Mike has blogged here recently about the dangers of CDS and the potential for manipulation. Last week Chaiman Bernake was questioned by Congress about the role CDS may be currently playing in destabilizing debt securities markets in Europe. The Chairman responded: "Using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that.”
Wikipedia notes the following: "Credit Default Swaps became largely exempt from regulation by the U.S. Securities and Exchange Commission (SEC) with the Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole. "
So CDS are Exempt Securities. Exempt Securities is a "term of art" in securities regulation, any securities regulator would be able to rattle off the definition in an instant. Many issuers specifically seek such an exemption in order to avoid costly SEC oversight. Apparently Ben Bernanke does not know what they are, he apparently thinks that the SEC regulates all securities (not the exempt ones Ben!).
How can the sitting Chairman of the U.S. Federal Reserve System not know what Exempt Securities are? Or at least in this case he does not know that CDS are exempt? (Ben, try Wikipedia!) What does he spend his time on? After all of this time and the grief the Fed has suffered due to AIG's CDS, and he doesn't know they are exempt? Couple this with his previous statements about (to paraphrase) "banks lending out reserves" and one has to wonder what his qualifications are to have his job. I've heard he is an expert on the Great Depression, which may be where his ignorance has us headed again.