A lot of people have lately been wondering what relevancy the Securities and Exchange Commission will have in the brave new world of Wall Street that the Treasury Department and the Federal Reserve have been building. For several weeks, SEC chairman Chris Cox seemed to have passively accepted an ever diminishing scope of authority for his agency. But now he’s fighting back.
We can squint our eyes at the recent emergency regulations on short selling and see a desperate bid for SEC relevancy. In his testimony at today’s Senate banking committee hearings, Cox reached out for more undiscovered regulatory territory by calling for regulation of the credit default swap market and comparing purchasers of CDSs to those dangerous short-sellers.
“The $58 trillion notional market in credit default swaps — double the amount outstanding in 2006 — is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market,” Cox told the committee. “Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based.”
We’ll leave the substantive question of whether the CDS market needs to be regulated for another time. (As Felix Salmon points out at Market Movers, the idea that the CDS market is being manipulated by hedge funds is more than a bit far-fetched.) What strikes us as inappropriate here is Cox seeming to use the current crisis to bid for an expanded scope of regulatory authority. It makes it all too clear that much of what is going on is bureaucratic and political wrangling rather than a serious attempt to prevent financial castastrophe.
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