’s oversight of the financial markets and develop more reforms of the financial regulatory system.

The Bill Proposes Three Main Reforms:

• Giving the Federal Reserve supervisory authority over investment-bank holding companies.
• Creating a national commission on financial regulation reform to evaluate, make recommendations, and implement changes to the current regulatory structure.
• Create transparency and oversight in the credit default swaps market by requiring that the Commodity Futures Trading Commission be notified about CDS contracts and mandating that parties make trades using a federally approved clearing house.

Credit Default Swaps
CDS are insurance-like contracts involving one party promising to cover losses on certain securities if a default occurs. Sold by hedge funds, banks, and other entities, they usually apply to mortgage securities, municipal bonds, and corporate debt.

Many CDS’s are represented as safe investments, when in fact, their risks often far outweigh their benefits. It was the unregulated credit default swaps market, a trillion-dollar-market, that reportedly led to the collapse of Lehman Brothers and AIG.

Sen Collins Introduces Legislation to Strengthen Financial Regulation and Oversight,, November 18, 2008
Credit Default Swaps: The Next Crisis?, Time, March 17, 2008 Continue Reading ›

Five school districts in Wisconsin are suing Stifel Nicolaus & Co., Inc. and Royal Bank of Canada (RBC) for losses incurred after the bank and brokerage firm sold the districts “Credit Default Swaps,” (also called “CDS” or complex credit derivatives) worth $200 million resulting in some $150 million in losses. The school districts claim that the bank and brokerage firm told them that the CDS investments were safe even though they knew otherwise.

The school districts involved in the lawsuit include Kimberly Area School District, Kenosha Unified School District, School District of Waukesha, Whitefish Bay School District, and West Allis – West Milwaukee School District. They are seeking full recovery of their money. Attorney Robert Kantas of the stockbroker fraud firm law firm Shepherd Smith Edwards & Kantas LTD LLP is representing the school districts.

The districts’ lawsuit accuses Royal Bank of Canada and Stifel Nicolaus of either negligently or purposely misrepresenting the investments and withholding key information. The plaintiffs’ complaint names specific times when they were told that “15 Enrons” would need to happen before the districts would be affected, none of the CDO’s had sub-prime debt, and the investments were “safe” and “conservative.” The districts later found out that some of the CDOs they purchased included leases, home equity loans, commercial mortgage loans, residential mortgage loans, credit card receivables, auto finance receivables, and other debt obligations.

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