The Bet That Blew Up Wall Street

Steve Kroft On Credit Default Swaps And Their Central Role In The Unfolding Economic Crisis

(CBS)  In the early part of the 20th century, the streets of New York and other large cities were lined with gaming establishments called "bucket shops," where people could place wagers on whether the price of stocks would go up or down without actually buying them. This unfettered speculation contributed to the panic and stock market crash of 1907, and state laws all over the country were enacted to ban them.

"Big headlines, huge type. This is the front page of the New York Times," Dinallo explains, holding up a headline that reads "No bucket shops for new law to hit.”

"So they'd already closed up 'cause the law was coming. Here's a picture of one of them. And they were like parlors. See," Dinallo says. "Betting parlors. It was a felony. Well, it was a felony when a law came into effect because it had brought down the market in 1907. And they said, 'We're not gonna let this happen again.' And then 100 years later in 2000, we rolled them all back."

The vehicle for doing this was an obscure but critical piece of federal legislation called the Commodity Futures Modernization Act of 2000. And the bill was a big favorite of the financial industry it would eventually help destroy.

It not only removed derivatives and credit default swaps from the purview of federal oversight, on page 262 of the legislation, Congress pre-empted the states from enforcing existing gambling and bucket shop laws against Wall Street.

"It makes it sound like they knew it was illegal," Kroft remarks.

"I would agree," Dinallo says. "They did know it was illegal. Or at least prosecutable."

In retrospect, giving Wall Street immunity from state gambling laws and legalizing activity that had been banned for most of the 20th century should have given lawmakers pause, but on the last day and the last vote of the lame duck 106th Congress, Wall Street got what it wanted when the Senate passed the bill unanimously.

"There was an awful lot of, 'Trust us. Leave it alone. We can do it better than government,' without any realistic understanding of the dangers involved," says Harvey Goldschmid, a Columbia University law professor and a former commissioner and general counsel of the Securities and Exchange Commission.

He says the bill was passed at the height of Wall Street and Washington's love affair with deregulation, an infatuation that was endorsed by President Clinton at the White House and encouraged by Federal Reserve Chairman Alan Greenspan.

"That was the wildest and silliest period in many ways. Now, again, that's with hindsight because the argument at the time was these are grownups. They're institutions with a great deal of money. Government will only get in the way. Fears it will be taken overseas. Leave it alone. But it was a wrong-headed argument. And turned out to be, of course, extraordinarily unwise," Goldschmid says.

[Mom-O-Truth]

I call it Financial cannibalism of capitalism. Perfectly planned in 2000 executed in all details to cash in right before the election n 2008. Those who played the American citizens MUST be prosecuted and their money taken just like Madoff. A history example must be set with sever punishments by the current Obama administration.

[BarbaraAnnJackson]

Certain mortgage companies align with shrewd foreclosure lawyers to
benefit from unlawfully seized & unlawfully flipped properties --mostly by use of names mortgage companies that LACK STANDING or are DEFUNCT. Successful frauds enable these companies to file FALSE form 1099-A's with the IRS, as well as to file fraudulent Bankruptcy Court "Lift Automatic Stay Motions." The potential fraud being committed on the IRS via deliberate sham foreclosures will be worse than the S&L debacle.

News reports about foreclosures which court judges VOIDED will help
raise awareness so that thousands of people will not UNLAWFULLY become HOMELESS due to ILLEGAL FORECLOSURES. See foreclosure fraud proof @
*http://www.lawgrace.org/2008/08/08/my-august-8-2008-statement-to-the-louisiana-secretary-of-state-office-of-financial-institutions-concerning-wells-fargo-irs-and-mortgage-frauds-sham-foreclosures-and-judicial-collusion-and-national-app/

*http://www.lawgrace.org/2008/09/14/lehman-brothers%E2%80%99-mortgage-troubles-nationally-evidence-of-foreclosure-fraud-deception-and-conspiracy-with-wells-fargo-deceptive-judicial-filings/.

[resolue1]

I saw the show for the first time this evening as well and I've since read through many viewers comments, some of which were quite enlightening. My ultimate conclusion is that we cannot count on any of our representatives to represent us. Clinton could and should have vetoed it, Christmas or not. His total disregard for the possible outcome goes hand-in-hand with his reputation as a bad loser.
That it passed unanimously is even more disconcerting since certainly the democrats still sitting could and should have voted against it. One can only conclude that a lot of those people made a lot of money on those deals. I wish we could get the names of members of congress who did business with those companies that made a killing in CDS. Greed is non-partisan. Everyone is guilty, and the more you have, the more you want. I'm sure that they would all defend it as good business judgement. In the end you must look out for yourself- as Voltaire said- il faut cultiver son propre jardin. It's too easy though, to let the liars and fleecers off the hook so I agree with the fellow who wrote in last year and suggested that we tax the living daylights out of everyone making over $250,000 a year, with a seering 50% bracket for people over say $500,000. That's how it was before Reagan when we were a real country. While I'd like to see an end to the capital gains tax for my own obvious reasons, we should probably tighten that one up and make sure there aren't any loopholes. If these guys and gals ( Since Pelosi's husband is/was? a hedgefund manager) are going to get rich on our sweat- then let them pay for it- fully fund Medicare, fully fund Medicaid, give the money back to the states to pay for the pensions and rebuild our schools & highways. Make them pay- Make them pay- they can afford it.

[tank82]

Very good story, glad to see some information like this coming out about what happened. Steve good job but you stop short and end up on the wrong road. We need to stop blaming everything on the government regulation or de-regulation as the case maybe. You came so close to getting to what I want to know.

You made the comparison of these instruments to side bets but stop there. Let?s continue with this comparison, in a bet there is always a winner and a loser. We know who the losers are; the company?s issuing these policies. Here?s the problem Bookies, Casino?s and Race tracks are the one ?issuing? bets and they are usually pretty profitable. So why did the issuer of these policies get burned so badly.

At best it was horrible business management by multiple companies. At worst it was insider trading on steroids. I hate to sound like a conspiracy nut but the big bounces paid to these companies management sure seem to point to a payment for a job well done. Then other companies giving mortgages to anyone that could rub to nickels together. It is hard to believe so many companies did so many seemingly stupid things all at the same time. Then add in that regulators relaxed the laws after being illegal for over a 100 years and ensuring that states could not regulate it.

This is the story I want investigated and reported on. Who all gained from this and were they involved in any part of what caused it.

In my opinion groups of greedy people who would do this is a greater threat to the USA than any foreign terrorist organization. If evidence is found this occurred, could law enforcement use the terrorism laws to aid in the criminal investigation of this financial terrorism?

[mybuisness]

I wish congress would demand a review of the hedge funds which profited so handsomley from these CDS and reveal all the notable people of vested interest who profited on all this.

[kamirika]

Would someone out there share their wisdom and tell me what piece of legislation made this all possible and who introduced the piece to begin with?

[gusron]

Unfortunately, most of comments show that the authors don''t understand the roots of the current crises. Those authors have been brainwashed with the myths of the "American dream," freedom and the superiority of the capitalist system.

That system needs a deep revision toward the "capitalism with the human face" - Do you remember- "...human face"?

Otherwise, it is, and it would remain a jungle, that is no better than communism!

[gusron]

Unfortunately, most of comments show that the authors don''t understand the roots of the current crises. Those authors have been brainwashed with the myths of the "American dream," freedom and the superiority of the capitalist system.

The system needs a deep revision toward the "capitalism with the human face" - Do you remember- "...human face"? Otherwise, it is, and it would be a jungle, that is no better than communism!

[sonnung]

Either Clinton didn''t know the Enron loophole was in there, or he was going to benefit from it. Either way it led to this. If he didn''t know, then he is kicking himself now for not seeing it and yelling at his former advisers as well. If he did benefit from it, then he can try to sleep with the knowledge that his involvement is causing the rise in homelessness and poverty in our great nation.... Reps and Dems on both sides approved this bill and might not have known about it. And Bush vetoed the Bill that would close the loophole? What the.... Bush also vetoed every measure against the NSA until telecom was allowed immunity. he loves us so much. thanx b.

[djlny]

Hey Mom O, if we redistribute the wealth of those who understood the risks properly and invested accordingly and distribute it to others, why not redistribute the wealth of those homeowners that bought low too. Since we are out of equity on our own homes we can start cashing out our neighbors equity and keep those carts moving over at Walmart.

[vhammon]

Is someone investigating CDS market manipulation? If someone can bet that anyone''s house will burn down, it is an open invitation to arsonists. It seems likely that the CDS meltdown was engineered.

[djlny]

95% of democrats voted for the bill versus 72% of republicans - though the congressional record does not indicate any opposition based on this provision from either party. This was a popular measure on both sides of the aisle. It was unopposed and for anyone to suggest otherwise is delusional. 60 trillion CDS doesn''t mean anything. The entire value of the underlying collateral would have to be zero. So the actual losses amongst investors who covered these bets is only going to be a small fraction of that. The biggest losses arose at AIG which was unregulated by the Federal Government - it was regulated by democrats in New York State who now claim to see nothing, know nothing and hear nothing. Is Sgt Schultz in charge over there or what?

[cao93058]

Funny how everyone wants to blame Bush on the financial woes of the country. Tell me, why did Clinton let this bill pass? Why was there no talk of if by anyone to the public, democrat or republican. Where were the democrats while all this was going on?

[achangenow]

And what party was in the White House and controlled Congress when "side" betting was made legal? We must vote the majority of Republicans out of office Nov. 4!!

[wbrynelson]

On your broadcast, Harvey Goldschmidt said that he did not know how much money was involved in the credit default swaps (CDS). However, on Oct. 8, Paul Volker (former Fed. Reserve Chair) said on the Charlie Rose show that $10 trillion were involved in bad debts though derivitives and that $60 trillion were involved in the CDS. Since the U.S. Govt. is currently bailing out such institutions as AIG and others who designed and sold these CDS, I believe American citizens and Congress should understand the magnitude of the CDS problem, as the 2007 GDP was approximately $14 trillion.

[mom_o_truth]

........WITH LIBERTY AND JUSTICE FOR ALL.

[mom_o_truth]

"If you can and you could lay down cents on the dollar to place a bet on the solvency of Wall Street, for example, as some did, when Wall Street became evidently insolvent, that cents on the dollar bet went up 30, 40, and 50 fold. Not everyone who did that wants to get his name in the paper. But there are some spectacularly rich people who came out of this," Grant says.

"Who got richer," Kroft remarks.

"Who got richer, who became, you know, fantastically richer," Grant says.

A lot of them were hedge fund managers. John Paulson''s Credit Opportunities Fund returned almost 600 percent last year, with Paulson pocketing a reported $3.7 billion.
------------------------------------------------
Where do we go from here?
---------------------------
Freeze their assets and redistribute on those who lost their home equity, not to those under foreclosure.

[oldbookguy]

Wow, and all I want to do is play a $5.00 game of poker online and congress says THAT is illegal.......

[djlny]

You don''t need a lobbyist when the US Treasury Dept. is run by Goldman Sachs. It is its'' own lobby. That is not about to change no matter who wins in a couple of days. Paulson and Rubin made more in a day at GS than their entire tenure at the US Treasury. Clinton made more than $120M after he left office versus around $2m while in the White House, who paid him? Quid pro quo? I don''t know. Bush isn''t going to be any poorer in a few months either. The amazing thing about the latest crop of Obamacons is that they think this time will be different. Ah, hope springs eternal, or in the words of the immortal Maurice Chevalier "Thank God for little girls".

[one4gipper]

krisd999, you are in the majority of Americans that believe there is a disconnect between morality and prosperty. I would adduce that you cannot have one without the other.

I believe that America is about to get a real dose of this Natural Law.