pcyhuang

Ambac, MBIA: Moody's strikes again

The huge market for credit default swaps, a derivative behind many of
the problems roiling the financial markets, will get some regulatory
oversight from New York state, Gov. David Paterson announced Monday.

Credit default swaps are contracts that enable institutional investors
to bet on the likelihood of companies defaulting on the debts. The
market for these contracts has grown from nothing a decade ago to $62
trillion of notional volume this year. Despite this extraordinary
growth, the credit default swaps market has remained outside the
purview of federal or state regulators, largely because they accepted
Wall Street’s argument that swaps are not securities or insurance
policies.

That seems poised to change. Mr. Paterson said the state Department of
Insurance issued guidelines to establish that credit default swaps are
a form of insurance and, hence, subject to state regulation.

“We are going to ensure that whoever sells them [credit default]
protection is solvent, in other words, can actually pay the claims,”
said Eric Dinallo, the New York state Department of Insurance
superintendent. “There is currently no such protection for
policyholders.”

Credit default swaps were a major factor in the difficulties
experienced by American International Group Inc., the giant insurer
taken over by the federal government last week. AIG wrote insurance
against tens of billions worth of credit default swaps and had to post
billions of additional collateral when the value of those swaps
declined due to growing mortgage defaults, causing the losses that
nearly bankrupted the firm.

"The state of New York should proceed very cautiously and in
consultation with federal regulators before acting in a way that may
ultimately cause more harm than good," said Robert Pickel, executive
director and chief executive officer at the International Swaps and
Derivatives Association, a trade group representing Wall Street firms.

Source: www.crainsnewyork.com/...

Comment: Great boost of confidence in ABK, MBI and other licensed
financial guarantors.