Credit Default Swaps as Insurance: One Regulator or Many?


The unregulated nature of credit default swaps has been blamed for playing a major role in the recent abrupt

demise of Bear Stearns, the dramatic bankruptcy filing of Lehman Brothers, the federal rescue of American

International Group and Bank of America?s acquisition of Merrill Lynch. Although the instruments are designed to

offer legitimate protection to those seeking to hedge or transfer credit risk, some argue that manipulative practices

in the credit default swap market have contributed to the demise of these entities, as well as to the general market


On September 22, 2008, New York?s Governor David Paterson made what proved to be the first in a series of

regulatory pronouncements on the topic of credit default swaps. Governor Paterson announced that the state

would reverse its prior position and begin, effective January 1, 2009, to regulate credit default swaps or CDSs as

financial guarantee insurance in those instances when the buyer of the CDS owns the underlying security for which

the CDS provides protection. On the following day, Christopher Cox, Chairman of the Securities and Exchange

Commission, called for federal regulation of CDSs.

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