Today I introduced landmark legislation establishing state regulatory authority over a segment of the financial system cited by many experts as a significant contributing factor to the 2008 collapse of Wall Street and the ongoing economic crisis.

The bill, cosponsored by 35 members of the Assembly, addresses the lack of public oversight that exists with respect to the $26 trillion credit default swaps (CDS) market. CDS are contracts in which the seller of protection promises to indemnify the buyer against losses incurred through bond failures or other negative credit events. Under the proposed provisions these transactions are defined and regulated as a form of insurance.

 

Nearly two years after the markets plunged, millions of Americans remain out of work and millions more are still waiting for their hard-earned investments and retirement funds to recover. The excessive speculation and other abuses that occurred in connection with CDS have been strongly linked to this historic upheaval, and there is a growing consensus that the regulatory vacuum revealed by this episode must be filled.

 

The bill announced today is drawn from legislation I authored as a member of the National Conference of Insurance Legislators, where I chair the Financial Services and Investment Products Committee. In that same capacity, I testified before a congressional committee in February 2009 on the need for CDS regulation. As Chairman of the Assembly Insurance Committee, I have also held multiple hearings on the subject.

Insurance has traditionally been the province of state governments and therefore states have the experience and institutional capacity to best fold CDS into that regulatory model.

 

I was honored to have this legislation cosponsored by Assemblymembers RoAnn Destito (D-Rome), Al Stirpe (D-North Syracuse) and Will Barclay (R-Pulaski), among others, and also supported by Michael Greenberger, the former director of the Division of Trading and Markets for the Commodities Futures Trading Commission, who maintains that the economic meltdown would never have happened if these highly toxic credit default swaps had been treated for what they really are: insurance policies.
 
Credit default swaps are a form of insurance. Just as New Yorkers take out insurance policies on their cars and homes, Wall Street takes out insurance policies on investments - like your mortgage. Unlike car or homeowners insurance, credit default swaps are completely unregulated. This legislation will require that financial firms have the capital to pay out on their bad bets, helping to ensure that Main Street doesn't once again pay for Wall Street's excesses.

 

Derivatives, which include credit default swaps, have been described as "financial weapons of mass destruction" by billionaire investor Warren Buffet and the "newest, riskiest, and most complex parts of the financial system" by US Treasury Secretary Timothy Geithner. 
 
For far too long, this little-known segment of our financial markets has operated under the radar and beyond the view of the public. The results are all too clear, and with this bill we redress an issue critical to the foundations of our economy and the financial security of hard-working families.
 
My concerns in this arena were heightened in September 2008, when insurance giant American International Group nearly failed because of critical overexposure in a CDS market weakened by a proliferation of subprime mortgages. The company underwrote hundreds of billions of dollars in contracts it did not have the reserves to honor until rescued by a massive federal bailout. If AIG's marketing of CDS had been regulated by the state of New York as insurance, these contracts would have been backed by adequate capital. 
 
Federal regulators dropped the ball in the case of AIG and other participants in the CDS marketplace. In fact, states have been precluded from providing oversight in this area. Today, by placing CDS within the purview of state insurance regulation we demand a new era of accountability.

 

Vendors would now be required to verify that they have the capital necessary to cover the policies they sell. We will also halt the sale of CDS in those instances where the buyer has no interest in the insured product and in fact would benefit from its failure. Otherwise we allow a level of speculation and moral hazard that puts the entire financial structure at risk, as we witnessed in 2008 when Lehman Brothers and Bear Stearns vanished and years of gains in the stock market were lost in days. Most recently, we've seen the results in the form of a federal civil suit brought by the Securities Exchange Commission (SEC) against Goldman Sachs for alleged fraudulent CDS uses.
 
New York must remain the financial capital of the world. We must protect major financial institutions and, more importantly, the livelihoods and life savings of working Americans whose faith in those institutions has been justifiably shaken.