Feds Probe Shady Market for Derivatives

The Justice Department is probing the market for credit-default swaps, the largely unregulated derivatives that contributed to the financial crisis, Bloomberg reports. Justice is investigating whether big banks have unfair access to price information through their ownership of a private company that provides data to investors. The Obama administration wants to bring transparency to the swap market, where investors speculate on companies’ failure to pay debts.

Currently investors can buy credit-default swaps “over-the-counter,” without alerting regulators. That opacity caused huge problems last fall, when the collapse of Lehman Brothers left credit markets frozen and exposed the degree to which the big banks were intertwined. “This has to be seen as another step towards regulating the over-the-counter market,” one investor says. (More credit default swap stories.)