Felix Salmon has a post on insider trading in credit default swaps that prompts Kevin Drum to say 


 Financial regulatory reform is looking better all the time, isn't it? No serious capital or leverage requirements. A consumer protection agency housed at the Fed and barely worth the paper it's implemented on. And no exchange trading of CDS because the exchanges don't want to do it and Congress probably won't force them to. I don't know about you, but I'm about ready to say we should just scrap the whole thing and admit that we're OK with Wall Street plutocrats continuing to run the country for their own benefit until they destroy the country properly. At least that would have the virtue of honesty.

And by the way: Felix will shoot me for saying this, but I've pretty much come to the conclusion that credit default swaps should simply be banned.

I am willing to entertain the notion that credit default swaps should certainly be banned.  But I'm not sure why we should care about insider trading in them.  The ostensible reason for insider trading bans is that they maintain retail investor faith in the market, by keeping them from getting rooked by unscrupulous dealings.  Believe it or not, there are some arguments against this logic, but assume it's correct.  Why should I care if Morgan Stanley gets taken for a ride by Goldman Sachs?  They're big boys who ought to be able to look out for themselves.

Nor does this pose any sort of systemic risk; the insider trading is done in anticipation of further bond issues in specific firms.  All the insider trading ban will do is maybe keep big financial firms from taking mild losses, and impede price discovery.

I know, I know . . . INSIDER TRADING!!!!  WE ALL KNOW IT'S VERY BAD!!!  But to the extent it's bad, it's bad because it lets the sophisticated and connected take advantage of the innocent.  And after the last year, I think it's hard to argue that any of the big firms who play in this market is particularly . . . innocent.

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