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December 05, 2008

"US lawmakers have much to answer for"

In an article for Economic Times, noted IAS officer Srivatsa Krishna points out some historic regulatory blunders that led to the US credit crisis .
First, at the heart of the current financial mess is what are called credit default swaps (CDS), a little-understood insurance cover, which feigned to be everything but an insurance cover (for otherwise it would need to come under regulatory purview), for an even more esoteric underlying financial instrument, namely mortgage derivatives. CDS constituted as much as a $60 trillion market or four times the entire national debt of the United States, before they came crashing down. And no one knows till date who owns them or their exact number or transactions in them, for there was no depository to track them.

...Secondly, on the last day of the last session of a lame duck 106th session of the US Congress in 2000, the last agenda item introduced the euphemistically titled: ‘Commodity Futures Modernisation Act’, which removed the various capital constraints on lending and took away derivatives and CDS from the purview of all legislation...

In other words, the US lawmakers were completely aware that they were wilfully going to remove all legal constraints to what was an offence under the existing US law as on that date. This was, as it were, the bedrock of casino capitalism, where bets could be made, without committing any capital to the underlying instrument, in order to collect on your insurance, whenever payday arrived.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in