An insurance contract without an insurable interest is a toxic instrument; it serves no valid purpose and creates incentives to do harm – the polar case of moral hazard. It’s surprising to me that such contracts have not generated more lawsuits by destroyed companies. I know CFMA2k tried to preempt state laws on such things, but I don’t see tort law in the list of preempted area, and issuing an insurance contract without an insurable interest sure seems like a tort against the owner of the insured property.

But be that as it may, naked CDS contracts are bad and should be banned.

We are the innocent victims of reckless casino capitalism, enabled by US governments who very well knew that the crash was inevitable (several economists have predicted it, for example professors Nouriel Roubini 1-2 years before and Michael Hudson 6 years before) but looked the other way.

It is fundamentally unfair that this destructive financial bomb, created by American finance gamblers and endorsed by the US government, is allowed to cause severe suffering among hundreds of millions of people outside the US. The US government carries the whole responsibility, having eliminated the regulations that were created in the 30-ies to prevent the emergence of another “megabubble” depression. Every economics and business student in the US, and consequently every financial advisor (including the great deregulator, Larry Summers) has been carefully informed during their studies about the mechanisms of the great depression and the importance of preventive regulation, so don’t say you did not know. The US government must carry the whole economical responsibility for the consequences of their irresponsible actions.

US is now like someone who, because of severe carelessness, puts your house on fire so it burns down to ashes, and then demands that the owner must pay the whole bill for restoring it.

Can you understand that any remains of sympathy for the US is rapidly withering away in the world? In Europe, even many non-socialists are now detesting capitalism, describing it as a system of organized, egoistic greed for favoring the already rich at the expense of the people. The present bailout of bankers in stead of using the money for financing constructive restorative projects to help the people is a very obvious confirmation of this understanding.

It is extremely naive by the US to believe that such strong and very pervasive sentiments can be calmed by some sweet talk and lofty promises, especially when you have “burnt down our houses”, creating untold suffering among millions of Europeans. I talked with the CEO of a real estate company yesterday – she wept out of despair when thinking of the thousands of honest, good people now being thrown out of their houses into misery due to foreclosures.

If the US government does not help defuse the CDS bomb, by taking due responsibility for it, it will generate intense hatred among those billions all over the world, whose “houses it has burnt down”. You can forget exporting anything however cheap and useful. Do you believe anyone outside the US will ever want to buy products of a country that has destroyed your country through enabling reckless casino capitalism?

The people of the US has supported this destructive behavior by electing these irresponsible politicians. It is time that you take the responsibility for your mistake and demand that the US repents for its destructive behavior against the whole world taking the full economic responsibility for it and for the defusion of the terrible CDS bomb.

As for the perverse incentives that they cause in favor of bankruptcy, I’m not sure that there’s anything fundamentally wrong with either of the two bankruptcies you cited, or indeed with most situations when companies are forced into bankruptcy. Both companies were on life-support and insolvent for all practical purposes. Despite that, they were being run by the equity owners’ representatives (the BoD), whose stake in the company was but a stub of the enterprise’s entire value (a quirk of our shareholder system of ownership).

A bankruptcy in this situation is healthy and puts an end to the unhealthy situation we have when a company is run by people whose stake in it has been virtually wiped out by the judgment of the market. From the company’s perspective, this is a clean exit for them and an opportunity to start afresh. The only parties affected are the equity holders, and if they hadn’t already bailed by now, it probably serves them right (BTW, I owned some equity in Abitibi-Bowater, and while I mourn the money I lost, I knew the risk that this could happen over a year ago. I took the risk and I got hammered. ‘Dem’s da breaks.).

SRS