Inventor of economy-crashing Credit Default Swaps is an architect of Cap and Trade’s carbon derivatives

Posted: December 11th, 2009 by Militant Libertarian

by Allison Kilkenny

FILES-US-BANKING-JP MORGANThe other day, I wrote about howcarbon credits will be the new bubble machine in town. Companies will need to have carbon credits in order to pollute, but the new carbon credit market is virtually identical to the under-regulated, over-leveraged market that allowed Goldman Sachs to rake in record profits, while taxpayers bailed out the financial system.

Risky derivatives called Credit Default Swaps (CDS) caused the economy to collapse. In the CDS market, all contracts are privately negotiated, and as a result, the market has no transparency. There’s no way to tell who is the original writer of a CDS, and who is the buyer, so when it comes time to negotiate a debt, there’s no head honcho to dole out payment. That’s why it comes down to taxpayers — the rich man’s piggy banks — to clean up the mess while anonymous CDS writers run off with the booty.

These derivatives were a bad idea the first time around, but now Bloombergreports that the carbon trading scheme will be largely centered around derivatives:

The banks are preparing to do with carbon what they’ve done before: design and market derivatives contracts that will help client companies hedge their price risk over the long term. They’re also ready to sell carbon-related financial products to outside investors.

[Blythe] Masters says banks must be allowed to lead the way if a mandatory carbon-trading system is going to help save the planet at the lowest possible cost. And derivatives related to carbon must be part of the mix, she says. Derivatives are securities whose value is derived from the value of an underlying commodity — in this case, CO2 and other greenhouse gases…

Who is Blythe Masters? Well, it turns out, not only are the markets similar, but they’ve actually been constructed by the same people. Masters is the JP Morgan employee who invented credit default swaps, and is now heading JPM’s carbon trading efforts. Bloomberg notes:

Masters, 40, oversees the New York bank’s environmental businesses as the firm’s global head of commodities…

As a young London banker in the early 1990s, Masters was part of JPMorgan’s team developing ideas for transferring risk to third parties. She went on to manage credit risk for JPMorgan’s investment bank.

Among the credit derivatives that grew from the bank’s early efforts was the credit-default swap.

Oh. Hi, Blythe. I think this is called failing upward, yes/yes?


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