Ag committee on credit default swaps?
I’m listening in on a hearing going on right now by the House Agriculture Committee that is focusing on the role of credit default swaps and the SEC’s Erik Sirri (see his opening statement here) is taking some tough questions from a few House members.
Here’s a snippet from Jim Marshall of Georgia: “To suggest that the SEC is innocent in all of this in a stretch.” And just before that statement, Bob Etheridge just tried to get Sirri to answer a question about what role CDS played in the downfall of Bear Stearns, but Sirri said he would have to get back to him.
But here’s my question: why is the Ag Committee, which normally focuses on farm-related issues diving into the CDS market?
I’ll be listening in on the rest of this.
UPDATE: Here’s a Bloomberg story that summarizes the hearing, which was actually pretty interesting. When one committee member asked the SEC’s Sirri about “the next shadowy world to emerge”, Sirri said this, “We’re (the SEC) always playing catch-up and it’s a criticism that we hear.” Talk about reassuring words!
ANOTHER UPDATE: Here’s the money quote from yesterday’s hearing: “There is an estimated $55 trillion in credit default swaps somewhere out there, but no one knows for sure if any of these swaps offset each other, exactly who is on the hook for these swaps, who is trading with who and on what terms; and worst of all, no one has any idea who is solvent and who is upside down.” That was from Committee Chairman Collin Peterson. The full release is here.
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October 15th, 2008 at 2:17 pm
Ag committee has oversight of the Commodity Futures Trading Commission, which gives you somewhat of a clue as to how we got into this under-regulated disaster in the first place.
October 15th, 2008 at 2:59 pm
The swap exclusion is in the Commodity Exchange Act.
October 16th, 2008 at 3:33 pm
The CFTC? The one WENDY GRAHAM used to chair? Wife of Phil-the-Bagman?
She would not let this mess happen!
Making our country safe for companies like Enron is what we could rely on Wendy for!
October 19th, 2008 at 4:50 pm
Warren Buffet called the derivatives market “Financial Weapons of Mass Destruction”.
Credit Default Swaps are probably the deadliest weapon of all. Credit default swaps are used to hedge against the risk of a borrower defaulting on their debt, but there’s no transparency in this market. The CDS market will end up being far more deadly than the CDO market.
The following article has more information on Credit default swaps and the Lehman bankruptcy fiasco….
http://www.bearmarketinvestments.com/credit-default-swaps-2
October 19th, 2008 at 7:57 pm
It is true that no one knows enough about the CDS market. This is not new.
The problem is that there has been no regulation and no central clearing. It could very well be that the vast majority are offsets, however, insurance type CDS could generate staggering losses without any offset. This would be a net loss of wealth, translate that to a loss of liquidity which in turn translates to a recession.
Until all outstanding CDS are registered and accounted for in some form of emergency regulation, the markets will remain jittery. Chairman Peterson was just stating what everyone already knows so I don’t think that his remarks caused any damage or additional loss of confidence.
As for the SEC playing catch-up, this is not new either. The SEC has never had a ‘preemptive’ doctrine and has always played the role of ‘cop catch crook’. One first has to do something wrong before the SEC puts down the dough-nut and hits the pavement. Some things never change as no one is attempting to legislate a change. Admittedly a presidential hopeful called for Cox’s head, but that would have accomplished nothing anyway…just business as usual under the tutelage of someone else.
Saul Sterman
October 21st, 2008 at 11:15 am
Like the new layout!