Calls for Regulation of Credit Default Swaps Market
If you never really understood the credit default swaps market and how it’s impacted the financial landscape lately, perk up because the New York Times did a pretty good job explaining it in an article today. In response to a call by Christopher Cox, chairman of the Securities and Exchange Commission, the NY Times took a closer look.
What is a Credit Default Swap? It’s a mechanism that lets lenders to a company purchase insurance in the event the company defaults. It’s insurance on a credit default. The problem we’re facing is that with no central regulation, it’s unclear what contracts are where, who has signed them, and what happens if one party goes under. The contracts are intended to offset one another and if one part goes under, the effect could snowball and get out of hand.
It’s one of the reasons why the Treasury helped out in the Bear Stearns situation, they didn’t know how a failure of that magnitude would affect the credit default swaps market. Yikes.