Investigations beginning of credit default swaps

It has been alleged that traders use credit default swaps as one element of intentionally driving a bank’s stock down, which arguably has, over the last year, killed a number of them and virtually eliminated the entire industry of independent investment banks. Now New York’s AG is investigating. Bloomberg:

New York Attorney General Andrew Cuomo’s investigation of short selling has been expanded to include trading in the $54.6 trillion credit-default swaps market…Cuomo is probing whether credit-default swaps were manipulated by short sellers to spread false rumors about financial companies such as bankrupt securities firm Lehman Brothers Holdings Inc. to drive down stock prices, the person said, asking not to be identified by name.

Cuomo likely wants to know if the credit-default swaps are fueling the failures of financial institutions including Lehman Brothers and mortgage companies Fannie Mae and Freddie Mac, said Anthony J. Carfang…”You have a set of people doing this trade and they’re targeting one company at a time…When Fannie Mae goes under, they move on to the next target, which was Lehman Brothers, and now you see them in Wachovia and Morgan Stanley.” Credit-default swaps on both Wachovia Corp…and Morgan Stanley reached record highs yesterday…

Several regulators are focusing on credit-default swaps to see if the bets are fueling the global financial crisis. U.S. Securities and Exchange Commission Chairman Christopher Cox said Sept. 23 that Congress should immediately grant authority to regulate the swaps…New York State’s insurance regulators began regulating part of the credit-default swaps market Sept. 22. Manhattan District Attorney Robert Morgenthau has opened an investigation of the swaps market too…

Cuomo on Sept. 25 subpoenaed three companies that provide price and trading data on the credit-default swaps market: Markit Group Ltd., Depository Trust & Clearing Corp. and Bloomberg LP…Cuomo also has subpoenaed hedge funds in New York, Texas and London as part of the probe. The attorney general’s office is seeking information on transactions since July 1 involving Lehman Brothers, Goldman Sachs Group Inc. and Morgan Stanley…

It was only a year or so ago that the credit default swap market was estimated at $45 trillion. Now it’s apparently at least $10 trillion bigger. The murky and unregulated market of credit default swaps, which has doubled in the last two years, is “more than half the size of the entire asset base of the global banking system.” So perhaps it’s not an entirely bad thing that some government officials are belatedly wondering what has been going on there.

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