There has been much debate in recent days regarding whether the market for Credit Default Swaps (CDS) should be more tightly regulated. Let’s take a look at the nature of credit default swaps and whether arguments for tighter regulation have merit.
Anyone reading this who is a taxpayer in the United States is, in effect, a shareholder of AIG due to the Federal Government’s infusion of $173.3 billion in bailouts over the past six months. These bailout funds have resulted in the near total nationalization of AIG with the Federal Government owning nearly 80% of the business. Putting aside the question of whether the government was correct to bail out AIG in the first place, it is very important to look at the potential problems that now exist as a result of government ownership and the political, rather than economic, calculations driving the operations of the company. Read this post for one viewpoint regarding the bonus fury at AIG.
With all of the inaccurate information being reported about Berkshire’s derivatives exposure, Warren Buffett apparently saw the need to devote several pages of his annual letter to shareholders to explain the situation in great detail. Unfortunately, it appears that most articles on Berkshire’s 2008 results either did not report on the contents of Buffett’s letter or continued to provide misleading or inaccurate information. Perhaps the reporters covering Berkshire are simply confused. This post attempts to shed some light on the situation.