Harkin blames credit swaps for financial crisis, proposes regulations - KWWL - Eastern Iowa Breaking News, Weather, Closings

Harkin blames credit swaps for financial crisis, proposes regulations


WASHINGTON, D.C. - Following a hearing of the Senate Committee on Agriculture, Nutrition and Forestry on the role of credit default swaps and other off-exchange financial derivatives in the current financial crisis, Chairman Tom Harkin (D-IA) today called for strengthening regulation over these contracts.  Last month, Harkin joined Senators Carl Levin (D-MI) and Jeff Bingaman (D-NM) in introducing legislation to prevent excessive speculation and price manipulation in U.S. energy and agricultural markets.  He now plans to introduce legislation that would regulate swaps and other financial derivatives that are traded with virtually no regulation or transparency. 

"Swaps contracts function much like futures contracts, but they are not regulated as futures contracts because of a statutory exclusion from the authority of the Commodity Futures Trading Commission," said Harkin.  "So currently they need not be traded on open, transparent exchanges, and as a result, it is nearly impossible to know whether credit default and other swaps are being traded at fair value or whether institutions trading them are becoming overly leveraged or dangerously overextended.

"Financial derivatives like credit-default swaps need to be traded on a regulated exchange so that we know the value of the contracts, who is trading and if they have enough assets to back the contract," he continued.  "Regulating these contracts is akin to employing the same sound economic policies used by businesses everyday - know what you're buying, the reliability of your seller, and if they have the assets to fulfill the transaction.  Without proper regulations, trading in swaps is nothing more than casino capitalism."

Swaps and over-the-counter financial derivatives are instruments theoretically intended to limit risk.  But with large doubts in the market as to how much companies owe and how they will pay their obligations, swaps and other financial derivatives have created uncertainty and have increased risk in the financial sector.  According to the International Swaps and Derivatives Association, the total outstanding notional, or face, value of credit-default swaps exploded to a high of some $62 trillion worldwide last year - more than the entire world GDP.  Renowned investor Warren Buffett has called derivatives "financial weapons of mass destruction."

Harkin has a history of raising questions about these contracts with federal officials.  At a February 10, 2000 hearing of the Committee, Harkin, in his position as Ranking Member, asked then- Chairman of the Federal Reserve System Alan Greenspan and then-Secretary of the Treasury Lawrence Summers about the potential threats to the financial system from their proposal to deregulate financial swaps and over-the -counter derivatives. 

From Senator Tom Harkin's Press Office.

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