At today's big hearing on Capitol Hill, the Chairman of the Securities and Exchange Commission, Christopher Cox, called for authority to regulate the credit default market. He told lawmakers that no regulators have any authority over that market. But at the same time, he said his agency was using its full authority to investigate fraud and manipulation in that market.

The shortcomings in the credit default market have been clear since the market began to heat up three years ago. In 2005, Goldman Sachs offered to lead a voluntary industry effort to address the shortcomings in the way that market operates. But the industry never really got around to addressing those issues. This is “boring stuff,” like confirmation, documentation, and processing. Unlike exchanges, there is no clearinghouse for CDS, and trades are done over the phone. The New York Federal Reserve pressed the industry to move things along, but still no action. With a backlog of unsigned deals, the failures of Fannie Mae, Freddie Mac, and Lehman created chaos. The industry group, the International Swaps and Derivatives Association, says the players in the CDS market have handled the situation. And it says CDS has been unfairly lumped in with the CDOs (collateralized debt obligations).

Lawmakers offered to give the SEC the authority it was seeking in the emergency bailout legislation. It struck me as odd that Paulson said it couldn’t be done, and Cox said he didn’t want this to interfere with the immediate task at hand. If that’s the case, why come to Congress and ask for it now? Perhaps the SEC is once again playing regulatory catch up with state regulators, since the state of New York last night announced it would classify CDS as insurance and regulate that market.