Imagine you bought a house and, to insure it, you had to purchase coverage from the homebuilder.
Then imagine a fire nearly destroyed the house, but your ability to collect the insurance depended on a committee of anonymous homebuilders meeting in secret to vote on whether to write you a check. If denied, the panel wouldn’t have to provide an explanation, you wouldn’t be allowed to review the minutes of closed-door discussions and you’d have no right to appeal.
Not a great system. But not dissimilar to the one that governs the world of credit-default swaps, the contracts that insure sovereign- and corporate-debt investors against default. Panels made up of representatives from large banks, hedge funds, investment firms and other interested parties, formed by the International Swaps and Derivatives Association, decide whether payouts will be made to investors.
With the Greek crisis, the group has been busy. It already ruled March 1 that Greece’s debt restructuring so far wasn’t a “credit event,” meaning it didn’t trigger payments on credit- default swaps. It may have been the correct decision. But no outsiders participated in that meeting. No transcript was made public. And when the determinations committee, as it’s called, issued a decision, a terse 300-word explanation was provided. As for CDS buyers, there was no opportunity for an appeal.
Keep reading; Banks Shouldn’t Be Both Judge and Jury on Credit Defaults: View – Bloomberg.
