Transparency for credit-default swaps
TEXT OF STORY
Steve Chiotakis: Among the many innovations that helped fuel the financial crisis was the credit-default swap, a bit like an insurance policy that pays out when a company or a government agency defaults on its debt. The owner of the Chicago Mercantile Exchange is scheduled to launch a new service today aimed at making that business more transparent. Here’s Marketplace’s Amy Scott.
Amy Scott: CME Group is launching a clearinghouse for credit-default swaps. It’ll act as a go-between, making sure both buyer and seller hold up their ends of the deal. Exposure to credit-default swaps nearly wiped out insurance giant AIG last fall.
Michael Greenberger is a former regulator now with the University of Maryland:
Michael Greenberger: If AIG had had to clear its products, there would have been a regular accounting of where they stood vis-a-vis the riskiness of the guarantees they were making.
And AIG might not have required an $85 billion taxpayer rescue last September. On Friday, the House of Representatives passed a bill requiring that many derivative transactions go through a clearinghouse.
Securities law professor Lynn Stout of UCLA says it’s a step in the right direction:
Lynn Stout: If you’re gonna let people gamble, at least make sure they can pay off their gambling debts.
But Stout says loopholes in the bill may limit its effectiveness.
Stout: There’s tremendous potential there for the industry to essentially appear to be reforming itself without actually reforming itself.
Chicago won’t be the only game in town. The Atlanta-based Intercontinental Exchange also clears credit-default swaps.
In New York, I’m Amy Scott for Marketplace.
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