Is the Swaps Market Too Big to Ban?

The New York Times reports:

Is the market for credit-default swaps in for a renaissance? George Soros, for one, reckons credit derivatives should be banned. But trading in swaps has so far survived the crisis and market reforms are on the way. Barring unexpectedly draconian regulatory changes, a comeback looks likely, Breakingviews says.

In a credit-default swap, the buyer pays the seller a fee to protect against default on a notional amount of a borrower’s debt, typically in increments of $10 million. If the borrower defaults, the seller pays up. Losses on an oversize book of particularly wacky versions of these derivatives forced the American International Group to take a gigantic government bailout.