Why the Naked CDS Should Be Banned: Part McCMLXXVII

Yes, once again we have Goldman Sachs that great vampire squid wrapped around the face of humanity,^* using naked Credit Default Swaps, (CDS) which are basically insurance policies, with the crucial differenc being that you can insure your neighbor's home, and collect when you burn it down, something forbidden in other insurance products since 1746.

You see Goldman Sachs bought naked CDS, and then interfered in its reorganizing its debt so that it could collect:

International Brotherhood of Teamsters President James Hoffa said Goldman Sachs Group Inc. is creating derivatives trades that would profit from the bankruptcy of YRC Worldwide Inc., the trucking company trying to avert failure with a debt exchange.

The most profitable securities firm in Wall Street history “is actively soliciting bond trades for clients and underwriting credit-default swaps to benefit from a failed exchange and resulting bankruptcy,” Hoffa, the union leader, wrote in a letter dated yesterday to Goldman Sachs Chief Executive Officer Lloyd Blankfein.

YRC, the biggest U.S. trucker by sales, is extending the exchange offer deadline to Dec. 23, after investors holding 75 percent of its debt initially agreed to the exchange, below the 95 percent required by bank lenders. As of 5 p.m. in New York yesterday, participation fell to 57 percent, the Overland Park, Kansas-based company said in a statement. The company said it believes some bondholders have withdrawn because they want to tender their notes only on the expiration date.

The company has faced opposition to its plan to exchange $536.8 million of notes for equity from bondholders who also own derivatives that pay out in a default, according to people familiar with the matter. The Teamsters’ pressure comes as Goldman Sachs is under fire from other labor groups over its role in the subprime mortgage crisis.

This is precisely why the Marine Insurance Act of 1746 was passed, and why the writing of new naked CDS instruments should be banned, and existing naked CDS contracts should be rendered unenforceable.

There is a difference between making money off of someone else's misfortune, and making money by causing someone else's misfortune.

^*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.