Credit Default Swaps

Hey, Wall Street? Chicken Little called. She says you need to stop overreacting to JPMorgan Chase's $2 billion trading loss. I mean, it's not as if the sky were falling. For a bank this big, $2 billion? It's practically rounding error.

JPMorgan Chase's rapid $2 billion trading loss reportedly involved credit default swaps -- the same investments that played such a large role in the financial crisis. Here's why credit default swaps still pose such a threat to the U.S. economy.

If you don't believe a happy new couple will make it to "til death do us part," now you can buy insurance that will repay you for your gift if they split. But why stop there? Why not apply the methods of credit default swaps to the business of hedging marriage futures?

On Friday, Greece reached a deal to "restructure" its national debt downward by about $133 billion. That's the biggest sovereign restructuring in world history. But don't worry. According to Fed Chairman Ben Bernanke, it's no big deal for the U.S.

To hear the pundits tell it, Greece's debt woes signaled the end of the euro, or worse. Yet, the country's rebound grabs few headlines. This pattern is getting repeated over and over, much to investors' detriment.

U.S. regulators voted in favor of limiting financial institution ownership of derivatives clearinghouses, exchanges and trading platforms to 20% and capping ownership of venues that clear securities-based swaps at 40%.

Europe's shakiest economies managed to ride out a sovereign debt crisis this spring with a lot of help from their more stable neighbors and the major central banks. But new data suggests we may soon see a replay of the debt default crisis.

Former AIG executive Joseph Cassano, who led the insurer's ill-fated CDS unit, says he has no idea why the government paid full price to cover AIG's swaps, asserting that he could have "negotiated an appreciably better deal" for taxpayers.

The massive regulatory revision touches almost every aspect of the financial industry. In addition to rules aimed at trimming risk-taking among banks, the package prominently includes several new protections for consumers.

The European Union is considering measures that would give regulators emergency powers to "prohibit or restrict" naked credit-default swaps -- insurance on bonds not owned by the CDS purchaser -- in reaction to the region's current debt crisis.