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SUNDAY/MONDAY MUST READ: It’s the Criminals, Stupid

October 6th, 2008 by Celeste Fremon


At the top of the list of this weekend’s MUST READS, is a actually a MUST VIEW and a MUST LISTEN.



On Sunday, 60 Minutes did an excellent segment on Credit Default swaps, the completely invented financial contraption that is, in essence, a side bet, that in combination with the subprime mortgage pyramid schemes, started the financial hurricane that you and I must now pay for and ride out the best we can.

(NOTE: If you’re still a bit fuzzy on the term, the beginning of the segment has a fairly good explaination of credit default swaps. This segment of This American Life has an even better one, but I’ll get to that down in a minute.)

And surprisingly for mainstream old 60 Minutes, the story concluded with the suggestion that the willfully reckless behavior that made billions for some and wrecked the economy in the process, is not just irresponsible, it is criminal.

Here are a few snips.

Asked what role the credit default swaps play in this financial disaster, [UCSD economist] Frank Partnoy tells [Steve] Kroft, “They were the centerpiece, really. That’s why the banks lost all the money. They lost all the money based on those side bets, based on the mortgages.”


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.

“It is something that we all need to look at and learn lessons from,” Pickel said blandly to Steve Kroft, as if talking about something no more weighty than improving his golf game. “And we all need to work together to understand that and design a structure in the future that works more effectively.”

“These people understand the nature of these products. They understand the risks,” Pickel said when Kroft challenged him further.

Well if they understood the risks, why, when everything went bad, why do we have to pick up the pieces?

“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.

That chapter is not over, and there is much suspense and fear on Wall Street that there are other big losses out there that have yet to be disclosed.

[The credit swap market is estimated as being in the range of 50 to 60 or so trillion dollars.]

They already dwarf what has been lost on those original risky mortgages. As bad as the mortgage crisis has been, 94 percent of all Americans are still paying off their loans. The problem is Wall Street placed its huge bets and side bets with all of those fancy securities on the 6 percent who are not.

“We wouldn’t be in any of this trouble right now if we had just had underlying investments in mortgages. We wouldn’t be in any trouble right now,” says Partnoy.

He says it’s the side bets.


Asked how much of this was incompetence on the part of Wall Street and the people who ran it, Jim Grant [editor of "Grant's Interest Rate Observer." and one of the country’s foremost experts on credit markets] tells Kroft, “The truth is that on Wall Street, a lot of people just weren’t very good at their jobs. It’s as simple as that.”

“These people were being paid $50 to $100 million a year. Some of them, the guys that were running the places,” Kroft remarks.

“There is no defending,” Grant replies. “A trainee making 45,000 a year would have had the common sense not to bet the firm on mortgage contraptions that no one in the firm actually understood. That is not a deep point to comprehend. Somehow, through, I will call it a criminal neglect and incompetence, the people at the top of these firms chose to look away, to take more risk, to enrich themselves and to put the shareholders and, indeed, the country, itself, ultimately, the country’s economy at risk. And it is truly not only a shame, it’s a crime.

Yes, it is. And I, for one, hope they are held to answer for it.


Even if you do understand Credit Default Swaps, the This American Life segment called Another Frightening Show About the Economy is, as of this morning, available for online listening, or download, and you absolutely, positively must listen to it.

The segment explains a lot of what happened last week, what regulators could’ve done to prevent the financial crisis from happening in the first place, and the alternate bailout plan that was sneaked into the English romance novel-length bailout bill last week when nobody was looking. So, listen!

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