One of the unfortunate hallmarks of the tenure of Eliot Spitzer as New York attorney general was a tendency to treat financial investigations as competitions between his office and the Securities and Exchange
Commission and federal prosecutors.
That history makes a new partnership between Spitzer’s successor, Andrew Cuomo and the U.S.
attorney in Manhattan, Michael Garcia, all the more remarkable.
The state and federal prosecutors are working together on an investigation into trading in credit default swaps, Vikas Bajaj of the New York Times reports.
Credit default swaps are a form of insurance. They are contracts bought by investors to protect themselves from defaults by corporate or government issuers. It is a virtually unregulated $54 trillion market that has helped foment much of the turmoil in the financial crisis.
Credit derivatives, as Jesse Eisinger notes in Conde Nast Porfolio,
“didn’t single-handedly force Bear Stearns and Lehman Brothers to bulk up on toxic debt, dooming them to collapse. But they made the financial world more complex and more opaque. Ultimately, they have exacerbated the market panic, as financial firms and regulators have belatedly come to grips with the enormity of the problems.”
As Lynnley Browning detailed for Portfolio.com, it was a decision by American International Group to ramp up an expansion into credit default swaps that left the insurance giant vulnerable to billions of dollars in losses and teetering on the brink of collapse.
Prosecutors, the Times reports, are looking “at whether traders manipulated the largely unregulated market for credit-default swaps to drive down the price of financial shares over the last year.”
The inquiry is in the early stages.
Subpoenas have been issued stock exchanges, investment firms and three companies involved in processing trades.
News of the investigation comes amid calls for greater oversight and regulation of the shadowy C.D.S. market.
Even the head of a derivatives trade group, Robert Pickel, chief executive of the International Swaps and Derivatives Association, today called for a globally coordinated effort on regulating credit default swaps.
"Current financial regulation infrastructure does not reflect the modern markets," he said, Bloomberg News reports. “We need to think about regulation broadly and we can't just do a little tinkering here and there."
Portfolio.com: News and Markets
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