Lawmakers likely will move to impose new requirements on companies involved in the credit default swaps market, according to Rep. Barney Frank, D-Mass.
Frank, chairman of the House Financial Services Committee, said today at a conference organized by the Consumer Federation of America, Washington, that the credit default swaps business at American International Group Inc., New York, was “unregulated speculation.”
In 2009, Congress probably will pass legislation curbing CDS speculation, partly by requiring an entity that guarantees debt instruments through CDS arrangements to back the CDS arrangements with reserves, Frank said.
“Look at AIG,” Frank said. “It is looking at the regulated entities to pay the debts of the unregulated entities.”
AIG is in that situation because an unregulated unit sold CDS guarantees on mortgage-backed securities “without regard to the [holding company's] ability to pay claims,” Frank said. “We will not allow people to do that going forward.”
Congress likely will move to regulate systemic risk separately from consumer and investor protection regulation, Frank said.
“The bullets that caused the current problems faced by financial institutions were subprime loans,” Frank said. “The gun that spread [them] was securitization.”
Systemic risk will be “regulated by the activity no matter who conducts the activity,” while consumer protection will be separately regulated, presumably by an entity’s primary regulator, Frank said.
But Frank sought to douse speculation that Democrats, in control of the White House and both houses of Congress for the first time since 1993, will impose Draconian regulation on financial services companies.
Democrats will act not to “stifle innovation, but to contain it,” Frank said.