Bank of Japan Governor Candidate Kuroda May Want to Buy Interest Rate Swaps and Other Derivatives as Part of QE

Boldly go where even the Ben Bernank hasn't gone before. The Fed chairman bought CDS (credit-default swaps) and interest rate swaps of Bear Stearns in the emergency rescue of the company in 2008, but not as part of ongoing quantitative easing.

A couple of laps behind in the QE track, Mr. Kuroda and Bank of Japan will overcompensate. Mr. Kuroda, by mentioning the financial derivatives at all, is signaling his intention to use them, I believe.

Multibillionaire investor Warren Buffett once called the derivatives "weapons of mass financial destruction". But then, Buffett was later seen writing put options on his railroad company shares which went into money. Oops.

Big bang for the money is irresistible even to the wealthy investors, I suppose. For Mr. Kuroda, it's not even his money anyway. What's there to lose?

From Nikkei Quick News (3/11/2013; part):

黒田氏、金利スワップの活用「十分検討したい」

Mr. Kuroda "will fully consider" the use of interest rate swaps

日銀総裁候補の黒田東彦アジア開発銀行総裁は11日午前、参院議院運営委員会の所信聴取で金利スワップの活用で金利低下を促す政策について「具体的にスワップやその他デリバティブ（金融派生商品）市場に出て行くのがよいのかよくないのか、いろいろな議論のあるところ」と述べた。そのうえで「十分検討させていただきたい」と付け加えた。

Haruhiko Kuroda, president of the Asian Development Bank and candidate for the Bank of Japan governor, said in the hearing in the Upper House Steering Committee in the morning of March 11 regarding the policy to induce lower interest rate using interest rate swaps, "There is much discussion about whether it is good to use swaps and other financial derivatives or not." He then added, "I would like you to let me fully consider the matter."

Interest rate swaps swap the cash flow of different interest rates - usually one is fixed and the other is floating-rate.

Several US municipalities have lost badly on the interest rate swap deals with Wall Street banks. The most famous case is Jefferson County, Alabama, which went bankrupt over the costly sewer plant project gone bad, partly thanks to the interest rate swaps that ended up costing the county much more when Lehman Brothers collapsed and the entire financial system almost collapsed in the fall of 2008.

Unlike Jefferson County, Bank of Japan, which is 55% owned by the national government, will not go bankrupt, as Mr. Kuroda would simply print money to replenish whatever he loses to the bankers.

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