Delivering Transparency to NCOIL

The day after we testified before National Conference of Insurance Legislators on the subject of Credit Default Swaps, we sent the following letter to the committee:

January 25, 2009

To the Members of the NCOIL Financial Services & Investment Products Committee
385 Jordan Road
Troy, NY 12180

VIA EMAIL AND FEDEX

Dear Assemblyman Morelle, Senator Seward; and other distinguished members of the Committee:

We are delighted that we were given the opportunity to testify before the National Conference of Insurance Legislators on the subject of credit default swaps – and, more particularly, from our unique perspective as providers of “Transparency in Financial Markets”, the subject of our testimony (attached). This was the first time we announced our solution publicly. We did so in the confidence that 50 state legislatures might bring us as much opportunity for exposure as one federal forum.

As stated in our testimony, we are honored to have been acknowledged by the Congressional Research Service (CRS) in a “CRS Report For Congress” as having “identified the problems in the financial markets that led to the credit and liquidity crisis, and to have devised a solution.” (the full CRS report is attached here). One portion of our solution, is to initiate transparency through “a transaction platform where market participants as well as state and federal regulators have access to view the disclosures and the transaction details…[and] that transparent information about the transaction details would keep market participants honest, while allowing all parties a reasonable expected profit…”

We can not emphasize this point enough: access to transaction data in the form of the contractual underwriting standards and statistics is critical to understanding what is actually contained in all financial agreements themselves. Our proposed solution works universally, whether for hedged or un-hedged (i.e. naked, or what some call “betting” types) of credit default swaps or any kind of financial contract, loan or line of credit or insurance/reinsurance. The solution of using underwriting standards to describe the risks themselves defines transparency; our methodology delivers it. We respectfully suggest that the solution we propose in the form of basic information empowers understanding. It is neutral, non-political – and the people demand it.

Still, there is more to our solution. It is useful to understand that Natural Disasters – and many other risks – do not correlate in any way directly to credit-related risks, the source of our financial meltdown. On this one fact – the use of risk transfer of perils that do not relate to credit – we can simultaneously rebuild both insurance and finance, while allowing for all proper diversification.

We look forward to having the opportunity to discuss this and other aspects of Marketcore’s intellectual property with you going forward.

Sincerely,

Constance Erlanger and Michael Erlanger
Managing Principals

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