Credit default data could inspire action

Traders work on the floor of the New York Stock Exchange


Steve Chiotakis: Ah -- a new month and a new week. Nothing like turning the page on the calendar in hopes of bettering the economic climate -- "Hope," of course, being the key word. We'll get the lowdown on U.S. auto maker sales and a construction spending report later this morning. The waiting, as Tom Petty says, is the hardest part.

We're all still waiting for some accounting for all the risky gambling that's hammered the global banking system. That's because much of the wagering in investments known as credit default swaps has gone on mostly unregulated.

Starting this week, the private operator of a central registry for that type of trading is set to start publishing some new information. As our senior business correspondent Bob Moon reports, it may help account for how much wagering is really going on, in the back rooms of the financial industry.

Bob Moon: The value of all the credit default swaps in circulation is around $40 trillion. Or, maybe $50 trillion. Nobody knows for sure -- which is why there's growing pressure to shine a light into this very dark room.

The initial data might not amount to much more than a candle. But Christopher Whalen of Institutional Risk Analytics believes even a glimpse of the monster should shock regulators into action.

Christopher Whalen: Of course it's helpful to have more transparency, but people definitely are not going to like what they see.

Whalen says banks are still hoarding all their cash because they're worried they can't cover all their bad bets.

Henry Hu is a securities law professor at the University of Texas. He says those massive wagers need to be exposed:

Henry Hu: It gives you both a heads up on where the trouble might be, and also if trouble happens anyway, you have a better sense how you should intervene or whether you should intervene.

Put another way, he says, it helps in deciding who really needs to be bailed out, and who might not be too big to fail, after all.

In Los Angeles, I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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CBS's 60 Minutes began its recent segment on Credit Default Swaps by pointing out that the enabling federal legislation preempted the "Bucket Shop" laws of the states prohibting betting on stock positions. The new administration should immediately make these instruments illegal and also prohibit the legal enforcement of all existing Credit Default Swaps. This problem is so immense it threatens national security and the well being of every citizen.

Very early in this catastrophe (last summer in Paris to be exact) I heard that the Credit Default Swaps were in the range of $85 Trillion. Now there is discussion? Could this be another example of the hubris of the Financial and Intellectual elite of the East Coast?

Compared to the huge CDS market, the 700 billion bail out just like nothing. I doubt whether all the actions could put down the fire.

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