Re: Credit Default Swap (CDS) question and answer

[David Farber <dave () farber net>]

Begin forwarded message:

> From: Harold Burstyn <burstynh () iname com>
> Date: October 19, 2008 2:06:39 PM EDT
> To: dave () farber net
> Subject: Re: [IP] Re:  Credit Default Swap (CDS) question and answer
>
> Dave Wilson  wrote:
> If I might weigh in (and, as always, I'm speaking solely for myself  
> on this issue): The problem with these instruments isn't that  
> they're all worthless, but that nobody knows exactly what each of  
> them is worth (some of them are doubtless worthless, but many if not  
> most of them have simply been overvalued). It's true that this lack  
> of clarity has contributed to the credit freeze, but if, for  
> example, all these instruments are declared worthless as of Nov. 1,  
> 2008, that creates a cascade failure throughout the system. For  
> example, any loan secured with one of those now non-existent  
> instruments gets called in by the lender; you'd have to sell your  
> other assets at firesale prices to pay that loan off. If you think  
> the economy is bad now, that's nothing to what would happen if tens  
> of trillions of dollars of assets suddenly ceased to exist.
> Certainly the problems related to these instruments were caused on  
> no small measure by a great deal of fraud from mortgage brokers,  
> assessors, banks who failed to perform due diligence before issuing  
> mortgages to people who lacked the resources to make payments, and  
> homebuyers who falsified their data so they could get a mortgage.  
> But these issues don't apply to every single one of these  
> instruments (more precisely, while a certain amount of fraudulent  
> activity clearly negatively impacts each of these instruments, it's  
> not clear at this point which instruments, if any, are completely  
> worthless and which have simply been slightly over valued). To a  
> certain extent, this situation has arisen because of deliberate  
> obfuscation by the people who developed these instruments, but that  
> does not mean that these instruments are all completely worthless.
> To the extent that one can identify fraud relating to individual  
> instruments, then those particular instruments can and should be  
> declared void (and doubtless would be by court). But simply  
> declaring an entire class of contract invalid because some / many /  
> most of those contracts are based on some element of fraud is both  
> inappropriate and dangerous, in my opinion, since it makes the  
> ability to create enforceable contracts going forward extremely  
> problematic. Who is going to enter into contractual arrangements in  
> the future if they're worried that the courts won't enforce that  
> contract?
>
>
> The above post does not respond to the suggestion that only  
> speculative CDSs be voided, that is, those contracts of insurance,  
> if there be any, whose holders have nothing at stake in the  
> transaction they have insured against failing. We've always demanded  
> that the purchaser of insurance have an insurable interest. That is,  
> I cannot buy an insurance policy on the life of an individual unless  
> that individual's death has financial consequences for me, e.g., my  
> parent, wife, or child. I cannot buy fire insurance on the house on  
> my street owned by someone else. I see no reason why insurance  
> policies held by entities with no insurable interest cannot be  
> voided. If they are really insurance, is it possible that they are  
> void on their face?
> --
> Harold L. Burstyn, Attorney-at-Law (NY & FL) and Registered Patent  
> Attorney
> 216 Bradford Parkway, Syracuse NY 13224-1767, tel. (315) 445-0620,  
> fax (509) 479-4103
> Adjunct Professor, L. C. Smith College of Engineering & Computer  
> Science, Syracuse University
> CST 4-232, Syracuse NY 13244-4100, tel. (315) 443-4375, fax (315)  
> 443-2583
> burstynh at iname.com http://www.burstyn.net




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