Congress advised to duck regulation of credit swaps – quack, quack

The Senate Agriculture Committee must have sounded like Old McDonald’s Howey’s Farm given the news from the hearing reported by the National Underwriter.

New York State Superintendent of Insurance Eric Dinallo…appearing before the Senate Agriculture Committee…explained that credit default swaps can be divided into two categories. The first he noted are transactions in which the holder of an obligation, such as a bond, “swaps” the risk of default with another party, who guarantees it for a fee.

That transaction, he noted, can be seen as similar in nature to an insurance transaction.

Similar? If it looks like a duck, acts like a duck, and sounds like a duck it must be a duck.

A second form, which Mr. Dinallo referred to as a “naked credit default swap” differs in that no party involved has ownership of the obligation, and is effectively a “directional bet,” he said.

However, regardless of what was said, naked or fully dressed, if a transaction meets the three-part test established  in SEC v Howey (1946), the duck is a security and subject to regulation accordingly: Continue reading “Congress advised to duck regulation of credit swaps – quack, quack”