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Will Government Do Away with CDSs?


Senate seems on the verge of violating contract clause.

During yesterday's Senate hearings, one senator rhetorically asked if taxpayers' money should go to backstop credit default swaps (CDSs) owned by speculators - that is, the senator suggested that positions in the underlying debt shouldn't be protected.

In October, Minyanville CEO Todd Harrison discussed the tools -- legitimate or otherwise -- that the government may have to wipe out speculative CDSs.

I'm raising my antennae high for any more chatter that the government may in fact try to reach into that toolbox. Let's be honest here: Senators wouldn't recognize a CDS if they woke up next to one, so the mere notion that one of them would question the "value to society" of a naked CDS suggests that someone in the financial business is whispering in our senators' ears that -- in true socialist spirit -- the Feds are perfectly within their powers to "technically" do what the Contract Clause of our Constitution expressly prohibits.

So what if we did wake up to a world in which AIG (AIG) was made solvent again by the waving of a magic congressional wand? It's not unthinkable that the market may have a sharp move higher, let's say... 50%?

And yet, while that will put most bears permanently out of business and make our federal government heroes worthy of a new pantheon, chances are -- when the populist euphoria wears off -- our leaders will have grown so much in myth that we'll have abdicated just about everything to them. Ultimately this evisceration of our private markets will, well, eviscerate them - and what seemed like a good idea at the time will be the bane of generations to come.

Do I sound like some wacky libertarian? Yeah, there may be a tinge of that. But how many people outside the 'Ville tossed around the possibility of a Great Depression a mere 24 months ago?

Let's hope for the best - but let's not get caught with our pants down should the worst come to pass.
No positions in stocks mentioned.
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