Feds finally act to stabilize dangerous $33 trillion credit-default swap market

The Federal Reserve, Securities and Exchange Commission and Commodities Futures Trading Commission are setting up regulated markets that will make it easier to buy, sell and resolve credit-default swaps, the unregulated bond insurance that forced American International Group into an expensive federal takeover when bond values plunged last summer. At least one clearinghouse for matching buyers, sellers and collateral for the swaps will be operating before the end of the year, the agencies said. Release here, Bloomberg story (which estimates the total value of CDS at $33 TRillion)  here.

Traders have called for these moves, fearing that otherwise companies that can't pay what they owe on CDS contracts that have moved south will default, setting up chain reaction losses that could force otherwise-solvent companies out of business.

As a private market with no government oversight, credit-default swaps were an experiment backed by contemporary Fed chief Alan Greenspan, influential Sen. Phil Gramm, R-Tx., and Treasury Secretary Lawrence Summers. Instead of being used just to hedge against default, the market took on a life of its own, and the swaps traded were eventually valued at far more than the bonds they insured. A transparent, regulated market may make the swaps more attractive, as well as safer.