Here 'ya go.
Section 124 of HR 1106 says the following:
"No provision in any investment contract between a servicer and a securitization vehicle or investor in effect as of the date of enactment of this Act that requires excess bankruptcy losses that exceed a certain dollar amount on residential mortgages to be borne by classes of certificates on a pro rata basis that refers to types of bankruptcy losses that could not have been incurred under the law in effect at the time such contract was entered into shall be enforceable, as such provision shall be contrary to public policy. Notwithstanding this section, such reference to types of bankruptcy losses that could have been incurred under the law in effect at the time such contract was entered into shall be enforceable."
(Hattip Mtgspy for the reference)
Now what does this mean? It means that certain provisions in some mortgage securitizations that cause cramdowns to be enforced ratably across the tranches (super-senior, etc) instead of up the line as is for ordinary losses, and which would have caused cramdows to therefore "hit" the "AAA" rated super-senior tranches, are retroactively modified by law as unenforceable due to being contrary to public policy.
This very same process solves the CDS problem.
Here's sample language:
"Investment contract": Any contract relating to a public or private firm including but not limited to credit-default swaps.
"Public exchange": An entity in which bids, offers, trades and open interest are published for public consumption, and in which the operator of said entity inserts itself into each transaction as the buyer for each seller, and the seller for each buyer, thereby guaranteeing the transactions thereupon, and which enforces nightly margin requirements against all participants selling said instruments via such exchange.
No provision in any "investment contract" not traded on a "public exchange" existing on or subsequent to the effective date of this act providing for payment on occurrence of a "credit event", where the holder of said instrument does not at the time of the event hold an equal and protected interest in the underlying security subject to that same event, shall be enforceable as such a provision is contrary to public policy.
If the CDS industry wants to trade "naked" CDS they can put all these instruments on an exchange with the same clearing guarantees (and margin supervision) found in the trading of equity options.
Until that happens all "naked" CDS are unenforceable.
The argument that "naked" CDS provide an important liquidity function has some merit. However, there is absolutely no argument beyond blatant fraud (that is, intentionally obscuring the insolvency of some writers of these contracts who are thus unable to perform) or bid-rigging (as a consequence of asymmetrical information) that can be raised against forcing these contracts onto a regulated exchange.
Step it up Congress. You enact this as law the BS in our financial markets related to credit-default swaps, the systemic risk they pose, and the willful obfuscation of some participants' inability to cover their bets all end on the effective date of that bill.
Do it now.
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