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They’re Back – Credit Default Swaps for the Next Generation

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They’re Back

Just when you thought the bankers learned their lesson, sorry, They’re Back! Here we go again with bankers creating the next generation of credit-default-swaps. Bankers should just be bankers. Creating products destined to blow up when they are the market-makers is just nuts. Now JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index. This is designed to make it easier for investors to wager on the debt. The problem is, the lack of an arm’s-length transaction and the people who create the product keep track of positions and then find it just impossible not to trade against their clients. This is just a new version of the same story over and over again.

Goldman Sachs Group Inc. is also in the game planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into “top-rated” securities. Isn’t this the same thing as taking low-grade mortgages and bundling them together so they somehow are not worth more in a bundle?

ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt. At least exchange traded is a little more transparent. Dealing with a banker who creates the product and provides the market for it has been done so many times and it always ends in a scandal.

Well – They’re Back. And this time, right on cue for big-bang.