The Bet That Blew Up Wall Street

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

(CBS)  Asked what role Greenspan played in all of this, Professor Goldschmid says, "Well, he made clear in his public speeches and book that a Libertarian drive was part of the way he looked at the world. He's a very talented man. But that didn't take us where we had to be."

"Alan was the most powerful man in Washington in a real sense. Certainly a rival to the president and had enormous influence on Capitol Hill," Goldschmid says.

"And he was at the height of his power," Kroft adds.

Within eight years, unregulated derivatives and swaps helped produce the largest financial services economy the United States has ever had. Estimates of the market for credit default swaps grew from $100 billion to more than $50 trillion, and you could bet on anything from the solvency of communities to the fate of General Motors.

It also produced a huge transfer of private wealth to Wall Street traders and investment bankers, who collected billions of dollars in bonuses. A lot of the money was made financing what seemed to be a never-ending housing boom, selling mortgage securities they thought were safe and credit default swaps that would never have to be paid off.

"The credit default swaps was the key of what went wrong and what's created these enormous losses," Goldschmid says.

"Is it your impression that people at the big Wall Street investment houses knew what was going on and knew the kind of risks that they were exposed to?" Kroft asks.

"No. My impression is to the contrary, that even at senior levels they only vaguely understood the risks. They only vaguely followed what was going on," Goldschmid says. "And when it tumbled, there was some genuine surprise not only at the board level where there wasn't enough oversight but at senior management level."

They didn't know what was going on in part because credit default swaps were totally unregulated. No one knew how many there were or who owned them. There was no central exchange or clearing house to keep track of all the bets and to hold the money to make sure they got paid off. Eventually, savvy investors figured out that the cheapest, most effective way to bet against the entire housing market was to buy credit defaults swaps, in effect taking out inexpensive insurance policies that would pay off big when other people's mortgage investments failed.

[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.
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Where do we go from here?
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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.