June 22, 2011
I believe that all CDS contracts in the hands of parties who do not own the underlying security are essentially insurance contracts without an insurable interest and should be illegal for the same reason that such contracts are illegal.
The preemption provisions in CFMA 2000 are an attempt to legislate away a fact of life. They are unconscionable, and SEC enforcement efforts should be aimed at substituting sane Federal regulation for the state laws preempted. Thus, to the extent a proposed rule in any way makes it easier for someone with no interest in a company's credit to bet against that company's survival - ESPECIALLY a large financial institution with the wherewithal to bring about the collapse of that company through short-selling (naked or otherwise), gossip-mongering, boycott, or any other means - that rule is a bad rule.
Simply put, naked, short derivatives are inherently destructive. They should be illegal, and, if the SEC cannot ban them, it should at least do nothing to facilitate them.