Last September, we witnessed a devastating change of fortune on Wall Street and in markets around the globe. The change precipitated a crisis that continues to threaten the financial well-being of millions of Americans.
The causes of this meltdown were many, and it may well be years before they are all identified and understood. However, one major underlying reason for the crash of 2008 is well known, and remains a source of potential trouble: Lack of regulatory controls in the co-called "credit default swaps" market.
In the next few weeks I will introduce landmark legislation establishing clear guidelines for public oversight of these transactions, which I believe is a necessary bulwark against future excesses and abuses. Put simply, CDS act as financial insurance policies, in which the holder of a bond or other credit instrument buys protection in the event there is a bankruptcy or default by the company that issued the bonds. The "insurers," or CDS sellers, agree to cover the buyer's financial loss in the same way home insurance indemnifies you in the event of fire or other catastrophic circumstances.
The problem? CDS sellers are not subject to federal or state regulatory oversight, and therefore not required to provide proof of their ability to make good on their obligations. Traditional insurance carriers are held to specific standards which help guarantee that carriers have the assets to cover policy payouts. A major contributor to the September 2008 stock market plunge was the near-demise of American International Group, Inc., which faced a liquidity crunch precisely because of ruinous overextension in the form of credit default swaps tied to subprime mortgages. Similar circumstances doomed Lehman Brothers just 24 hours before the federal government enacted its $85 billion AIG rescue plan. As chairman of the Assembly's Committee on Insurance and as a member of the National Conference of Insurance Legislators, I have worked to develop a regulatory framework that redefines CDS as a form of insurance, subject to state-level supervision. I have also testified before Congress on this matter.
In 2000, Congress took specific action preventing state governments from exercising the regulatory control that I am now advocating. Last month, members of NCOIL unanimously adopted my legislative model, which I hope to advance in the 2010 session in Albany. I expect similar proposals will be introduced in other states. This is a particularly important issue for New York, which has suffered severe revenue losses as the result of Wall Street's upheavals.
I remain a strong believer in the value of a free-market economy, but I also believe that prudent regulatory controls are the key to the economic and financial stability America's hard-working families need and deserve.
