Thursday, August 04, 2011

Betting on Default, Investors Lose Faith in Italy

A recent surge in the purchase of credit default swaps shows that an increasing number of investors believe Italy is in trouble. Some experts doubt the CDS providers would be capable of paying out if Rome were to default.
Still, if a country does default, it doesn't automatically mean that the entire value of a CDS would be paid out. This is because betting partners often hedge the bet through offsetting transactions. So the maximum amount that would have to be paid out if Italy were to default would be about $25 billion. For Spain, that figure would be $18 billion.

But even at these amounts, experts have expressed doubt over whether the participants would actually be able to come up with their share of the bet. If some of these betting partners were unable to pay, it could rattle the markets even further. The reason is that a CDS works like insurance: Creditors purchase them in order to provide protection in case their debtor defaults. But the CDS market is also unregulated, and the derivatives played a role in the global financial meltdown in 2008 after the subprime mortgage market collapsed.

looks like unconventional warfare
with "plausible denial"
the "architects" need to be studied in deeper details
wandering if it can be invoked the NATO clause
analyzing the countries of ownership "and" influence
also this would help defining
up to which point and for whom the US is using "plausible denial" against its allies
and make a decision in the merit if Europe is willing to be prayed upon
and still remain in NATO
or maybe just respond with plausible denial
on "personal" high enough level

Depository Trust & Clearing Corporation
Donald F. Donahue Chairman, CEO, Michael C. Bodson President, COO

Controversy over naked short selling

Several companies have sued the DTCC, without success, over delivery failures in their stocks, alleging culpability for naked short selling. Furthermore, the issue of the DTCC's possible involvement has been taken up by Senator Robert Bennett and discussed by the NASAA and in articles—disagreed with by DTCC—in the Wall Street Journal and Euromoney Magazine. The DTCC contends that the suits are orchestrated by a small group of lawyers and executives to make money and draw attention from the companies' problems.

Critics blame DTCC as being in charge of the system where it happens, say that DTCC turns a blind eye to the problem, and that the Securities and Exchange Commission has not taken sufficient action against naked shorting. DTCC says that it has no authority over trading activities, cannot force buy-ins of shares not delivered, and suggests that naked shorting is simply not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said. The U.S. Securities and Exchange Commission (SEC), however, views naked shorting as a serious enough matter to have made two separate efforts to restrict the practice. The DTCC says that the SEC has supported its position in legal proceedings. DTCC General Counsel Larry Thompson calls the claims that DTCC is responsible for naked short selling "pure invention."

In July 2007, Senator Bob Bennett, Republican of Utah, suggested on the U.S. Senate floor that the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them. The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing. However, no hearing was ever held, and both Sen. Bennett and Dodd are no longer in the Senate, so any possible investigation seems moot at this point, and no further action on naked short selling is anticipated. The North American Securities Administrators Association, representing state stock regulators, filed a brief in a suit against the DTCC, arguing against federal preemption as a defense to the suit. NASAA said that "if the Investors’ claims are taken as true, as they must be on a motion to dismiss, then the entrepreneurs and investors before the Court have been the victims of fraud and manipulation at the hands of the very entities that should be serving their interests by maintaining a fair and efficient national market.". The Whistler suit was later dismissed by the courts.

Critics also contend that DTCC and SEC have been too secretive with information about where naked shorting is taking place.

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