Regulating swap transactions blamed for meltdown

[November 21, 2008]  WASHINGTON (AP) -- The chairman of the Senate Agriculture Committee proposed Thursday giving the Commodities Future Trading Commission authority to regulate market credit default swaps, which have played a key role in the Wall Street's recent financial meltdown.

Sen. Chairman Tom Harkin, D-Iowa, said he is introducing legislation to end what he called "unregulated 'casino capitalism' that has turned the swaps industry into a ticking time bomb."

"We need to take a hard look at gaps in our regulatory framework that have contributed to the mess we find ourselves in," Harkin said. "Financial derivatives like credit default swaps need to be traded on a regulated exchange so that we know the value of the contracts, who is trading and if they have enough assets to back the contract."

Credit default swaps are a form of insurance purchased on bonds. Basically, they're contracts, usually between banks, that act as insurance on debt. Under the contract, the seller, for a fee, agrees to make a payment to the buyer if something bad happens to the debt the buyer has insured with the swaps.

Since the market for the swaps is so much larger than the initial loans they were meant to insure, they have tended to magnify every injury the financial markets have suffered.

Harkin's bill has little chance of action in this Congress, which will return in December to again tackle coming up with a rescue package for the teetering Big Three U.S. auto companies. But he said he will reintroduce the bill on the first day of the next Congress in January.

"I wanted to get it out there and test the waters on it and see what kind of reaction we get," Harkin said.

Across the Capitol, House Agriculture Chairman Collin Peterson, D-Minn., held a hearing on the issue Thursday. He said the swaps should have been part of the recent $700 billion financial industry bailout.

The bailout "took the wrong approach and does not begin to get at the problems caused by these unregulated financial sectors," Peterson said.

Peterson said regulators and the next Congress "will have to get to the root of the problem before it is too late."

The Federal Reserve, the Securities and Exchange Commission and the CFTC said last week that they would agree to exchange information on credit default swaps from private groups that will be set up to act as central clearinghouses for such transactions.

A White House panel also called for public reporting of prices, trading volumes and other information on credit default swaps in a bid to enhance market transparency for industry players and the public.

[Associated Press; By MARY CLARE JALONICK]

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