David Glovin and Karen Freifeld
Monday, Oct 20, 2008
The U.S. government and New York Attorney General Andrew Cuomo opened a joint investigation into the $34.8 trillion credit-default swap market, the top federal prosecutor in New York said.
U.S. Attorney Michael Garcia in Manhattan said in a statement today that his office will try to “determine whether any federal laws have been violated” and will complement an earlier probe by Cuomo’s office.
Cuomo has been investigating whether credit-default swaps were manipulated by short sellers to spread false rumors about financial companies. Prosecutors are looking into whether traders attempted to drive down stock prices of companies including bankrupt securities firm Lehman Brothers Holdings Inc., a person in Cuomo’s office who asked not to be identified said last month. The U.S. is also probing Lehman’s failure, the bank has said.
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Investors may buy credit-default swaps to bet that a company’s financial condition will worsen. The contracts pay the holder face value for the underlying securities or the cash equivalent should a company fail to repay its debt. The instruments’ value increases as investor perception of the company’s stability deteriorates.
The absence of regulation in over-the-counter markets such as credit-default swaps was the “principal cause” of the meltdown on Wall Street last month, New York Governor David Patterson said in a Sept. 22 statement. There were at least $34.8 trillion of credit-default swap trades outstanding as of Oct. 9, the Depository Trust and Clearing Corporation, which operates a central registry for the derivatives, said in a statement last week.
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“By combining the resources, expertise, and legal authorities of the two offices, we are taking a comprehensive approach to this important issue,” Garcia said today of the joint probe with New York state.
Separately, New York State’s insurance regulators began regulating part of the credit-default swaps market Sept. 22. Manhattan District Attorney Robert Morgenthau has opened an investigation of the swaps market as well, his office said.