A Look At Wall Street's Shadow Market

60 Minutes: How Some Arcane Wall Street Financial Instruments Magnified Economic Crisis

(CBS)  How big is the market for credit default swaps?

Says Partnoy, "Well, we really don't know. There's this voluntary survey that claims that the market is in the range of 50 to 60 or so trillion dollars. It's sort of alarming that, in a market that big, we don't even know how big it is to within, say, $10 trillion."

"Sixty trillion dollars. I know it seems incredible. It's four times the size of the U.S. debt. But that's the size of the market according to these voluntary reports," says Partnoy.

He says this market is almost entirely unregulated.

The result is a huge shadow market that may control our financial destiny, and yet the details of these private insurance contracts are hidden from the public, from stockholders and federal regulators. No one knows what they cover, who owns them, and whether or not they have the money to pay them off.

One of the few sources of information is the International Swaps and Derivatives Association (ISDA), a trade organization made up the largest financial institutions in the world. Many of them are the very same companies that created the vast shadow market, lobbied to keep it unregulated, and are now drowning because of unanticipated risks.

ISDA's CEO, Robert Pickel, says there is nothing wrong with credit default swaps, and that the problem was with underlying mortgage securities.

"Well, there's clearly something wrong with the system if all of these leveraged bets, hidden leveraged bets, caused a collapse in the financial system," Kroft remarks.

"It is something that we all need to look at and learn lessons from. And we all need to work together to understand that and design a structure in the future that works more effectively," Pickel says.

"My point is, the people that made these mistakes are the people you represent in your organization. And many of them sit on the board. I mean, if they didn't get it right, who would?" Kroft asks.

"These people understand the nature of these products. They understand the risks," Pickel replies.

"Well…they didn't or they wouldn't have bought them. They wouldn't have used them," Kroft says.

"These are very useful transactions. And the people do understand the nature of the risk that they're entering into…but I'm not sure that…," Pickel says.

"Useful?" Kroft interrupts. "How come they brought down the financial system?"

"Because, perhaps they didn't understand the underlying risk, and nobody really saw the effects that were going to flow through from the subprime lending situation," Pickel says.

[north45]

I like the transcript of the videos, speakers are identified and I can look up exact quotes.

These comments are not a real blog. In real life I''m 45north not north45 (rules). The rule against html is a constraint.

[notassmartas]

Well, now it is mathematicians and physicists who are the *bad* guys. If so, one wonders why there were no well paying jobs in math and physics for them and they had to work in the corporate world of finance?

[tracysmom39]

Who sets the million dollar ceo bonus. The stock holders certainly cannot agree that golden parachutes should be given to a ceo who has departed after damaging the company. Is it a I''ll scratch your back, if you scratch my back amoung upper management.

[nkhunt]

Re Your story on October 5 on "...Wall Street''s Shaddow Marrket." The thrust of your story was that the current economic crisis was caused entirely by Wall Street malfeasance. You failed to mention that the federal government was complicit in this fiasco. You cetainly knew that. Are you so enamored with liberal politicians, that you have lost your journalistic integrity?

[hur451]

This segment should be shown as a psa on every station in the country to expose this mess ,it should also be shown to the senate and congress. Mr. Kroft an excellent report.

[babooph]

Keep the Somali pix in the news-it portends the USA future with the BUSH legacy.

[deanhix]

The problem lies not with the fat cats. Some might have taken advantage but the problem lie with Fannie/Freddy. lending instutions were required by Fanny/Freddy to carry subprime housing loans. their strong arms were Acron and liberials in congress

[deanhix]

The 2005 reregulation bill of freddie mae offered by john mccain was killed in senste by dem, it takes 60 votes to pass bills. all dems voted against and all rep voted for. there are only 49 rep in senate.

[johnb92711]

This is why I tell people to have at least 3 to 4 months (or more) of food on your shelves. Buy only what you use anyway, so you don''t waste money. If things get alot worst, you''ll be ready. Prices could go up alot more or even shortages. It does not hurt to have extra food. You don''t want to be dependent on someone else for your next meal. This also buys you some time. If nothing happens, so what, you don''t go shopping for awhile. You''ve saved money. If things do get worst, you''re ready and you have something to trade with.

[bobnjersey]

[john mccain tried to stop this mess in 2005 and his bill was blocked by the liberals in the senste including obama. 60 minutes removed my comments. CBS is in the tank for obama]
[Posted by deanhix at 11:07 AM : Oct 07, 2008]

did john mccain resist the lobbying efforts of wall street to keep the credit default swaps from remaining unregulated ... being the man of deregulation that he so proudly used to state?

what party controlled congress when mccain called for legislation to control freddie/fannie? why didn''t the republicans push the limits thru?

[epicflux]

The CEO of that derivatives company was hilarious blaming the underlining securities.

The metaphor in my mind is like a gambling addict trying to explain to his therapist & family that it''s not his bets that are losing him money, but the horses he''s betting on. It''s a skewed logic that only an addict could understand.

"If only the horses would win, I would win, CAN''T YOU SEE!"

[maine11111]

Bilical times people, can everyone say ONE WORLD GOVERNMENT!!!!!

[pakaal]

"These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk."

The start of that sentence should include "mathematicians and physicists _working for financial houses_" and end with "eliminate most of the risk to themselves _and the corporations they worked for_."

And judging by some of the hundreds of millions being paid out to the execs who are now leaving the burning buildings cash in hand, it looks like they did their jobs well.

[suriko]

I am so angry. Just where is the $60 Trillion dollars or is it all just worthless paper too? I''ll join the class action suit. I''ve worked hard all my life and I want justice for the American people. Don''t forget to VOTE...

[onedayatatim]

Is it just me or does anyone else wish they could slap the smirk off of ISDA''s CEO, Robert Pickel? I would love to see that association investigated.

[onedayatatim]

onedayatatim

[cbsisafraid]

Why was there no mention of JP Morgan in the 60 minutes story? They are the largest holder of derivatives.
$80 Trillion or so in notional value according to the government agency that monitors banks

http://www.occ.treas.gov/deriv/deriv.htm
Where did you see $80 trillion?
The tables are in "millions" and JP shows
total Derivatives of $83,436,951,000.

[deanhix]

If you want to know what happened see the video "no Money" on youtube.com/themouthpeace

[deanhix]

I posted a comment about the basic cause of this being the social engineering of fannie mae. john mccain tried to stop this mess in 2005 and his bill was blocked by the liberals in the senste including obama. 60 minutes removed my comments. CBS is in the tank for obama

[julietteg]

Do I, as an Americal citizen, have the right to file criminal charges against those who took such incredible risk with the economy resulting in the current situation and/or do we have the right, as the American people, to file a class action lawsuit against the same? If any of them had a conscience, and obviously none do, they would return the money - it just didn''t disappear.