When the going gets weird, the weird turn pro. - Hunter S. Thompson

15 March 2009

It's not gambling because we've specifically exempted it

In the manic years of this decade, credit default swaps took off as a way to bet on the likelihood of default by a firm or an investment portfolio, without having to own any financial interest in the firm or portfolio. That is definitely not insurance, it is gambling. The reason it is not illegal gambling is that, in 2000, Congress specifically exempted credit default swaps from state gaming laws.

The result? Eric Dinallo, the insurance superintendent for New York State, has said that some 80 percent of the estimated $62 trillion in credit default swaps outstanding in 2008 were speculative.
Following the A.I.G. Money (editorial, New York Times)

This is a very interesting point that I haven't seen raised elsewhere... the specific exemption from regulation as illegal gambling.

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