The CDO/ABS/CDS “market” was the biggest pump and dump scheme in history.

The new rules which allow the banks to book “increases in value” on these instruments guarantee that the same cycle of write-downs will happen again. The problem was created when you had what was a small market with a relatively small number of players shuffling the same “assets” back and forth to artificially inflate their performance. They have to bring more people into the game from outside their circle because they keep manufacturing more and more of these “assets” and need more and more places to dump them; these also happen to be the people who won’t be there to be a dumping ground the second time around when those “increases in value” suddenly evaporate and the banks can’t get rid of their toxic waste. Bottom line is that the majority of institutions in our financial system are insolvent and monkeying around with mark-to-market or mark-to-model is not going to suddenly make them solvent out of nowhere.

It will be interesting to see what becomes of the proposed “Kyle Bass Rule”. I personally have no objections regarding a man being able to recognize a pump and dump or Ponzi scheme ready to implode and being equally ready to take advantage of the situation. However, such a rule may be in order because the Bass playbook is now public knowledge and more people who have the money to do so will try to emulate it. This means the insurers who issue the swaps will have more Bass-sized claims they will have to settle and would precipitate the fire sale of legitimate assets. Without restrictions on who can buy a CDS, a cascading crash is all but a certainty; we already have the artificial inflation of CDOs and ABSs back on the banks books.

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