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

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.