The $55 trillion question

So what started out as a vehicle for hedging ended up giving investors a cheap, easy way to wager on almost any event in the credit markets. In effect, credit default swaps became the world's largest casino. As Christopher Whalen, a managing director of Institutional Risk Analytics, observes, "To be generous, you could call it an unregulated, uncapitalized insurance market. But really, you would call it a gaming contract."

Good article, though it misses out on one significant thing: credit derivatives don't necessarily need to be regulated like insurance to function soundly; much improvement would be had if they had to be cleared on an exchange which had collateral requirements. In other words, you can't write a contract to pay out on default of General Motors unless you have some significant fraction of cash backing that promise, plus all your other positions.

In all likelihood, some combination of insurance regulation (which really wouldn't be new regulation) plus exchanges could capture all the good of credit derivatives and eliminate most of the bad.

But boy, the world might be reluctant to even bother after cleaning up the current mess.