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
turmoil.
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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