CDS reform – not before time (MarketWatch) (11-03-2010)

NEW YORK (MarketWatch) – After the fiscal problems experienced in some European countries, regulators are finally shedding much needed light on credit swaps, those financial instruments that allow investors to bet against underlying securities such as mortgages or sovereign debt.

By general agreement, this comes not a moment too soon. Swaps are as dangerous for corporations as they are for countries. Case in point the massive losses at American International Group Inc., as well as the economic crisis in Greece. European leaders are now considering banning credit-default swaps, WSJ Brussels bureau chief Stephen Fidler reports on the News Hub.

The swap issue also goes to the heart of an underwriter's role in supporting an issue. Underwriters are required to provide potential investors with clear information about an issuer's ability to make good on its debt. At the very least, investors should be required to disclose whether they plan to bet against those securities and the size of those bets once they are made.

It's been nearly two years since Wall Street firms, notably Goldman Sachs Group Inc., bet against mortgage securities they helped underwrite. When Goldman's chief executive, Lloyd Blankfein, was questioned about the firm's tactics by the Financial Inquiry Commission in January, he drew the ire of the commission's chairman Phil Angelides.

Without firm rules spelling out an issuer's responsibility, don't expect confidence to return anytime soon.

Source: MarketWatch