Regulators target credit default swaps
Credit default swaps are blamed for many of last year's financial crises, including the fall of Lehman Brothers. Now federal regulators are hoping to rein in the $58 trillion market. Janet Babin reports.
A trader at the New York Stock Exchange (Chris Hondros/Getty Images)
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Renita Jablonski: One of the financial terms we heard a lot last year was "credit default swaps." The demise of Lehman Brothers and the bailout of AIG are a couple of the disasters blamed on credit default swaps. The market for them is unregulated, but probably not for much longer. Federal legislation is expected to be introduced this month to rein in the $58 trillion market. Janet Babin reports from the Marketplace Innovations Desk at North Carolina Public Radio:
Janet Babin: Credit default swaps are kind of like shorting stock. They're a bet that a mortgage-backed security will go belly up and to buy one you don't even need to own the security.
And that could potentially lead people to manipulate the market. The Securities and Exchange Commission is now creating a credit default swap database to look for dodgy sales. Some congressmen back a bill that would mandate a CDS clearing house.
Professor Bill Brown at Duke Law School is all for it. He says more regulation will save credit default swaps, and he thinks they should be saved:
Bill Brown: It's a great financial innovation. They facilitate transactions, yet like a lot of things, if a bad carpenter uses it, a bad carpenter's going to make mistakes.
And it's not just the Feds. New York regulators have also promised additional oversight.
I'm Janet Babin for Marketplace.
Comments
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From Flagstaff, AZ, 01/05/2009
Treated as individual instruments of profit generation, CDSs are a “tool miss-used,” as stated by Bill. Ultimately, their true utility resides in their ability to limit risk and generate predictable investment scenarios. This lowers credit risk, and in-turn, the cost of capital/credit to users of credit. Keep em! Just regulate enough to keep them from being abused.
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