U.S. seen probing if derivatives walloped banks

[UpInArms]

Source: Reuters

NEW YORK, Sept 25 (Reuters) - U.S. regulators are looking into credit derivatives as they investigate market manipulation, and some lawyers believe the government is looking at whether traders have used the products to help push banks closer to insolvency.

The Securities and Exchange Commission has said it wants to crack down on investors spreading rumors against financial companies. Lawyers said some traders could be using credit derivatives to harm financial firms more fundamentally than just rumors can.

For example, market participants can buy credit derivatives linked to a bank, boosting the cost of protecting the company's debt against default. That price action could lift a company's borrowing costs dramatically, particularly if combined with rumors of trouble at the company.

For financial companies, which typically borrow billions daily, any pressure on borrowing costs can sap their resources, further pushing them toward the brink.

Boosting a company's borrowing costs through credit derivatives is in some ways similar to short selling, which can also push a bank's shares lower, raising questions about the company's ability to raise equity capital. Those doubts can, in turn, bring ratings downgrades and higher borrowing costs.

Read more: http://www.reuters.com/article/bondsNews/idUSN2553212120080926?sp=true

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financial "weapons of mass destruction"

hmmmm....

Buffet called it after I did.