“Weapons of Mass Financial Destruction…” - August 24,2009

Old habits die hard…and sometimes they don’t die at all…particularly on Wall Street.

The same type of securitization products – that’s the pooling and repackaging of loans into securities – that helped to bring the global financial system to its knees in the past year are now surfacing again…and fast. Here we are with the big banks feeling better and getting back on their feet, and little has changed.

Bank of America, Citigroup, and JP Morgan Chase, for example, are peddling dressed-up versions of the same dicey products. They’ve recently rolled out new corporate credit lines tied to complicated and volatile credit default swaps – which reached $62 trillion in 2008, five times the size of the entire economy.

Warren Buffet called these instruments “weapons of mass financial destruction.” And he’s right.

As with all tools, the problem isn’t the tool, it’s whose hands it’s in. In the hands of lenders looking for some insurance for questionable loans, they’re helpful. In the hands of traders who just want to make money by speculating about whether a company will fail, they’re Wall Street’s version of nitroglycerine.

Credit default swaps need to be rigidly regulated… put on an exchange, not left in the hands of just a few big banks. The domino failure of these trillions of dollars of instruments again would send a sonic boom through the economy. The sustainability of any recovery would then not be the question…It would be the survivability of the system.