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N.Y., Feds Probing Credit-Default Swaps

Several weeks ago, the Securities and Exchange Commission started looking into the possibility that the credit derivatives market was manipulated to help short sellers in the stock market.

Now the same theory is being tested in New York, where the state attorney general's office and federal prosecutors are taking the unusual step of running a joint investigation.

You may recall that prior to Congress passing the $700 billion rescue/bailout legislation, shares of Morgan Stanley suddenly tanked one afternoon in the absence of any concrete news.

What may have driven down the shares was a dramatic spike that day in the cost of credit derivatives contracts that would pay off if Morgan Stanley defaulted on its debt.

As the cost of the insurance-like protection surged, stock investors surmised that a default by Morgan Stanley was somehow more likely than it was a day earlier.

Regulators are trying to determine whether there was manipulation in the unregulated credit derivatives market, where someone could conceivably make a wild bid for contracts without putting much money behind it in the hopes of profiting from any resulting panic in the stock market.

New York Attorney General Andrew Cuomo has been involved in a broad range of investigations stemming from the credit crisis.

In the joint investigation with the U.S. Attorney for the Southern District of New York, federal prosecutors in Manhattan will focus on determining whether any federal laws were violated in the credit-default swap market.

"By combining the resources, expertise, and legal authorities of the two offices, we are taking a comprehensive approach to this important issue," said a spokeswoman for the prosecutors' office.

-- Heather Landy

By Frank Ahrens  |  October 21, 2008; 1:08 PM ET
Categories:  The Ticker  
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