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Will the next President regulate credit default swaps?
By Lauren | May 9, 2008
Continuing my Friday series on ethical issues facing the next President, let’s go to Wall Street. You may remember my posts from a few weeks back discussing how Bear Stearns got bailed out by JP Morgan Chase and the Fed when subprime lending took its toll. It turns out that subprime mortgages may be just the tip of the financial iceberg threatening the ship of America’s economy. Below the surface of the regulatory waters lurk something most Americans have never heard of until recently: credit default swaps.
Credit default swaps are contracts that were designed to be a kind of “investment insurance” to protect lenders from debtors with shaky credit. They were originally thought to be such a great idea that former Fed Chairman Alan Greenspan called them “probably the most important idea in finance” just a few years ago. Unfortunately, credit default swaps quickly became an easy way for financiers to bet on companies’ credit standing. The credit default swap market grew to an estimated $45 trillion in mid-2007, roughly twice the size of the stock market and about six times the U.S. mortgage market. Credit default swaps are unregulated, the market for them is swathed in secrecy (ordinary people wouldn’t begin to know where or how to buy them), and apparently they’re distributed throughout the U.S. financial markets like the holes in a nice piece of Swiss cheese.
The geniuses in the financial world love unregulated investments because they offer greater opportunities for profit. Unfortunately, they also usually involve a lot of risk, and when a high-risk investment is distributed throughout the economy, it’s not just the high rollers who get burned if things go sour. If people choose to risk their money on an unregulated investment, is it ethical to deny them that opportunity? If credit default swaps offer such great potential returns, is it ethical to deny average investors access to them? Then again, if credit default swaps have the potential to undermine the integrity of the U.S. investment market, is it ethical to let the wizards of Wall Street gamble with the nation’s financial future?
Would your Presidential candidate have the courage to take this issue on? If so, what would s/he do, and are you comfortable with that? You decide.
Topics: Business Ethics, Presidential Campaign, Social Ethics |
May 9th, 2008 at 1:37 pm
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