Does the Senate's version of the Bailout Bill get the
government into the business of Credit Default Swaps?
Defined by Time CNN - Credit Default Swaps - the Next Crises?
Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.
Here is Sec. 102 of the Senate Bailout Package. It sounds like credit
default swaps to me. This bill offers insurance for troubled assets issued prior to March 14th. However, this
insurance could cover trillions of dollars for all we know.
What if, as the geniuses at AIG learned, the premiums don't cover all
the claims. Guess who will be called upon to stand behind the government's insurance business. Of course, we will, we ravaged taxpayers. I find this provision very disturbing. I don't think the government should
reward risky investors by insuring their "troubled assets" after we
already know they are troubled. I don't trust these people at the
treasury to get enough premiums to cover this because even AIG
wasn't able to get it right.
This is going to create a bailout that never ends to go along with
our war that never ends.
Sec. 102. INSURANCE OF TROUBLED ASSETS. (1 Comment) subscribe to the comments feed
1.
AUTHORITY.
1.
IN GENERAL.If the Secretary establishes the program authorized under section 101, then the Secretary shall establish a program to guarantee troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities.
2.
GUARANTEES.In establishing any program under this subsection, the Secretary may develop guarantees of troubled assets and the associated premiums for such guarantees. Such guarantees and premiums may be determined by category or class of the troubled assets to be guaranteed.
3.
EXTENT OF GUARANTEE.Upon request of a financial institution, the Secretary may guarantee the timely payment of principal of, and interest on, troubled assets in amounts not to exceed 100 percent of such payments. Such guarantee may be on such terms and conditions as are determined by the Secretary, provided that such terms and conditions are consistent with the purposes of this Act.
2.
REPORTS.Not later than 90 days after the date of enactment of this Act, the Secretary shall report to the appropriate committees of Congress on the program established under subsection (a).
3.
PREMIUMS.
1.
IN GENERAL.The Secretary shall collect premiums from any financial institution participating in the program established under subsection
4.
. Such premiums shall be in an amount that the Secretary determines necessary to meet the purposes of this Act and to provide sufficient reserves pursuant to paragraph (3).
1.
AUTHORITY TO BASE PREMIUMS ON PRODUCT RISK.In establishing any premium under paragraph (1), the Secretary may provide for variations in such rates according to the credit risk associated with the particular troubled asset that is being guaranteed. The Secretary shall publish the methodology for setting the premium for a class of troubled assets together with an explanation of the appropriateness of the class of assets for participation in the program established under this section. The methodology shall ensure that the premium is consistent with paragraph (3).
2.
MINIMUM LEVEL.The premiums referred to in paragraph (1) shall be set by the Secretary at a level necessary to create reserves sufficient to meet anticipated claims, based on an actuarial analysis, and to ensure that taxpayers are fully protected.
3.
ADJUSTMENT TO PURCHASE AUTHORITY. The purchase authority limit in section 115 shall be reduced by an amount equal to the difference between the total of the outstanding guaranteed obligations and the balance in the Troubled Assets Insurance Financing Fund.
5.
TROUBLED ASSETS INSURANCE FINANCING FUND.
1.
DEPOSITS.The Secretary shall deposit fees collected under this section into the Fund established under paragraph (2).
2.
ESTABLISHMENT.There is established a Troubled Assets Insurance Financing Fund that shall consist of the amounts collected pursuant to paragraph (1), and any balance in such fund shall be invested by the Secretary in United States Treasury securities, or kept in cash on hand or on deposit, as necessary.
3.
PAYMENTS FROM FUND.The Secretary shall make payments from amounts deposited in the Fund to fulfill obligations of the guarantees provided to financial institutions under subsection (a).