Treasury Secretary Tim Geithner said that he likely will not ban one of the key financial instruments that led to the collapse of AIG and a number of other institutions.
“My own sense is that banning naked default swaps isn’t necessary and wouldn’t help fundamentally in this case,” Geithner told Rep. Joe Donnelly (D-Ind.) when asked about the value of the instrument.
Credit default swaps were insurance policies offered by AIG and other companies on bundles of toxic assets, allowed under the assumption that increasing property values would fuel increased value for mortgages. Under those assumptions, the credit default swaps would only rarely have to be paid out.
Geithner said it would be too difficult to distinguish under the law what is a legitimate business risk (or “hedge”) versus what constitutes a major gamble.
“Well our issue is not whether we want to protect the American economy from these things in the future, which we do, the question is how best to do that,” the Treasury secretary explained. “My own judgment is: don’t need to do that, very very hard to do that, but understand there are other views on that and happy to listen to any suggestion.”
Watch a video of this segment of the testimony below (h/t firedoglake).