Congresswoman Waters Introduces Credit Default Swap Prohibition Act

Congresswoman Maxine Waters introduced the Credit Default Swap Prohibition Act of 2009 (H.R. 3145) last night. Citing concerns that current regulatory reform proposals would require central-counterparty clearing but provide exceptions to supervision over customized credit default swaps, Congresswoman Waters offered H.R. 3145 to put a total prohibition on these financial instruments.

"Credit default swaps are one of many contributing factors to the current economic crisis," said Congresswoman Waters. "I applaud the sweeping reforms to the financial regulatory system that have been proposed, but I believe we must go even further. Preventing all credit default swaps is essential to bringing stability to the market and preventing a similar crisis in the future." 

Congresswoman Waters was inspired to write H.R. 3145 in part by the crisis involving American International Group (AIG), which wrote credit default swap contracts in which both parties involved had exposure to the underlying reference asset.  These swaps ended up causing the company's downfall, costing thousands of jobs and billions in taxpayer dollars.   

Congresswoman Waters is joined in her concerns by some of America's top financial minds.  Leading financier George Soros has called credit default swaps "instruments that should be outlawed" and has compared these swaps to "buying life insurance on someone else's life, and owning a license to kill."  Charles Munger, Vice Chairman of Berkshire Hathaway also believes credit default swaps should be eliminated, calling their prohibition "the best solution."  Munger has also noted that "it isn't as though the economic world didn't function quite well without it, and it isn't as though what has happened has been so wonderfully desirable that we should logically want more of it." 

"Unless credit default swaps are banned entirely, I am concerned that the industry will find a way to loosen standards and widen exemptions for customized contracts and then we will be right back to where we are today, with capital markets hobbled and the financial system in need of additional government intervention," said Congresswoman Waters.  "This Act, combined with President Obama's proposed regulatory reforms, will ensure that our financial markets are resistant to future attempts at reckless behavior."

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