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where investors can be assured that there are rules that the financial industry has to abide by, regulators are the watchdogs and the eyes for the public. Wall Street has been adding new and complex products to the financial industry, but the government has failed to update regulation so as to ensure that new and complex products are regulated and investors protected.

A perfect example of regulation related to the subprime crises, is the use of credit derivatives called credit default swaps (CDSs). CDSs are contracts between two parties, in this case, the bank and the party selling the product essentially guaranteeing payments of the debts/mortgages in case the borrower of the bank defaults. In substance, CDSs work much like insurance contracts, but unlike insurance contracts, they are not regulated. If CDSs were referred to as insurance contracts, the companies issuing them would be required to maintain adequate capital to cover the insured assets in case of a default.

As the credit or subprime crises deepened, it became clear that the companies that sold the CDSs to investment banks did not have enough money to cover subprime borrowers' defaults, hence the American Insurance Group (AIG) bailout. What is perhaps shocking is that the CDS industry which is a multi trillion dollar industry is still not regulated. Had there been some level of regulation and had these products been treated like insurance products, the chances are that AIG would not have gone to Capitol Hill asking for a bailout

As a result of all the above and many other causes, the economy finds itself in what some economists label the biggest financial crises after the great depression. Various stakeholders had a piece of what now appears to be a Wall Street pie that long past its sell by date. Role players included borrowers who took more debt than they could afford; commercial banks who behaved more like predators or vultures going after their prey; investment banks who saw an opportunity to make quick money and rating agencies who could not keep up with the complexities of business on Wall Street and finally regulators who were just missing in action.

Learn more about this author, Selaelo Ramokgopa.
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