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Curbing Derivatives Might Hurt, Not Help, Greece
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Investors hold $406 billion worth of outstanding Greek bonds, according to Citigroup [C
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]. But they hold only $9 billion in insurance against that debt through credit default swaps.
Credit default swaps on countries' bonds "represent only a small percentage of government bond trading volumes, so it is difficult to conclude (they're) dictating price levels," the International Swaps & Derivatives Association said in a statement.
U.S. regulators are trying to determine if that's indeed true. The Federal Reserve is using its supervisory authority over banks to examine swaps and other transactions that Goldman Sachs and other banks made with Greece.
Goldman was already under scrutiny for currency swap deals it undertook with Greece to reduce that country's debt. Goldman defended the transactions last month. It said their impact was minimal and within the rules.
The SEC has declined to say if it's investigating Goldman's derivatives dealings. The agency has said only that it's examining potential abuses and destabilizing effects of credit default swaps and other unregulated financial instruments.
Goldman declined to discuss the inquiries.
"As a matter of policy, we do not comment on regulatory matters," spokesman Ed Canaday said.
The probes are the latest setback for the elite Wall Street firm. It came under criticism for its use of derivatives contracts during the housing crisis in 2008. When the subprime-mortgage bubble burst, credit default swaps that insured against the default of mortgage-backed securities collapsed. That led to the downfall of Lehman Brothers. The same fate nearly befell insurance conglomerate American International Group.
AIG [AIG
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] was saved only through a $182 billion taxpayer bailout. Much of the rescue money went to meet the company's obligations on credit default swaps. And Goldman was among the biggest recipients of the AIG money, at $12.9 billion.
The Obama administration is seeking new regulations on derivatives.
One bill in the House would force companies to conduct derivatives transactions on regulated exchanges, under the oversight of the SEC or the Commodity Futures Trading Commission. Companies would have to have enough money in hand to protect themselves against the transactions' risks.
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