More moves afoot to rein in credit default swaps

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Credit default swaps have come to look like the premier ‘financial weapons of mass destruction’ that Warren Buffett has warned about, referring to derivative securities.

Swap bets gone awry helped bring down insurance titan American International Group last fall.

Now, there’s a bill in Congress that could drastically shrink the multi-trillion-dollar default-swap market, Bloomberg News reports.

Under the bill, many investors might lose the ability to use swaps as insurance policies against the possibility of companies or municipalities defaulting on their debts.

On the flip side, speculators might no longer be able to use swaps to bet on defaults -- essentially, a way to ‘short’ a company or municipality.

The bill is another sign that regulation of the credit default swap market remains a hot-button issue in Washington and on Wall Street. Some kind of new regulatory oversight seems certain, with the Obama administration on the record as favoring a clampdown on the largely unsupervised market.

The ever-present risk, of course, is that government could make markets more fragile rather than less so by messing with them.

Read the Bloomberg story here.

For another take on the issue, go here.

-- Tom Petruno