AIG, Credit Default Swaps and the Lack of Regulation

By Christopher J. Boggs, CPCU, ARM, ALCM
March 25, 2009

Credit default swaps (CDS's) total $58 trillion in notional value (face value) worldwide and are regulated by…no one; this according to September 23, 2008, testimony given before congress by Christopher Cox, US Securities and Exchange Commission chairman. Cox stated that "swaps" are not defined as securities and are thus not under SEC enforcement. Brenda Wells, Ph.D., CPCU, AAI adds, "CDS's were carefully labeled 'swaps' rather than 'insurance' to avoid regulatory oversight by insurance commissioners." Wells is an associate professor of risk management and insurance at the University of North Texas.

AIG's continued downward spiral, evidenced by the company posting the worst quarterly losses of any company in history, can be traced back to its playng in the deep end of an essentailly unregulated financial product.

InsuranceJournal.com and MyNewMarkets.com produced a two-part series on Credit Default Swaps and AIG late last year. Credit Default Swaps: AIG's Unregulated Killer? and Are Credit Default Swaps Insurance? combine to provide the details of CDS's, their place in the financial world and if they are, in fact, insurance contracts.