Financial WMDs
August 30, 2009 4:35 PM
Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis.
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See all 41 Commentshttp://www.govtrack.us/congress/vote.xpd?vote=h2000-540
Oh, and DelRay21, government mandates to make loans to unqualified people were nullified when the insurance instrument was created, thus turning every bank on every street corner into a defacto Fannie and Freddie. The government mandate ceased to be a mandate after that point. What the government mandated now became a profit center of its own, to be chased after by the banks. Fannie and Freddie created 20% of the "Fannie and Freddie problem", the banks hustling the unqualified borrower, essentially paying prople to buy houses, created the other 80%. You need to get over the Barney Frank connection. It was only 20% of the housing problem. And still, the housing problem didn't create the Wall St problem, Wall St did that themselves, with all the side betting.
And, I'm wondering if any of those involved in passing this legislation have profited in any way from it? How about digging into this a big Steve...in the interest of full disclosure...
Your ability to get a car loan, a small business loan, school loans for your kids, a mortgage have been helped by the securitization market and derivatives.
I own a race horse that has a history of winning.
Just before the big race, I whack the horse in the leg, so he cannot win.
I loan the unsuspecting jockey $100,000 to buy the race horse. I know that the horse cannot win and I know that the jockey cannot make the horse payment unless he wins.
I bank the cash from the jockey, and sell the loan to the taxpayer.
The terms of the loan quickly become common knowledge to the spectators.
As the horse and jockey move to the gate, I buy a Credit Default Swap betting that the jockey will default on the loan, because I know that the horse cannot win.
The CDS costs me 1% of the loan value or $1,000.
As the horse limps to the gate, it is clear to 1,000 spectators in the stands that the horse cannot win, so they also buy CDS?s betting that the jockey will default on his debt.
Of course, the jockey owes $100,000, so he has to run the race and hope for the best.
The jockey loses the race and defaults on the $100,000 horse loan.
The seller of the CDS pays me the $100,000 for the loss which he underwrote.
So, I ?win? $200,000: $100,000 from the sale of the horse and $100,000 from my CDS
However, the thousand spectators also bought CDS?s betting that the horse would lose and that the jockey would default on the $100,000 horse-debt.
Moreover, one of the spectators called a wealthy friend, in a foreign country, who buys 1,000 CDS?s for himself, betting that the horse will lose.
The taxpayers have the jockey?s bad loan for $100,000 and they must dispose of the horse - guess where?
The CDS seller goes broke because 1,000 spectators and one wealthy overseas ?winner? make a total of two-thousand $100,000 claims because a single horse lost a race.
The bettors clamor for the government to make the seller?s CDS?s good.
The government bails outs the seller for $200,000,000 of taxpayer money.
Here is the big catch: because the CDS sellers are unregulated there may be thousands of CDS?s yet outstanding.
How is this different than a real horse race?
A real gambler would not accept the terrible odds that Congress gave the taxpayers.
* Greenspan responsible for not regulating the banks(underwriting,high risk loans, inflated appraisals, etc);
*Phil Gramm, and his charming wife Wendy should do jail time-Research Phil Gramm and his charming insider trading wife Wendy, who was on the BoD of Enron.
60 Minutes, should follow up on this charming couple, will make you choke.
Odd how Warren Buffett realized the impending disaster, while Gramm and Congress stood by and did nothing.
Greenspan, Gramm are both academics and are clueless in a non-academic environment
http://www.youtube.com/watch?v=yCxty7wOWvI
My one page learn all chart and proposals can be studied at: Iudicium Scientia (Decision Knowledge) http://www.iscientiausa.com/Figures_Links.html
http://www.iscientiausa.com/Home_Page.php#Partial_List_the_bailout_must_have
I suppose it is better late than never, but as a nation, we are sure slow to grasp things.
Sincerely,
Robert A. Jasso, President, Iudicium Scientia
I wish the press would report that truth to the people.
From Wikipedia:
The "Commodity Futures Modernization Act of 2000" (H.R. 5660) was introduced in the House on Dec. 14, 2000 by Rep. Thomas W. Ewing (R-IL) and cosponsored by Rep. Thomas J. Bliley, Jr. (R-VA) Rep. Larry Combest (R-TX) Rep. John J. LaFalce (D-NY) Rep. Jim Leach (R-IA) and never debated in the House.[2]
The companion bill (S.3283) was introduced in the Senate on Dec. 15th, 2000 (The last day before Christmas holiday) by Sen. Richard Lugar (R-IN) and cosponsored by Sen. Peter Fitzgerald (R-IL) Sen. Phil Gramm (R-TX) Sen. Chuck Hagel (R-NE) Sen. Thomas Harkin (D-IA) Sen. Tim Johnson (D-SD) and never debated in the Senate.
"Given the above-stated chronology, it would appear that the House and Senate versions of the bill were introduced just prior to the Christmas holiday in December of 2000, following George W Bush''s (first) election (in November of 2000), while then-President Clinton was serving out his final days as President. The bill was never debated by the House or Senate. The bill by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes. In substance, it appears that the leadership of the Republican-controlled Senate and House incorporated the deregulation of credit default swaps into an omnibus budget bill (without hearings or recorded votes)at a time when the outgoing president was in no position to veto anything."---commentary following the piece.
CAN WE GET SOMEONE TO TAKE RESPONSIBILITY FOR THIS MESS?
side betting and more,complete lack of securities regulation, are just one
more confirmation why members of Congress, the President, the Feds, must not
be allowed control of our Nation's health care program. Social Security,
Medicare, Medicaid are open examples of how they promise plans to get it
passed then continuously make changes to further downgrade any value we might have hoped to derive from the program, which was forced upon us in the first place. Also,the proposed tax plan to help pay for it is totally
unacceptable.
That brings us to the real cause of the crisis. While the CDS market was obviously a component in this debacle, widespread fraud in mortgage lending is the fundamental issue. Millions of Americans have benefited from the availability of credit. Mortgage securitization and products like CDOs made this possible by allowing banks to sell their mortgage portfolios and use the money to make new loans. The ease of credit allowed people to buy homes, to take vacations, buy new cars, add swimming pools, and consolidate credit card debt. No money down and no documentation loans allowed people to buy several properties and flip them. The argument that wall st was the sole beneficiary of this crisis is just not factual. When housing prices stopped climbing and as adjustable rates increased, people started defaulting on their loans. Regulation of the mortgage lending industry should be a top priority of Congress. Don't forget it was Congress (Barney Frank and others) that required Fannie Mae and Freddie Mac to buy billions in mortgages in an effort to provide every American, especially lower income Americans an opportunity to be a home owner. In previous years they simply would not have qualified. You can see how mortgage originators like Countrywide (and many others) would be happy to make loans, lower the standards for applicants, require no income verification etc, when they knew that they could quickly turn around and sell them to Fannie Mae. These pools of mortgages were bundled and sold as securities around the world to investors.
Susan Doubilet
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