"Naked" CDS trading under fire from Congress

Bloomberg News reports that the U.S. House of Representatives is circulating an updated draft bill that would ban credit default swap trading unless investors owned the underlying bonds. The bill is being circulated by Rep. Collin Peterson of Minnesota and also proposes forcing the nearly $700 trillion over-the-counter CDS market to be processed by a clearinghouse. It is estimated that 80% of CDS trading "naked" trading....Seeking Alpha is reporting that the draft bill coupled with rumors about an impending Bad Bank are causing CDS indexes to tighten to levels last seen in November 2008. The article discusses how a ban on naked CDS trading would impact earning potential of the residual Good Banks.