In the recent past, we have published a plethora of reasons why it is fundamentally unsound to ignore credit analysis in favor of loan guarantees like the CDS.
Let's take the opportunity to discuss the respective rates of the various countries involved in a crises in North Africa.
The loan insurance rates (CDS) for Egypt are literally flying as a result of the chaos.
One might infer that the financial markets see the current uprising as an event that can hinder the borrowers ability to repay a loan.
Keep in mind the CDS can either insure a loan or insure against the borrower's ability to repay the loan.
Now let's discuss the motivation of both sides.
The investors insuring the loan are merely trying to borrow money from the financial markets, while the hedge fund betting against the loan repayment are merely speculators.
Now imagine some unscrupulous group simply betting against the borrower repaying a loan with a naked CDS, and then starting a political fight.
Its similar to buying put options on a stock of a company, then sabotaging the company.
In the US, there are laws to monitor option contracts, but the CDS cannot be monitored.
While I could site dozens of likely suspects who could be betting against North Africa, I would prefer to focus on abolishing the credit default swap. Theoretically, it can be used to finance or encourage terrorism or government manipulation.
From the chart you can see that the buyers started raising the price in December.
Take a moment to imagine a labor union buying put options on the companies stock prior to announcing a general strike.
When the event hits the newspapers, the stock price would fall and the put option would rise.
It is illegal to profit off information that is not public; therefore, it is called insider trading.
If we were to return to the Egyptian analogy, we could see the transactions occurring December and January, which was prior to the regional problems. That too should be considered insider trading.
There are a number of other laws that were established after Sept. 11, 2001, that investigate the purchase of put options prior to a terrorist event. The same laws should apply to the credit default swap. We should be able to follow the money.
For Example, "Germany's Finance Minister Wolfgang Schaeuble told the Bundestag on March 16, 2010 that the country may have to consider ordering 'intelligence agencies to set up surveillance of who is getting together with whom for which kinds of speculative processes, and where' to protect the euro" - quoted from a Bloomberg article entitled, "Sinister' German spy plan aimed at hedge funds, analysts say".
The world has not evolved into a Utopian society of non-violence.
We are not playing in a market that is free of manipulation, and bound by truth, honor, and the rule of law. Therefore it is our position that we should abolish the credit default swap, much like Angela Merkel did in Germany in the height of the European contagion of 2010.
Simply removing the source of finance will remove the motivation for war and chaos.
Please join us in abolishing the CDS.
— Khalid I. Natto, [email protected], is chairman & CEO of The KIN Consortium.