Justice Department probes credit-default swaps
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The Obama administration’s push to regulate derivative securities now includes a Justice Department probe of credit-default swaps, one of the most vilified types of derivatives.
From Bloomberg News:
The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks. ‘Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,’ spokeswoman Teresa Chick said [Monday] in an e-mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. ‘We will work with the Department to provide any information requested of us.’ The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592-trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.
Swaps are contracts written between big investors, including investment banks, that can be used either to insure against a debt default by a company or to speculate that a default will occur. Critics have accused some Wall Street players of using credit-default swaps to gang-up on weak financial institutions and speed their failure.
From Bloomberg:
Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps, said two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site. ‘I say Hallelujah that some authoritative body has finally stepped forward to investigate, in a small way, how Wall Street takes advantage of information for its own advantage,’ said William Cohan, a former JPMorgan Chase & Co. investment banker and author of ‘House of Cards,’ about the financial crisis. ‘The fact that they control Markit and it provides information about the prices of credit-default swaps, and they’ve benefited from this for many years without any challenge or investigation, was outrageous.’
-- Tom Petruno