Regulating the nation’s commodities trading regime is a tough job, though it becomes significantly easier when your moral compass remains ever fixed on JP Morgan’s well-being. When you buy into the idea that it’s a political sin to halt wild speculation up until the moment you socialize their inevitable losses, the job actually entails a good deal of free time.
Which is probably why CFTC Chair J. Christopher Giancarlo feels it’s an appropriate use of his agency’s limited resources to start a public spat with the Pope over the pontiff’s audacity to suggest that it’s probably a moral failing at this point to turn a blind eye to the ill-conceived financial instruments that triggered the last global recession.
Hating on the aggressive over-derivatization of everything — and especially the concept of credit-default swaps — isn’t even some unfounded rambling from economic neophytes. Warren Buffet, a guy who’s done a decent job of proving his financial acumen, blasted the crazy derivatives flying around as “financial weapons of mass destruction.” That’s why this passage from the Vatican’s Bollettino isn’t particularly shocking.
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A similar ethical assessment can be also applied for those uses of credit default swap (CDS: they are particular insurance contracts for the risk of bankruptcy) that permit gambling at the risk of the bankruptcy of a third party, even to those who haven’t taken any such risk of credit earlier, and really to repeat such operations on the same event, which is absolutely not consented to by the normal pact or insurance.
The market of CDS, in the wake of the economic crisis of 2007, was imposing enough to represent almost the equivalent of the GDP of the entire world. The spread of such a kind of contract without proper limits has encouraged the growth of a finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view.
In fact, the process of acquiring these instruments, by those who do not have any risk of credit already in existence, creates a unique case in which persons start to nurture interests for the ruin of other economic entities, and can even resolve themselves to do so.
But Giancarlo felt this slight against his personal golden calf could not be allowed to stand and forced his senior staff to put together a laughable love letter to the virtues of gambling on human misery. Responding to the Vatican’s concern that the oligopoly of elite financiers are exploiting informational asymmetries:
The difficulty with broadly applying this ethical position to financial markets can be illustrated with an old joke. The owner of a car with engine trouble visits a mechanic. The mechanic opens the hood and carefully examines the engine. After some time, the mechanic takes out a hammer and bangs on one part of the engine. To the joy of the owner, the engine seems to be working as good as new.
“That will be $100,” says the mechanic.
“$100?” asks the owner. “Just for one bang on the engine?”
“Oh, no,” says the mechanic. “It’s only $1 for the bang. But it’s $99 for knowing where to bang.”
What the hell? If the effect of these instruments were to provide something of value to the company like the mechanic, that’s all well and good. The more apt analogy is the mechanic taking $100 and turning to someone else entirely and saying, “if that car stops working give me $5000” knowing full well that the bang guarantees the car won’t even make it all the way home.
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The Bollettino reserves special reproach for naked purchases of protections on sovereign nations, that is, for “gambling” that a nation will default. Such purchases are considered “extremely immoral actions,” from which “can derive enormous damage for entire nations and millions of families,” and which call for sanctions of “maximum severity.”
The problem with this posture is that governments actually benefit from the availability of CDS on their sovereign securities. Recent research has shown that the initiation of CDS trading on sovereign bonds lowers countries’ cost of debt and increases the information efficiency of their bond markets. In fact, the greatest reductions in debt cost are enjoyed by the countries with the highest risks of default[17] hedged through the use of sovereign CDS. Without such availability, bond holders would demand that governments pay higher interest payments to offset the additional risk to bondholders that in a crisis the only participants in CDS markets would be limited to other sovereign bondholders.
This is the heroin dealer saying, “The problem is my customers seem to really like massive amounts of heroin.” Yeah, no kidding. There’s a level of willful blindness involved in pressing this claim, especially against an international organization with deep ties on the ground in South America and Sub-Saharan Africa, where you find most of the countries on the losing end of these deals.
But just when the United States couldn’t afford another instance of international buffoonery, we’ve got a federal agency charged with reining in market excesses picking fights with the Catholic Church over the virtue of market excesses.
Stay tuned next week when OSHA releases a sternly worded 25-page retort scolding the Paralympics for not doing enough to encourage workplace amputations.
Joe Patrice is an editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news.