What are these Gramm Swaps I've been hearing about? I think it has something to do with the financial crisis?

My friend tells me this whole mess was caused by a scheme to avoid insurance regulations called gramm-swapping. What is a gramm-swap?

What are these Gramm Swaps I've been hearing about? I think it has something to do with the financial crisis?A gramm-swap is a private contract. It works like insurance. A client company pays premiums to an Insurer, and if a bad thing happens (in the case of grammswaps the bad thing is a debtor defaulting) then the Insurer has to pay a claim. But because of legislation sponsored by Phil Gramm when he was in the Senate (The Commodity Futures Deregulation Act of 2000), these special contracts are not technically classified as "Insurance." So instead of having to be capitalized and regulated, they do not have to be capitalized, at all. And they aren't regulated, at all.



Insurers have simply been collecting preiums, lots of premiums, wihout any means of paying a claim. The insurers didn't think claims would ever be made because they thought the underlying securities, (in most cases real estate) would just increase in value forever.



They didn't, and the claims started crashing in. That sound you heard on Wall street this week was the glass house of cards crashing down.



Because they are completely outside the regulated financial world, no one, not even the Secretary of the Treasury, really knows how many Gramm-swaps are out there, or how many claims will be made. $700 billion is just a start.