Eric Dinallo, New York Superintendent of Insurance, guest post at NakedCapitalism:
Credit default swaps must be regulated and sellers must be required to hold sufficient capital. That will make them more expensive, but it will mean the guarantee has real value.
Does requiring adequate capital mean the end of financial innovation? Of course not, it just means that most institutions will operate with less leverage.
Risk and reward are integral to capitalism. But innovators should risk their own capital, not the entire financial fabric. Setting that balance is where effective regulation comes in.
In sum, if you offer a guarantee – no matter whether you call it a banking deposit, an insurance policy, or a bet – regulation should ensure you have the capital to deliver. If you offer investments, be transparent, but buyer beware.
No one should ever again get to bet the store called the Entire American Economy.