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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.

The Bet That Blew Up Wall Street
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by Intrepid_Iconoclast September 29, 2009 9:50 AM EDT
Here is the vote record from the house. Only 4 voted against it, one being Ron Paul.

http://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.
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by edward1011 September 28, 2009 4:44 PM EDT
I hope some of those bankers go to jail.
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by MindLift September 14, 2009 12:13 AM EDT
A trickle of truth emerges. CBS, Please keep reporting on this story and work harder to get MORE TRUTH about the corrupt monetary system. The secrecy and lies must end, and the media MUST reveal this truth as fast as possible. Throw off the shackles of your slave masters and fulfill your purpose: REVEAL THE TRUTH.
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by mackendw September 11, 2009 9:24 AM EDT
So, there presumably was a significant fee associated with selling these unregulated ticking time bombs which the wall street houses collected and which resulted in large bonuses being paid out to said traders. Now, with these contracts being suspended and not honored (RE: china giving the proverbial middle finger salute), will these bonuses be recinded and paid back I wonder? How about returning those billion dollar windfall payouts mr hedge fund manager(s) as your ill gotten gains have resulted in catastrophe.

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...
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by megawavez September 9, 2009 12:46 PM EDT
Just let them go bankrupt and prosecute those who actively engaged in fraud.
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by delray21 September 4, 2009 1:28 PM EDT
Mike60min - fraud is fraud. Everyone needs to recognize that there is plenty of blame to go around. I agree there are some overpaid execs on wall st, but there aren't any billionaires simply because of the CDS market. These businesses were only a portion of the overall revenue of even the largest investment banks. In your example the CEO presumably made a profit by exercising his options because the stock price of the company went up. Any retail investor who owned the company stock or even call options (which anyone can buy) would also benefit. Usually those executives must wait 5 years or more to exercise those options. If the company doesn't perform well (ie the stock price goes down) his options would be worth significantly less. I would argue that running a large and complex company like State Street or Boeing or Goldman Sachs and making them profitable would qualify as earning it.

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.
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by redknight13 September 4, 2009 10:03 AM EDT
OK, guys. I have figured out the Credit Default Swap scam.
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.
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by lane4411 September 1, 2009 1:31 PM EDT
A Couple have touched on this, bears repeating:

* 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
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by IScientia September 1, 2009 1:31 PM EDT
It is refreshing to see that news network, politicians, and the president are finally beginning to understand the complexity of the financial meltdown. I sent an analysis of the meltdown to all the major networks, national talk show host, my elected representatives, and both presidential candidates Obama and McCann 7 hours after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke meet with key legislators to propose a $700 billion emergency bailout September 18, 2008.

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
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by bigjimjames August 31, 2009 10:54 PM EDT
See also "The Reckoning - Taking Hard Look at a Greenspan Legacy" NY TIMES, Peter S. Goodman October 8, 2008
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