House Agriculture hearing today on credit derivatives and the U.S. economy
Today at 10am the House Agriculture committee will hold a hearing on the role of credit derivatives in the U.S. economy. I think this is a follow up from the 1994 hearings.
The private nature of credit derivatives contracts has made it impossible to precisely measure the size of the market. Estimates within the industry range from about $35 trillion to $55 trillion.
Credit default swaps were developed about a decade ago as a way for bondholders to protect themselves against defaults by borrowers. The market exploded as investors started buying and selling the credit protection without ever owning the underlying bonds.
The September failure of Lehman Brothers generated anxiety for the credit derivatives market on two fronts. Investors were left worrying whether they would suffer losses on contracts in which Lehman was their counterparty, and holders of protection against a Lehman default were concerned about whether all their claims would get settled.
I wonder what Charles A. Bowsher must be thinking. Bowsher, who in 1994 as Comptroller General of the United States, testified before Congress at two hearings on "Financial Derivatives, Actions Needed to Protect the Financial System." From his statements:
Given the gaps and weaknesses that impede regulatory preparedness for dealing with a financial crisis associated with derivatives, we recommend that Congress require federal regulation of the safety and soundness of all major U.S. OTC derivatives dealers. The immediate need is for Congress to bring the currently unregulated OTC derivatives activities of securities and insurance firm affiliates under the purview of one or more of the existing federal financial regulators and to ensure that derivatives regulation is consistent and comprehensive across regulatory agencies. We also recommend that the financial regulators take specific actions to improve their capabilities to oversee OTC activities and to anticipate or respond to any financial crisis involving derivatives.
*** Check out this excellent reference from RGE: Structured Finance Glossary – Making Sense of the Alphabet Soup
audio and video webstreams available from the committee website.
- Ananda Radhakrishnan, Director, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission
- Patrick M. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System
- Erik R. Sirri, Director of Division of Trading and Markets, Securities Exchange Commission
- Eric R. Dinallo, Superintendent, State of New York, Insurance Department
Also today at 10am, the House Small Business committee will hold a hearing to
Review of Recent Federal Efforts to Improve Credit Conditions for Small Businesses