Europe moves to ban trading in credit default swaps
Wednesday, March 10, 2010
Europe moved ahead of the United States on Tuesday in advocating new measures to ban certain types of financial speculation after concerns surfaced that traders used complex financial instruments to push Greece deeper into a fiscal crisis and threaten the European economy.
The European Commission said it would back a proposal to restrict trading in a type of financial instrument, known as a credit default swap, that is linked to the prices of government and corporate debt.
The Obama administration favors more tightly regulating these instruments, also known as derivatives, but has not endorsed any ban on trading them. Gary Gensler, chairman of the Commodity Futures Trading Commission, in a Tuesday speech pointed to Greece's troubles as a reason for new regulation. But neither Gensler nor the Obama administration went as far as European officials who proposed a ban on trading in credit-default swaps linked to national debt.
The differing approaches to regulation come as officials in the United States and Europe seek to learn whether hedge funds and investment banks manipulated obscure financial markets to hurt Europe's economy -- by driving down the value of the euro and deepening Greece's financial woes.
The Justice Department is examining whether several prominent U.S. hedge funds conspired to send the euro plunging over the past few weeks, according to a source familiar with the matter.
Meanwhile, federal regulators have said they are looking into two additional matters: whether banks helped create derivatives that would allow Greece to mask its debt and whether firms used sophisticated trading techniques to push down the value of Greek bonds and profit in the process.
The inquiries underscore how a lack of regulation over the past decade has left U.S. and European officials with few tools to stop potential wrongdoing in complex financial markets -- and the staggering implications this could have for countries and continents.
Neither hedge funds nor derivatives, for instance, are regulated in the United States, making the job of investigators all the more difficult.
"If derivatives had to be traded on exchanges, you'd have records of how these transactions happened. If hedge funds had to make filings of their holdings, there'd be some record. But if you don't have either one, that's a real challenge," said Bruce Baird, who formerly led the white-collar-crime unit in Manhattan for the Justice Department. "That's a very, very long road" to find evidence of wrongdoing.
Call to arms
Greek Prime Minister George Papandreou visited Washington on Tuesday as part of a tour to boost confidence in Greece's economy and attract capital at cheaper rates. At a meeting with President Obama, he warned that the United States must aggressively join Europe in stopping excessive speculation.
"Europe and America must say 'enough is enough' to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system," he said. "An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world."
But Papandreou also said he wouldn't seek financial support from the United States. A White House spokesman made clear that no support would be forthcoming.