Credit Default Swaps: Unregulated, Certainly. Insurance? You Bet.

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   Credit Default Swaps, or "CDS's," are a form of derivatives contracts.  They offer "insurance, for example, on trading positions".  Louis Uchitelle, "Elders of Wall St. Favor Tight Rein" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Wednesday, February 17, 2009).

   As readers of this space know well, CDS's are unregulated Credit Insurance, unregulated until recently.  Last year, the New York State Insurance Commissioner announced that a form of CDS's that functions like Credit Insurance will from now on be regulated as Insurance in New York.  See for example the previous post here on March 18, 2009,  "New York Times Concurs:  Credit Default Swaps Are Unregulated Credit Insurance," and related posts here in the Category of "Credit Insurance".  See also the posts of December 24, 2009 and February 10, 2010 on Insurance Claims Bad Faith Law Blog.

   A stray phrase has recently surfaced that Credit Default Swaps "in essence, work like bond insurance ...."  Mary Williams Walsh, "Risky Trading Wasn't Just on the Fringe at A.I.G." (New York Times Online, February 1, 2010).  No, they don't.  They not only act like unregulated Credit Insurance, but to lawyers and regulators -- and investors/Policyholders -- they are Credit Insurance.  The differences can be material.  But not in regard to what counts right now.

   Everyone agrees that CDS's have gone unregulated and that they are Insurance.  Had CDS's been regulated properly, perhaps we would not still be living through the Great Recession but we would instead be looking back at it.

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