Week revolves around three little words
Wake up and good morning. Three little words. Credit. Default. Swaps. Get used to them because they're going to start appearing a lot more often in mainstream business coverage. Like now. A New York Times story this morning says that New York state and federal prosecutors have launched an investigation into the role of credit-default swaps in the U.S. financial crisis. Prosecutors are looking at whether there was manipulation in the largely unregulated market for credit default swaps to drive down the price of financial shares over the last year, the paper said, citing people briefed on the investigation. Of particular note, subpoenas reportedly have been issued to clearing agent Depository Trust Clearing Corp. (DTCC) -- a Manhattan-based firm that's expanded to the Tampa area off Bruce B Down Blvd. -- swaps data provider Markit and financial data company Bloomberg. These three companies are involved in processing trades in swaps and stocks. DTCC and Markit in July formed a joint venture to combine their electronic trade processing services.
Still not sure what these swaps are? Welcome to the club. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts. The market for these securities is enormous, as the New York Times business reporter Gretchen Morgenson has been warning readers for many months. Since 2000, it has ballooned from $900-billion to more than $45.5-trillion -- (hello, regulators, anybody home?) -- roughly twice the size of the entire United States stock market. Only now do we see Securities and Exchange Commissioner Christopher Cox step up and suggest more oversight of this market. I'm not sure whether to laugh or cry on this belated clarion call.
Still don't care? Consider this: Credit default swaps are the main reason the giant AIG -- the insurance company had issued $440-billion in credit default swaps -- required an $85-billion federal rescue loan. Don't think AIG is the only one playing in this $45-trillion (I'm repeating for emphasis) game. The unregulated swaps market gets tested anew this week as countless claims are settled on a series of expensive corporate casualties at the heart of the credit crisis. Banks, hedge funds, insurance firms and other investors are unwinding an unprecedented number of the contracts following the recent failure of Wall Street investment bank Lehman Brothers, S&L giant Washington Mutual and three lenders in Iceland. Tomorrow is the deadline for settling the contracts on Lehman.
Whew. Once again, it's time to end on a lighter note of what may be a rough week ahead. The New York Post asked readers: What song do you think best describes (either based on title or lyrics) the current mood on Wall Street? Here's the breakdown (click to watch each video):
28.2 percent - Ball of Confusion, The Temptations
22.1 percent - I Wanna Be Sedated, The Ramones
18.4 percent - Mo Money, Mo Problems, Notorious B.I.G.
8.5 percent - Wave of Mutilation, The Pixies
22.6 percent - After the Gold Rush, Neil Young
-- Robert Trigaux, Times Business Editor