Swapped Out of Our Underwear by Credit Defaults
In Light of Crisis, Common Trading Practice Looks Risky
By Binyamin Appelbaum and David Cho Washington Post Staff Writers Friday, October 3, 2008; D01
Regulators and Wall Street's scarred survivors increasingly are zeroing in on a massive risk to the stability of the financial system posed by rampant, unregulated trading in credit-default swaps.
A key linchpin in global securities trading, swaps are basically insurance policies bought by investors to protect against an investment such as a corporate bond losing all value if the company falls apart. Over time, the broader market has come to view the price of that insurance, which fluctuates, as a leading indicator of a company's health.
. . . Similar price spikes in the swap market sent the shares of some of the nation's leading insurance companies plummeting yesterday, including Hartford Financial Services, Prudential Financial and MetLife.
The movements have raised alarm over whether investors are manipulating the swap market to fals…