Joint Taskforce Investigates Credit Default Swap Market
Lack of transparency prompts fears that unwinding contracts on big corporate collapses could result in heavy losses
Federal prosecutors and New York's attorney general said yesterday they had joined forces to investigate the multitrillion-dollar credit default swap (CDS) market, an unregulated area of finance blamed by some for helping to fuel the credit crisis.
Separately, credit derivative pricing firms and regulators are working to reduce the scale of outstanding swaps and to increase market confidence through the introduction of a central clearing body.
A lack of transparency in the CDS market has prompted fears that unwinding contracts on big corporate collapses could result in heavy losses. Today is the deadline for CDS contracts relating to the collapse of Lehman Brothers tobe settled. Regulators will be watching closely, though most credit analysts believe it is not likely to result in a series of hedge fund failures, as had been feared by some.
The offices of US attorney Michael Garcia and New York attorney general Andrew Cuomo acknowledged the unusual arrangement of their joint inquiry.
"The attorney general believes that these unprecedented times call for unprecedented levels of effort and cooperation to ensure that our markets are stable, free of fraud and purged of corruption," a spokesman for Cuomo said.
A credit default swap is a contract that offers insurance for lenders worried about a borrower's ability to repay loans. Banks have used them to cover the risk of default in mortgage and other debt securities. Worries about the swaps unraveling prompted the US government in September to lend $85bn to the insurer AIG.
Separately, credit derivative pricing firms and regulators are working to reduce the scale of outstanding swaps and to increase market confidence through the introduction of a central clearing body.
A lack of transparency in the CDS market has prompted fears that unwinding contracts on big corporate collapses could result in heavy losses. Today is the deadline for CDS contracts relating to the collapse of Lehman Brothers tobe settled. Regulators will be watching closely, though most credit analysts believe it is not likely to result in a series of hedge fund failures, as had been feared by some.
The offices of US attorney Michael Garcia and New York attorney general Andrew Cuomo acknowledged the unusual arrangement of their joint inquiry.
"The attorney general believes that these unprecedented times call for unprecedented levels of effort and cooperation to ensure that our markets are stable, free of fraud and purged of corruption," a spokesman for Cuomo said.
A credit default swap is a contract that offers insurance for lenders worried about a borrower's ability to repay loans. Banks have used them to cover the risk of default in mortgage and other debt securities. Worries about the swaps unraveling prompted the US government in September to lend $85bn to the insurer AIG.
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