FROM: THE NEW YORKER
On the other hand, this week, the New York Federal Reserve began to convene meetings to try to create transparency and liquidity in the global market for credit default swaps. These are essentially unregulated insurance contracts sold privately to financial institutions to protect them against losses in stocks or bonds. No government agency regulates credit default swaps. There is no official information available about the size of the market or the distribution of liabilities within it.
On the other hand, this week, the New York Federal Reserve began to convene meetings to try to create transparency and liquidity in the global market for credit default swaps. These are essentially unregulated insurance contracts sold privately to financial institutions to protect them against losses in stocks or bonds. No government agency regulates credit default swaps. There is no official information available about the size of the market or the distribution of liabilities within it.
Maybe most of these contracts are sound, or balanced out in ways that don’t create huge systemic liabilities--let’s hope so. Published estimates of the nominal value of all credit-default-swap contracts in the world today are in the range of $55 trillion to $60 trillion. So here is a global private market whose products, combined, have a nominal value roughly equal to the total size of the world economy’s output in a year, and apparently no one in any government knows the full market’s shape, distribution, or true vulnerabilities. Gulp.
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