Most of the Senate Banking Committee hearing on Tuesday focused on the details -- or lack thereof -- of the Paulson plan, and I'll have a lot more to say about that tonight. But midway through the hearing North Carolina Republican Senator Elizabeth Dole took a slight detour and asked the all-star panel of witnesses some questions about credit default swaps.
CD swaps are the notorious credit derivatives that are at the heart of the credit crunch. Essentially insurance policies that are bought and sold by financial institutions aiming to protect against bond defaults, they comprise a relatively new market that has grown astonishing rapidly in recent years from $144 billion ten years ago to $62 trillion this year.
Dole said she was concerned about the "the transparency of this market and what regulators have been doing to improve oversight of these securities." Both Paulson and Bernanke hemmed and hawed in response, noting that credit derivatives were a big complex problem that they had been working on for a long time. But Cox was refreshingly forthright.
It's also important to note that legislation has expressly excluded CDS from regulation even of the most modest kind, such as disclosure, and the lack of disclosure, the lack of transparency, around this market is one of the reasons that we as a law enforcement agency, but also market participants, are very, very concerned about this.
If I'm not mistaken, the legislation Cox is referring to is the Commodity Futures Modernization Act of 2000, a bill that former Senator Phil Gramm was instrumental in passing.
Maybe Cox is still smarting at the attack launched against him last week by Gramm's disciple in all affairs economic, John McCain. McCain said Cox hasn't been doing his job. Well here, Cox appears to be saying that one of the reasons the SEC hasn't been able to do its job is because it was handcuffed by legislation that McCain's economic advisor, Phil Gramm is responsible for enacting. Touche!