by John Darer CLU ChFC MSSC CeFT RSP CLTC
Credit default swaps are financial contracts that "insure" against the default of financial instruments such as
and corporate debt which are also traded as a hedge against bond defaults.
Credit default swaps played a major role in the credit crisis that brought the downfall of Lehman Brothers Holdings, the bailout and restructuring of American International Group Inc., and Merrill Lynch & Co. being absorbed by Bank of America Corp.
Today Insurance Journal's Valerie Bauman cites New York Insurance Commisisoner Eric Dinallo:
"I have said for more than a year that credit default swaps should be regulated and that those who write them should be required to hold adequate reserves,'' Dinallo said. "But one thing should be clear. While the credit default swap market is not regulated, insurance company use of credit default swaps is.In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval.''