WASHINGTON–New York State Superintendent of Insurance Eric Dinallo echoed an offer by New York Gov. David Paterson's to regulate part of the credit default swap market at a Senate hearing today, but also endorsed a more “holistic” approach to the problem.
Appearing before the Senate Agriculture Committee, Mr. Dinallo explained that credit default swaps can be divided into two categories. The first he noted are transactions in which the holder of an obligation, such as a bond, “swaps” the risk of default with another party, who guarantees it for a fee. That transaction, he noted, can be seen as similar in nature to an insurance transaction.
A second form, which Mr. Dinallo referred to as a “naked credit default swap” differs in that no party involved has ownership of the obligation, and is effectively a “directional bet,” he said.
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