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User Info	Aftermath of banking and ins. regulations being bypassed?; entered at 2007-12-02 21:29:10
Theneedles Posts: 3259 Registered: 2007-08-31	Both banking and insurance are (were?) pretty heavily regulated for obvious reasons. Banks were supposed to set aside a percent of each loan in reserve as a precautionary measure. This got bypassed with the off-balance sheet stuff (SIVs). There was a reason the regulations were in place and now everybody is finding out why. Similarly the insurance industry is heavily regulated. Companies must set aside reserves to cover losses should they happen. One can't just set up a shop and call it "Needles Auto Insurance" and start collecting premiums. The government red tape involved must be fierce. But with Credit Default Swaps (CDS) all of this was bypassed. A CDS is basically paying for insurance on a bond not defaulting. Its specifically not called insurance so the insurance regulators can't come in. Now we're going to find out that a lot of sellers of CDS protection don't have the resources to pay out all the claims that will be coming in. There's a reason insurance is regulated and its because of a history of insurance companies going insolvent when the claims come due. The CDS market is about to repeat history. So what is the future of off-balance sheet entities and derivatives like the CDS? There is a massive derivatives lobby that prevented any sort of regulation after any number of blow-ups (e.g. Orange County, Gibson Greetings Cards, P&G) Is the current crisis going to have Washington actually do something to prevent this crap from happening again? Its obvious the market is not learning from its mistakes. This crap just keeps on repeating.