'Credit default swaps' getting attention
A peculiar kind of unregulated financial instrument called a credit default swap was a key factor in why the Fed kept Bear Stearns from failing. Marketplace's John Dimsdale tells Kai Ryssdal about whether Congress might be applying some scrutiny.
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TEXT OF INTERVIEW
KAI RYSSDAL: One thing Bob and I didn't much talk about was how those swaps are going to be regulated under the new rules Henry Paulson proposed Monday. Right now, they're not at all. Marketplace's John Dimsdale's on the regulatory beat in Washington. Hi John.
JOHN DIMSDALE: Hello Kai.
RYSSDAL: Let's start, I suppose, with what the situation is right now. What does Treasury Secretary Paulson propose to do about credit default swaps?
DIMSDALE: Well, he only deals with it very generally. His plan would give the Federal Reserve Board broad jurisdiction over investment banks. It would allow the Fed to look at these banks' exposure to potential defaults by borrowers, pull the investment banks back from the brink of too much risk, but it's a very light regulatory touch. Remember, Henry Paulson was chief executive of Goldman Sachs. He's very much a part of the Wall Street investment world that fought really hard to keep these credit swaps unregulated the last time there was a major reform of the banking world.
RYSSDAL: What are you hearing though, the buzz in Washington about people maybe going off the treasury reservation and talking about actually doing something about these things?
DIMSDALE: Yes, there's lots of talk of a much more aggressive, government regulation of these credit swaps. Robert Rubin, President Clinton's Treasury Secretary, has proposed treating credit insurance policies the same way stocks and bonds are regulated. That means licensing traders, just like stockbrokers. Requiring that traders have reserves to cover sales or defaults. I talked to one former regulator who warns that, you know, setting up government oversight isn't going to be easy. Michael Greenberger was at the Commodity Futures Trading Commission in 2000, back when Congress deregulated credit swaps, and Greenberger says that the investment banks are going to lobby extremely hard against any attempt to make the government a market referee.
MICHAEL GREENBERGER: Wall Street wants to tell you, ooo this is too complicated for you. Only we can understand this. They're not that complicated, and by the way, these guys who are so bright are losing billions and billions of dollars hand over fist. They don't understand what they're doing
RYSSDAL: So John, here we are. By my count it's three days, two days actually, since the Treasury Secretary formally made his announcement, and already we're talking about other things that are going to happen in the world of regulation. How long's it going to take to get anything done?
DIMSDALE: You know, major banking reforms like this take years. One problem in imposing regulations is that this credit swaps market is bigger than the stock market now. These swaps have been repackaged and resold so many times that they've permeated through the entire economy. Credit swaps are in pension funds, money market funds, endowments. Just finding them, much less putting a value on them, will be difficult.
RYSSDAL: So, sadly we are not done talking about them yet, are we?
DIMSDALE: Not at all, unless, of course, some sort of financial meltdown forces Congress' hands. That always has a way of concentrating the minds around here.
RYSSDAL: Yes it does. John Dimsdale at the Marketplace Bureau in Washington, thank you John.
DIMSDALE: Thank you, Kai.
