Granted, insurance companies disclose little information about their holdings to the public, but they are subject to state oversight, while hedge funds fly almost completely under the regulatory radar. The Securities and Exchange Commission is making some noise about changing that, but hedge funds are lobbying hard against added oversight. And judging from Alan Greenspan's hands-off approach to financial regulation, the funds probably have an ally in the Fed. Yet a Chubb analyst warns that big losses in hedge fund holdings of credit default swaps could pose as great a systemic threat to the financial system as Long-Term Capital Management's failure in 1998, which prompted the New York Fed to intervene. —R.F.

More Protection, Fewer Loans

The advent of credit default insurance in the late 1990s led to the widespread expectation that banks would be more willing to make loans to companies, since the banks wouldn't be on the hook for defaults by borrowers.

But a look back at actual practices suggests that those expectations were vastly overblown. While the notional value of credit default swaps soared almost sixfold between 2001 and 2003, from $630 billion to $3.6 trillion, the percentage of bank assets made up of loans to companies fell from 20 percent to 17 percent during roughly the same interval. —R.F.

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