Idiotic CDS Proposal of the Day, Ben Stein Edition

On Sunday, I was quite rude about Karen Shaw Petrou, who thinks it would be a good idea to ban all CDS trading in the future: I explained that total CDS losses would skyrocket as a result, since no one could dynamically hedge or stop out of their positions any more.

But leave it to Ben Stein to come up with an even more idiotic notion:

I think the only rational possibility is for the federal government or the New York State government (because most of the CDS were entered into in New York) to simply annul the credit default swaps as void as being against public policy. After all, there was no insurable interest in most cases, which tends to void insurance contracts, which is what a CDS is.

Once that happens, the banks can breathe freely again, take risks, and the economy can revive.

Now I normally ignore Ben Stein’s Yahoo column, I have too much choler as it is and I just can’t bring myself to read his web-based ramblings on top of his NYT blather. But dear God is this a bad idea: he’s taking Petrou’s concept one further, and instead of banning hedges in the future, he’s banning hedges in the past!

There’s a good chance, just for starters, that every major bank in America would go bust overnight: after all, they’ve been packaging up and selling off the credit risk on their multi-trillion-dollar loan portfolios ever since Bistro, ten years ago. If Stein got his way, all that credit risk would suddenly reappear on the banks’ balance sheets, and there’s nothing they could do about it. Genius. Remember that those super-senior CDOs were the safest bits of the credit that they sold off. Just imagine what their balance sheets would look like if all the risky bits reappeared.

But maybe that’s what he means by breathing freely: being so massively insolvent that you’re beyond caring any more. Must be.

(HT: Fox)

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