60 Minutes: The bets that brought down Wall St.
By SilentPatriot Monday Oct 27, 2008 8:00am60 Minutes' Steve Kroft examines the complicated financial instruments known as credit default swaps, and reveals how these little-known derivatives played a central role in precipitating the current market meltdown. In essence, speculators bet that homeowners wouldn't be unable to pay back their mortgages, and when those people started defaulting and the speculators tried to cash in their wagers, there was no money to cover the literally trillions of dollars in payouts. What it really boils down to is an unregulated gambling racket that Congress voted unanimously to create and legalize.
The world's financial system teetered on the edge again last week, and anyone with more than a passing interest in their shrinking 401(k) knows it's because of a global credit crisis. It began with the collapse of the U.S. housing market and has been magnified worldwide by what Warren Buffet once called "financial weapons of mass destruction."
They are called credit derivatives or credit default swaps, and 60 Minutes did a story on the multi-trillion dollar market three weeks ago. But there's a lot more to tell.
As Steve Kroft reports, essentially they are side bets on the performance of the U.S. mortgage markets and the solvency on some of the biggest financial institutions in the world. It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages.It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea.
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http://en.wikipedia.org/wiki/Credit_default_swap
There was a great story a couple of weeks back on NPR about these monsters.
http://www.thislife.org/Radio_Episode.aspx?sc...
Act Two. Out of the Hedges and Into the Woods.
Enjoy.
i HIGHLY recommend this broadcast on thislife.org . it's very informative and entertaining. we're NOT
hearing the complete/REAL story. why? it's complicated and if the public really understood maybe all
hell would have broke out.
the financial shadow market system got out of control. the REAL culprit is the CREDIT DEFAULT SWAP
instument. essentially side bets on outcomes. these bets were insured if you will with swaps. NOW
financial institutions can't cover the swaps, they over borrowed/leveraged.
it's MUCH more complicated than people defaulting on their mortgage.
First off, 60 Minutes..like they aren't biased.
Now, ok, I will agree that these guys did indeed do Credit Default Swaps, but let us not stop there. Let us dig deeper and actually see how this came to light to allow these guys to make these bets.Is it complicated? Sure it is, but you can not just blame financial institutions or wall street alone.If you are going to report something, try to at least do a full report.
http://www.youtube.com/watch?v=1RZVw3no2A4
http://www.youtube.com/watch?v=_MGT_cSi7Rs&fe...
http://www.youtube.com/watch?v=cMnSp4qEXNM&fe...
Oh, newsflash...
When are the hearings with Fannie and Freddie? Oh that's right...AFTER the election, I wonder why?
I'm curious who you think is not biased journalistically, John.
Also, can you explain exactly how Freddie Mac and Fannie Mae contributed MORE to the current crisis than the wholly unregulated and completely unknown number of credit default swaps?
And why can we not blame the financial institutions for lobbying for the elimination of the prohibition of bucket shops/swaps? Is it not their bad business decisions that caused them to fail?
Honestly, I have not seen, through this whole entire election cycle any non biased journalism from any form of media at all.I would rather see a TV station or radio station that says, you know what, here are the gaffes from both candidates, here are the un-truths from both candidates, here are the facts from both sides etc...This, I believe would be the absolute best media, but I fear we will never see this.
Well, the first question you must ask is this, would the credit default swaps have happened on such a "large" scale if Fannie and Freddie would have been regulated and not allowed so many loans to homeowners, who on paper could afford a home but in reality they couldn't. Regulation for Fannie and Freddie was asked for, but shot down every time.
I am not saying we shouldn't blame the financial institutions, absolutely we should, But, they should not be bailed out like we are about to do and they are not the only ones to blame. I believe the businesses that made bad decisions should be allowed to fail. There is a lot of blame to spread around for sure on the Republican and Democrat side.
I will be the first to say that both sides have some blame in the current situation. What I am trying to say is that the 60 minutes story is biased and doesn't show the full spectrum, they could have done a much better job.
At this point, mortgage defaults are only a tiny piece of the puzzle. Once one leg of the foundation collapsed, the rest of the financial house came tumbling down. The entire structure was built on unsound principals, with little or no regulation. A bastion of GOP policy-- free markets left to run amok.
Both parties, and Wall St., are complicit, as is anyone not paying their bills-- mortgage, credit card, loans, etc.
Well, the first question you must ask is this, would the credit default swaps have happened on such a "large" scale if Fannie and Freddie would have been regulated and not allowed so many loans to homeowners, who on paper could afford a home but in reality they couldn't. Regulation for Fannie and Freddie was asked for, but shot down every time.
Um, no. Not really. In fact, over the last eight years, the Bush administration has systematically asked for less and less regulation. Who do you think was pushing for the "no doc" loans? Who said they wanted to create an "ownership society"? It wasn't Freddie and Fannie.
Why is the video so damn small?
I tried to zoom in but the frame is keeping me from viewing the whole thing. Be more careful with your page formatting, C&L.
And oh, BRING THE OLD SITE BACK!
EDIT:
Slightly bigger vid at
http://www.cbsnews.com/stories/2008/10/26/60m...
Or you can watch it full screen- both do-able here.
Washington, D.C., if Henry Fucking Paulson uses 1 cent to buy or underwrite any goddamn credit default swap.
The Wall Street fucks who created these monsters KNEW what they were doing and CHOSE to ignore the obvious risks.
Fuck 'em. Not my problem, nor yours.
When all this is over and done with.
Henry Paulson will be remembered as the person who launched Goldman Sachs into the stratosphere. The major banks in the US will be GS, JPMorgan Chase, and BAC. Citibank is nowhere to be found.
The fall of Lehman accelerated the financial mess that we are in. All thanks to Henry for refusing to help Lehman. As bad as they are, Lehman is an important market makers in the bond market. To let this market disintegrates right before your eyes, is wholly unjustifiable, simply astounding, and unbelievably inept.
And then to let a 35-year financial whiz (ex GS exec) who have no background in mortgage or bond to take the helm also smells of stinking cronyism.
Face it, the big mania amongst bankers nowadays are mergers and acquisition. Forget these homeowners, they are going to use the govt money to consolidate and merge. And who is the top company for M&A, who else but Goldman Sachs !!!!
That's the real news, not the $700 billion govt buyout, but $700 billion gift for Goldman Sachs !
PS:
The recently updated tax law that is passed secretly along with the buyout bill also encourages bank consolidation.
hey folks it's only a few trillion , what's the big deal?
trillion =1 million- million
my wife has been warning me about these for the last two weeks,
funny how the Republican party ai'nt so hot on managing money, oh yeah the other canard is their better on security,
when did 9-11 happen , who was in charge??
Funny how the hostage crisis, in which the casualty rate was pretty low, brought down Carter. Yet the Lebanon bombing which killed hundreds of Marines ended up strengthening Reagan.
Same for Boosh, 9/11 happened during his watch. Yet the GOP marketed themselves as the party more "likely to protect you."
So it boggles the mind, how... even though almost every major economic crisis has happened during a republican presidency (or brought by republican policies)... the GOP still presents itself as the "business-savvy" party.
It takes two to tango I guess: the unmitigated gall of the GOP and the unmitigated stupidity of certain sections of the American public.
That was a Republican Congress...wasn't it?
Just askin'.
Sadly, it was a Democratic President.
Notice, the biggest failures Democratic leaders make are when they abandon progressive policies for right-wing ideals.
Kucinich '12
Here is what I said previously.
I am firmly against breaking legs as a bookie might do, but I could be persuaded that decapitation by guillotine would be in the interest of national, not to mention poetic, justice.
Maybe bring along an apple to munch -- or better, a bottle in a plain brown paper bag.
The one thing no one is mentioning is the increasing chance of another world war.
This seems to, in some ways, mirror the junk bond market that led to the Great Depression in the 30's. A few got very wealthy (Joe Kennedy for one)while most could barely feed themselves.
Uh, who sponsored the bill in the Congress that changed the rules for Wall Street?
I think that would be Phil Gramm. John McCain's economic advisor.
So where is that in the report?
Stop being a whiner... now it is not the time to point fingers...
(republican sarcasm)
Wouldn't it stimulate the economy more if they had given a million dollars to each of the 300 million U.S. citizens? Instead, those who drove their companies into financial ruin are rewarding themselves with $70 million bonuses, spa treatments and cruise vacations to Greece. How in God's name does that stimulate the economy?
The gall of wallstreet. It takes brass balls to give themselves 70 billion in bonuses in this economy.
Enough is enough... they need to put on notice, and at this point they are doing the equivalent of "niah, niah" to our faces.
The ironic part: Wallstreet needs us (and our money and labor) than we need them. It is time for people to organize, and stop buying the "American dream" which must have been one of the most successful "divide and conquer" mechanisms in history.
And what can we do but shake our fists at the air? Any attempt to stop any of it would be viewed as "terrorist activity" and put down accordingly.
They set the whole thing up. Created this unregulated holy horror of a financial mess. They milked every penny they thought they could get and then when it starts to look like the party is over, when things are going bad, they pull the plug and demand a final payoff before the chimp executive officer fks off to his undisclosed location with no extradition.
Not to mention that there isn't actually any way to stop the cascade failure of the world financial situation even if you were to pour every penny from every country into it.
So they dupe the planet, take ungodly amounts of personal wealth and leave the pieces to fall where they may.
It's win win for dumbya and his rich buddies.
And as usual it's everyone else who pays the bill.
As I've said before and will continue to say, people who voted for and supported dumbya are brain dead.
BTW today, the've come out with the bonuses being given out to the banking criminals with taxpayer money-23 billion
At least in Europe they don't get bonuses from taxpayer money.
At the very least.
Heads had BETTER fucking roll over this shit!
How Al Qaeda of you.
Funny thing, at one time losing one's head was what nobles received, peasants slowly choked to death by hanging.
I don't quite see the benefits.
Al Qaeda endorses McSpain for preznit...
I sir, am no Al Qaeda! ;)
the French cut off a lotta heads
some were innocent ..
but the snake died
HEY it's back
and it's Eating your country alive
still do'nt see the benefits?
ACORN! Redlining! Obama!
*snark off*
a progressive wouldve vetoed that bill
oh well
Wow, it actually was Clinton's fault.
Clinton may have supported the Commodity Futures Modernization Act, but even if Dennis Kucinich was president at the time, he couldn't have vetoed it. It was veto-proof. Republican control of Congress and Bush on the way to the oval office insured it would become law. Clinton was a lame duck in 2000.
A progressive could've done absolutely nothing to stop that act. Period. I'm hardly a scholar of how our government works, but I know that.
Does anyone know if Clinton could've just not signed it? I don't know.
You actually think Clinton was against this but signed due to lame duck status?
The guy who brought us NAFTA? He was never exactly a friend to the unwashed masses in regards to financial policies. It may have been at Alan Greenspan's prodding, but Bill Clinton let the financial sector, dot.com sector and pretty much all business sectors run rampant with greed in the emerging global economy of the 90's.
He had the surplus because the bubble hadn't burst yet.
Bush has screwed up everything he's touched, but we're fooling ourselves to think he was handed a strong economy. He was handed one verging on collapse, then proceeded to kick the bottom out from under it.
This play was Phil Gramm's aided and abetted by a 54/46 Rep/Dem Senate and a 223/211 Rep/Dem House. And you expected Clinton to Veto? Right?
Clinton, a Rhodes scholar, would have known about the ramifications of deregulating the financial sector and had only to call the MSM toadies to get 30 minutes of airtime to warn the electorate of the impending folley. Even old IKE, another presidential warmonger, took to the airwaves, in a rare moment of lucidity and disinterested compassion, to put the teeming unwashed on notice about the military-industrial complex. Clinton deserves to excoriated for his bending over to fiscal conservative special interest groups.
If each citizen was given one million dollars, they would buy homes (which would create jobs for carpenters, plumbers, etc). They would pay off overdue mortgages (which would help banks). They would buy cars (which would help the auto industry). They would shop for the holidays (which would help department stores). Etc-etc-etc. But instead the taxpayers got a measly $600 and the government is surprised that the economy is still in the tank. Duh.
When Bush instilled the panic into Americans at the beck and call of the bankers and brokers, it led to what you see today. It's a plan folks, simply a plan:
http://ugv.abcnews.go.com/Player.aspx?id=6231365
If someone will do a baroque/Renaissance style religious painting of Obama casting the speculators out of Wall Street?
I've already seen one with boosh as Jesus surrounded by his disciples (his advisors) at the last supper.
AIG the insurance company was NOT acting like an insurance company but like a SPECULATIVE investment
bank/HEDGE fund. AIG was selling swaps for investors to cover their bets. when it became time to pay
AIG had to borrow to cover the insurance or the swaps as they called it. too MUCH borrowing/leverage
a 25-30 times the capital.
HEDGE funds are out of control. they're hurting the market. they also in my opinion brought up the
CRUDE oil price at an accelerated rate. NOW the u.s. dollar is strengthening hedge funds are getting out
of oil futures now bringing price down.
my freinds daughter is marrying a hedge fund manager and his salary is a million a year [not bad for a 29 year old]
I understand he is underpaid in his proffesion
chelsea
the clintons were up to their necks in this
so happy hillary didnt win the nomination
the bankers, arbitrageurs, brokers, traders--start piling in the streets next to the Wall Street houses that foisted this crap off.
I don't much care if they jump...
...or are pushed...
"I wonder," sez ysbaddaden (Mon, 10/27/2008 - 10:01 )
If someone will do a baroque/Renaissance style religious painting of Obama casting the speculators out of Wall Street?"
nagahapun...wall street has supplied multiple tens of millions of dollars in contributions to the Obama campaign, including UBS...You know UBS? Phil Gramm's a vice-president there...
Obama caved on the bail-out, just as he will cave on ANY threat to the established order...
I credit (no pun intended) 60 Minutes for this examination of the market collapse. All we normally get from the media are distractions by reactionaries like inside trader Lou Dobbs blaming Fannie and Freddie. The REAL problem was the unregulated financial industry that based the bulk of their wealth on an illusion.
Jan. 15, 2008 Alan Greenspan keeps on cashing in. The former Fed chief is joining hedge fund Paulson & Co. as an adviser.
http://dailybriefing.blogs.fortune.cnn.com/20...
His gravestone will read: "We Didn't Know"
It was either Warren Buffet or Jim Rogers who said they typically found the best investments prospectus was kept to about two pages. Bad investments are always hidden in hundreds of pages of complex details.
Wall street you paying attention?
And the banks who lent them money. For SHAME!! Blaming people who are losing their homes (and the money they invested in them) instead of these people who made billions of dollars on others' misery! And of course, it happened on the last day of Clinton's presidency, so I guess the GOP will blame him, too. It's never the GOP's fault, though weren't they in control of Congress at the time?
The thing that is really making me feel uneasy is the creation of these megabanks, BOA with Merryl Lynch or JP Morgan Chase with MaMu. I thought we had anti-trust laws in the United States. Why is our government trying to create bank monopolies? The thing that scares me about bank monopolies is that if in about fifty years (probably less) the same situation occurs due to an unregulated shadow market, everyone will be screwed beyond redemption.
I hope every person in the US and the world at least gets a cursory understanding of derivatives and credit default swaps. It's complicated but actually quite easy to explain. It's like if you placed a bet and then were able to obtain insurance on that bet. However, that insurance really isn't technically insurance because if it were it would be regulated, so a new fancy term was invented for it, credit default swaps (CDS). Now let's say your insurance company who issued your CDS didn't have to list these on the books, and therefore, the insurance company's capital ratios were unaffected when in reality they should have been because CDS are risk-weighted assets. Thus, your company like AIG was able to boast fantastic revenues and good capital ratios when in reality it was all a deception. Okay, now you understand that millions of other bets, a lot from banks, are made, and they all got insurance as well. You understand that people bet against you, bet along the spread, or bet the same way as you did. Now, it's time to see how well you did at placing you bet, and it turns out that you lost. But, you have your insurance, so you go to make your claim. Millions of others go to make their claim as well since they lost on their bet. Since the insurance company didn't have to adjust its capital ratio, the insurance company tells you that they have no money to give you right now. The insurance company now realizes that they are in astronomical debt because of these CDS or insurances, and their balance sheet will now have to tell the truth, which is insolvency. They run to the government asking for help. Now, these banks who made their bets lost their bets as well, but since their insurance claim cannot be paid by the insurance company, these banks now have to report a loss as well and like the insurance company claim insolvency (bets didn't have to be regulated and thus not reported meaning a false capital ratio). The most insidious thing in this whole fiasco is that no person, bank, or insurance company truly knows the value of their bet or CDS. As complicated as the situation is, no one now understands the mathematics that created these convoluted financial instruments. Therefore, no one knows how far down the rabbit hole everyone is.
The other thing that I find highly amusing/ironic about these complicated financial instruments is that they were created by physicists and mathematicians, and these same people who created these financial instruments now don't even understand what they created. They underestimated the human factor for randomness in their mathematical models which is highly dangerous when using mathematical models to predict economic futures that are used as the basis for these financial instruments. I guess what I am trying to say is that no mathematical model no matter how precise can accurately predict human behavior. They can help to understand human behavior and can be used as a guide for implementing policy, but using mathematical models of human behavior as the basis for an entire shadow market is indeed risky business.
I mainly wrote this post to help myself get things straight (sorry for its length). Please, let me know what I screwed up and what I missed.
Ohhh...the next person who says that Freddie and Fannie combined with the Community Reinvestment Act and those dastardly democrats are at fault for this whole financial meltdown needs to be catapulted into space. Things are a little bit more complex than that.
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