Legitimacy in financial markets: credit default swaps in the current crisis

Abstract

The current financial crisis appears to be a moment of epochal change, an archetypal ‘legitimation crisis’. This paper examines the impact of this collapse on one particular section of the financial markets that concerned with credit default swaps. This paper shows how and why the markets for these products expanded and why they were integral to the financial crash. The consequence of the crash was a huge loss of legitimacy for these markets. This paper examines the processes whereby this legitimacy is being reconstructed. In particular, it distinguishes between the re-establishment of pragmatic legitimacy, which is the primary concern of the market participants, and the re-establishment of broader political legitimacy, which concerns governments and regulators. It argues that these two forms of re-establishing legitimacy work in different ways and proceed at different rates. It explores the tensions to which this leads in terms of reconstructing the financial system.