Tom Harkin set to put some of Humpty Dumpty back together.
Credit default swaps, heralded by Phil Gramm as a necessary and innovative new way in which risk can be passed off onto unwary suckers (paraphrase), were invented by JP Morgan in 1997 and signed into law with the Commodities Futures Modernization Act of 2000. Before that they were illegal. After the CFMA they were legal and free of regulation. Trillions of dollars down the drainpipe later Harkin wants to put them under the regulatory jurisdiction of the Commodity Futures Trading Commission:
WASHINGTON — Senate Agriculture Committee Chairman Tom Harkin plans to introduce a bill Thursday that would force all over-the-counter derivatives, including credit-default swaps, onto regulated futures exchanges.
The bill, if eventually made law, would essentially mean that all derivatives would be defined and traded as futures contracts. In forcing them to be traded this way, it would grant the U.S. Commodity Futures Trading Commission sole regulatory jurisdiction. It would also put to rest recent questions over which federal regulator should have oversight of complex swap products.
“The economic downturn in this country is forcing us to examine all contributing factors on our markets,” Sen. Harkin said. “With the value of swaps at a high of some $531 trillion for the middle of this year — 8 1/2 times the world GDP [gross domestic product] of $62 trillion — it is long past time for accountability in the markets.”
Lawmakers have been scrutinizing the role that credit-default swaps played in the financial crisis on Wall Street. Several companies, including CME Group Inc. and IntercontinentalExchange Inc., are also preparing to launch competing clearing platforms for credit default swaps, and federal regulators are vying for jurisdiction.
Credit default swaps are privately traded contracts that require one party to pay another in the event that a third party defaults. They have been blamed in large part for American International Group’s financial woes.
-mg
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