Regulate CDS as insurance

Credit default swaps nearly brought down the world financial system last fall when it was discovered that AIG Financial Products had written hundreds of billions of dollars worth of credit protection without setting aside sufficient reserves. Yet since then, pathetically little has been done to get this corner of the derivatives market under control. There’s a simple way to fix the problem. Regulate CDS as insurance. That could happen if some state insurance legislators get their way.

Treating these financial weapons of mass destruction as insurance instead of as merely swaps would subject them to sensible regulation. But Wall Street is fighting the idea because it would hammer profits and, more importantly, force them to reduce leverage.