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Thread: Financial and Economic Crisis

  1. #136
    Disgruntled Optimist lofter1's Avatar
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    All eyes on Wall Street - reframing the crisis

    understory.com

    The Offical Website of RAN (Rainforest Action Network)

    posted by Becky in Global Finance, RAN General on September 30th, 2008

    UPDATE: Activists Scale Flagpole Behind Iconic Wall Street Bull, Raise 150-Square Foot American Flag with ‘Foreclosed?’ Stamped Over It



    UPDATE 2: link to Flickr set

    UPDATE 3: High-res photo.


    ————————————————

    In the past few weeks, our economic system has sustained some of the most dramatic shifts of the past 50 years. Comparisons have been made to the Asian economic crisis of the nineties, the dot-com bust of the early 21st century, and even the Great Depression. Our economic and financial system is in tatters, and all of us are wondering what will come of our savings, our homes, and our future.

    The news has been focused on whether and what kind of a bailout package will be handed to the very financial institutions that got us into this mess. Understandably so: $700 billion is a large sum of money, and a significant contribution from taxpayers wallets, especially when compared to other possible uses of such a cash injection — Medicare, infrastructure or renewable energy, to name just a few.

    However, with the unprecedented nationalization of Freddie and Fannie, Lehman Brothers filing the largest bankruptcy filing in U.S. history, and Goldman Sachs and Morgan Stanley voluntarily becoming bank holdings companies, the actions taken by the Federal Reserve are themselves an admission that the institutions that makeup the U.S. financial system are broken.

    It is critical that we look beyond the bailout to the underlying cracks this crisis has exposed in our financial system. We cannot allow the bailout (whatever its conditions) to further subsidize the decades of risky financial behavior that is now mortgaging our homes and our planet.

    We have an unprecedented opportunity to rebuild our economy and establish a financial system that operates within ecological limits. It’s time for Americans to demand structural solutions that put families before financiers and the planet before profits.

    For the past eight years, RAN’s Global Finance Campaign has urged America’s leading financial institutions to take responsibility for the impacts of their investments and to recognize the financial and reputational risks inherent in directing vast sums of capital towards environmentally unsustainable and socially unjust projects—from rainforest destruction and oil extraction to the construction of coal-fired power plants.

    Banks need to be held accountable for the impacts of their investments, whether they are subprime mortgages or new coal plants. In both cases, the impact of the financing deal is ‘externalized’ – that is, the effect on people and the environment is not considered when the loan or transaction is being approved. In the case of subprime mortgages, home foreclosures were not considered a ‘downside’ until they started happening at a rate that impacted the viability of the financial system itself. The same reasoning holds true in the financing of fossil fuel projects. The impacts of constructing coal-fired power plants on the climate and on communities have not been deemed key factors in determining whether or not to finance such projects.

    There has never been a better time to hold banks accountable for the impacts of their investments and demand that they develop the necessary due diligence processes to ensure that we do not mortgage the Earth’s natural capital in the same way that we have mortgaged the futures of millions of Americans whose homes have been foreclosed on.

    It is crucial to take this opportunity to shift the debate from one that dwells on the immediate need to staunch the bleeding from the subprime meltdown to one that is based on a vision for a socially just and ecologically sustainable financial system.

    All eyes are on Wall Street — Now is the time.

  2. #137
    The Dude Abides
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    Lofter: hedge funds can invest in almost anything, and can take positions both long and short. Mutual funds, on the other hand (think Fidelity) can only bet long on their investments.

    Quote Originally Posted by Edward View Post
    This article is an eye opener in identifying the source of the crisis, it's not real estate, it's not too much cash. Read http://www.nytimes.com/2008/09/28/business/28melt.html

    So, in a nutshell, AIG London division took premiums from insured businesses, provided NOTHING in return, and got paid $3.6 billion. That sounds like a robbery.

    Now, the fascinating part. Goldman Sachs has $20 billion tied up in AIG. The current chairman of GS comes to talk to his buddy Paulson, the former chairman of GS, and shortly afterwords Paulson gives $85 billion of taxpayer money to AIG. Goldman Sachs is saved.

    The summary: AIG robbed other companies to the tune of billion of dollars, and then took taxpayers money to give to victims, keeping the loot.

    If the $700 billion bailout goes for the same purposes, that's wrong.
    I read that article when it came out, and it raised some good points. However, the most important reason AIG was bailed out was because it insured some 400 billion of European banks' assets. (The division responsible for the mess was, after all, based in London.) If AIG had failed, a number of large European banks would have become insolvent overnight, and the impact would have been disastrous.

    The Blankfein-Paulson connection, while glaring throughout the crisis, amounted mainly to an increased sense of urgency on the part of the Fed/Treasury to come up with an idea to stem a possible run on Goldman. They saw how crippling the Lehman failure was, both in terms of market confidence and in sorting out liabilities and reassessing counterparty risk; if Morgan Stanley or Goldman Sachs had failed as abruptly, it would have been an endgame of sorts.

  3. #138

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    Quote Originally Posted by pianoman11686 View Post
    If AIG had failed, a number of large European banks would have become insolvent overnight, and the impact would have been disastrous.
    Why EU did not act then, why it falls into USA lap?

  4. #139

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    Quote Originally Posted by Jasonik View Post
    ... it is a scandal that the risk pyramid scheme ended with the Fed covering the defaults and writedowns rather than have AIG liquidated to cover its obligations.
    "Risk pyramid scheme" - what a great expression, nails the essence of this crisis.

  5. #140

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    Quote Originally Posted by Jasonik View Post
    They tried to pass the risk on to an insurer, but it doesn't change the fact that too much money was going into real estate market-wide. Real estate was bound to have an economy changing correction -- insurance or not.
    That's exactly the point I am making - it was bound to happen, the Wall Street knew about the possibility of the catastrophic scenario, but was mum because they were making too much money.

  6. #141
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    Quote Originally Posted by Edward View Post
    Why EU did not act then, why it falls into USA lap?
    For starters, AIG is an American-incorporated company, overseen by American regulators. Secondly, the EU is incredibly ill-equipped to deal with this financial crisis. Individual countries are too small to singlehandedly rescue trillion-dollar financial companies, and trying to arrive at a joint-rescue is next to impossible, as each country faces its own set of problems.

    I think the Times article had a not too subtle agenda to paint Goldman as a behind-the-scenes decisionmaker. I don't buy it, because there's so much other evidence showing that this crisis impacts almost everyone. If major European banks were to go under because they woke up the next morning to find out they're insolvent on account of AIG not being able to insure their risk capital, they would have been immediately nationalized. American banks are their biggest lending/trading partners, and would have seen untold billions' worth of holdings vanish overnight.

    While it now seems the AIG rescue was not such a big deal in the grand scheme of things, it is worth pointing out that the only reason the Fed/Treasury extended the loan because AIG didn't have enough time to liquidate its assets. It would have been forced to file bankruptcy within a day or so. Instead, it is now just beginning to auction off big pieces of the company while paying 8.5% interest on the credit facility, and 11.5% on any drawdowns.

  7. #142

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    StrategeryCapital Management LLC
    "Putting your money where our mouth is."

    strategerycapital.com

  8. #143
    Disgruntled Optimist lofter1's Avatar
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    Tomorrow's News Today ...

    Citigroup Says Judge Suspends Wachovia Deal

    NY TIMES
    By ERIC DASH and JONATHAN D. GLATER
    October 6, 2008

    On the web: 10.05.08 - 10:28 AM EDT

    Citigroup announced late Saturday that it had persuaded a New York judge to temporarily block Wells Fargo from acquiring Wachovia, firing the first shot in what could be a prolonged legal battle.

    Citigroup has accused Wells Fargo of wrecking its plan to acquire Wachovia’s banking operations for $2.2 billion, or $1 a share, in a deal arranged by the Federal Deposit Insurance Corporation. Four days after that deal was struck, it fell apart when Wachovia agreed to Wells Fargo’s offer to pay seven times as much for the entire company.

    The underlying battle is over which company will emerge from the economic crisis in a stronger position among a smaller number of financial giants. Citigroup contends that the deal with Wells Fargo violates an agreement that prohibited Wachovia from having any sale or merger discussions with anyone other than Citigroup until Oct. 6.

    The order issued by a judge on Saturday extends the term of that agreement until further court action, Citigroup said. A person briefed on the situation said that Citigroup was seeking $60 billion in damages from Wells Fargo for interfering with the initial transaction.

    Lawrence P. Haeg, a Wells Fargo spokesman, declined to comment on Sunday morning on any claim that Wells Fargo had interfered with Citigroup’s deal with Wachovia. Wells Fargo has “a definitive merger agreement with Wachovia Corporation and it is a compelling value for, and in the best interests of, Wachovia’s shareholders, team members, customers, communities and the American taxpayers,” he said. Mr. Haeg also declined to comment on the impact of the Judge Ramos’ order on the Wells-Wachovia merger.

    Christy Phillips-Brown, a Wachovia spokeswoman, said the bank “believes its agreement with Wells is proper, valid, and is in the best interest of shareholders, employees and American taxpayers.”

    “Under that agreement,” Ms. Phillips-Brown continued, “Citigroup is always free to make a superior offer to Wachovia.”

    A senior Wachovia official said that Wachovia’s lawyers had not seen the judge’s order and suggested that Citigroup’s actions were a pointless legal maneuver designed to destabilize the Wells deal.

    The litigation could be a blockbuster, pitting some of the nation’s largest surviving financial institutions against one another and giving work to the most expensive legal talent money can buy. Citigroup is represented by the New York lawyer Gregory P. Joseph; Wachovia by David Boies of Boies, Schiller & Flexner; and Wells Fargo by Paul K. Rowe of Wachtell, Lipton, Rosen & Katz, according to people briefed on the matter.

    Until late Thursday, Citigroup believed it had reached a deal with Wachovia after marathon talks last weekend under intense pressure from federal regulators worried about Wachovia’s financial condition. Regulators agreed to help Citigroup by absorbing losses over $42 billion.

    Wells Fargo, which had walked away from talks with Wachovia, returned late Thursday with its surprise bid, in which Wells Fargo offered to buy all of Wachovia, not just its banking operations, for about $15 billion in stock, far more than Citigroup had offered. And Wells Fargo’s deal, which takes advantage of a lucrative tax loophole tied to deferred losses, would be structured without any direct government support.

    Federal regulators did not block Wells Fargo’s proposal, and by early Friday morning, its merger with Wachovia was approved by the boards of both companies.

    The move left Citigroup officials fuming. On Friday, they put out word to regulators and the public that Wachovia had breached an exclusivity agreement and that Wells Fargo had interfered with their deal. That night and Saturday morning, Citigroup officials huddled in a makeshift war room at the law offices of Davis Polk & Wardwell in Midtown Manhattan.

    Federal regulators have been discussing the offers, with senior officials from the Federal Reserve encouraging the parties to reach a swift resolution, according to a person briefed on the matter.

    Citigroup raised the stakes in the merger battle on Saturday afternoon, asking Justice Charles E. Ramos of New York State Supreme Court to issue an emergency order blocking the deal between Wachovia and Wells Fargo.

    Representatives from the banks met at Justice Ramos’s home in Cornwall, Conn., late Saturday afternoon for more than three hours of oral arguments, according to people briefed on the situation.

    In the unusual weekend session, Citigroup presented Justice Ramos with a 16-page complaint naming both Wells Fargo and Wachovia, and their boards, as defendants. But it has not yet filed the suit formally because the courts were closed.

    Late Saturday, after several hours of intense legal jockeying, Justice Ramos issued an injunction effectively blocking the Wells Fargo deal, pending a hearing scheduled for Friday.

    The agreement with Wachovia that Citigroup has cited and that contains the ban on negotiating with any other potential bidders was not a final merger contract but rather a letter agreement to “continue to proceed to negotiate definitive agreements.”

    Lawyers not involved in the battle said Wachovia could defend the Wells Fargo deal by arguing that it was better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.

    The litigation could put regulators in a tough spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit.

    Copyright 2008 The New York Times Company

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  9. #144
    Disgruntled Optimist lofter1's Avatar
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    Wachovia says it will press ahead with Wells deal

    Yahoo Finance / Associated Press
    By Sara Lepro, AP Business Writer
    Sunday October 5, 3:37 pm ET

    Wachovia says it's pressing ahead with Wells Fargo deal after Citi gets order against sale

    NEW YORK (AP) -- Wachovia Corp., at the center of a fight between Wells Fargo & Co. and Citigroup Inc. over who will buy the beleaugered bank, is moving ahead with its deal to sell itself to Wells Fargo -- while questions arise about the damaging effects that prolonged litigation might have on Wachovia.

    Wachovia responded Sunday to a judge's order temporarily blocking the sale of the bank to Wells Fargo, saying it does not believe the order "has any effect on the validity of the Wells Fargo agreement with Wachovia."

    Citi said in a statement announcing the ruling late Saturday it "is prepared to continue negotiations with Wachovia on the parties' previously agreed-to transaction."

    New York State Supreme Court Justice Charles Ramos issued the order blocking the sale of Wachovia, which Wells Fargo had agreed to purchase in its entirety in a $14.8 billion deal. Citigroup accused Wells Fargo of trying to cut off its earlier takeover offer of Wachovia's banking operations for $2.1 billion in a deal struck with the assistance of the Federal Deposit Insurance Corp. On Friday, four days after that deal was struck, Wells Fargo said it was buying all of Charlotte, N.C.-based Wachovia.

    In its request to Ramos, Citigroup invoked an exclusivity agreement in its agreement that bars Wachovia from talking with other potential buyers. In New York, the Supreme Court is a trial-level court; it was quite possible that ligitation among the three banks could go on for some time.

    A protracted court fight raised the possibility that Wachovia, already hurt by billions of dollars in losses from failed mortgages, will further weaken. However, the government, which has closed and then seized failing banks including Washington Mutual Inc., the nation's largest thrift, would likely step in if the bank were in jeopardy.

    Wachovia is among the banks whose billions of dollars in losses from bad mortgage bets ultimately led to the government's $700 billion plan to buy bad assets from banks and other institutions to shore up the financial industry.

    "I would hope there would not be a long battle because that does not bode well for Wachovia's existing business," said Ben Halliburton, chief investment officer at Tradition Capital Management. "Any delays in action and uncertainty of who is going to own Wachovia ... just causes further problems for the operating entity."

    Wachovia spokeswoman Christy Phillips-Brown said in a statement Sunday the company believes its agreement with San Francisco-based Wells Fargo is "proper, valid and ... in the best interest of shareholders, employees and the American taxpayers."

    She said Citigroup is free to make a better offer to Wachovia under that agreement.

    Wells Fargo said Sunday it has "a firm, binding merger agreement" with Wachovia.

    "That agreement represents a transaction that, in stark contrast to Citigroup's proposal, provides significant and certain value to Wachovia shareholders, keeps Wachovia intact, is better for all of Wachovia's stakeholders including its employees and does not demand financial support from our government," the bank said, adding that it is confident that it will complete the deal.

    "Nothing in the court's temporary order impacts our ability to ultimately do that."

    The FDIC said Friday it "stands behind its previously announced agreement with Citigroup." It also said it would review all proposals and work with regulators of all three institutions to resolve the tug-of-war.

    The government insurance agency held an auction for Wachovia that led to the announcement of the Citigroup deal a week ago. But Wachovia clearly wanted to be sold intact, and reached a deal with Wells Fargo, which had been among the companies vying for Wachovia.

    "This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Robert Steel, Wachovia's president and chief executive, said in a statement Friday.

    The legal fight pits two of the largest remaining financial institutions against one another as the ongoing credit crisis leads the federal government to arrange marriages and sales among banking entities.

    But not only does a legal battle delay Wachovia's saving, it could also be damaging to Citigroup, Halliburton said.

    "I'm quite surprised that Citigroup would be agitating in this fashion, given that they themselves might need some government favors in the near future," Halliburton said, either for recapitalization or potentially to take over some other failed institution with the help of the FDIC.

    "I can see why Citigroup wants it. I'm just surprised they don't recognize in all likelihood it's over."

    Wachovia was a big originator of what are called option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months.

    Wachovia and Citigroup are among the companies that have been forced to take billions of dollars in write-downs because of failed mortgages and mortgage-backed securities that have also plunged in value. The heavy losses led to the failure not only of WaMu and a number of smaller banks, but also the government-brokered sale of Bear Stearns Cos. to JPMorgan Chase & Co. and the bankuptcy filing of Lehman Brothers Holdings Inc.

    New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.

    Copyright © 2008 Yahoo! Inc. All rights reserved.

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    Disgruntled Optimist lofter1's Avatar
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  11. #146
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    ^ Lol!

  12. #147

    Default Looks like this financial crisis is spreading North

    CTV News

    Scotiabank forecasts recession for Canada

    Updated Sun. Oct. 5 2008 11:20 PM ET
    CTV.ca News Staff



    A Scotiabank report is forecasting recessions for both Canada and the United States that could last well into 2009.


    But the report says a potential recession in Canada would not be nearly as bad as one in the U.S. The bank expects Canada's housing market to continue to slow, exports to the U.S. to drop and unemployment to rise as companies cut back on expenses.

    The economic report for the bank's customers, exclusively obtained by CTV's Ottawa Bureau Chief Robert Fife, also forecasts particularly gloomy news ahead for Canada's ailing auto sector.

    "We expect 2008 U.S. passenger vehicle sales to fall to 13.7 million units -- the lowest level since 1993 -- from our previous estimate of 14.1 million. Our 2009 forecast has also been reduced to 13.5 million units, compared with an average of 16.7 million over the past decade," the report says.

    The report that September's job numbers, to be released this week by Statistics Canada, will show a "mild decline in employment."

    The report says Canada's housing market should continue to slump going into 2009, but the impact will not be as severe as the sub-prime housing crisis in the United States.

    "Canada's sub-prime market is only (five to six per cent) of outstanding mortgages whereas the U.S. is over three times that amount. Canadians are also more conservative and have lower debt tolerance than the U.S. while the funding model is also completely different," the report says.

    The bank is also forecasting that the Bank of Canada and the Federal Reserve will cut rates by a full percentage point, taking the overnight rates down to one per cent.

    The Scotiabank report could put Conservative Leader Stephen Harper in a difficult position during the last full week of campaign for the 2008 election.

    Conservative insides say that Harper has been playing it safe on the economy because he doesn't want to rattle the market. His opponents, however, have been playing up the economic slowdown as an election issue.

    But as incumbent prime minister, Harper's words have more impact than his opponents and if he starts to say that the economy is in trouble, there could be an adverse reaction on the stock market.


    Bailout won't work: top economist

    A prominent American economist says Washington's massive bailout for Wall Street will not stop a recession from hitting the United States.
    "This is the most serious economic crisis I've seen since the 1970s," Peter Navarro, an economist at the University of California, Irvine, told CTV's Question Period on Sunday.

    He said the bailout has stopped a "global depression," but "we're not going to avoid a recession here in the U.S."

    Navarro, the author of numerous books on the American economy, said that a weak U.S. dollar has so far allowed the country to avoid a recession. But that will likely change as European and Asian economies slow down and reduce American imports.

    "More subtly, the central banks around the world from Europe to Asia are going to be cutting interest rates. That is going to send the dollar back up and that is also going to cut exports (from the U.S.)," he said.

    Navarro's analysis is similar to that found in recent economic surveys, including an International Monetary Fund report released this past week.

    It said the U.S.-financial sector problems are likely to be associated with a protracted downturn in the economy.

    On Friday, U.S. President George Bush signed into law a bill that gives a US$700-billion lifeline to waning financial markets. Commentators said the measure was a tourniquet for the banking industry. The sector has suffered a credit crisis because of a housing market that burst due to increasing numbers of foreclosures on subprime mortgages.

    Navarro said the declining portfolios of ordinary North Americans will add to recessionary pressures.

    He said Americans will spend less because "people are going to be hurting," adding that the impact will be felt in Canada.

    "I see a prolonged recession given the track we're on. Canada is tightly coupled to the U.S. economy, so whatever we feel here, Canada is going to feel as well," he said.


    © 2008 All Rights Reserved.

  13. #148

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    MBS (mortgage backed security) has entered the popular vocabulary, but there's another instrument behind them - Credit Default Swap.

    CBS 60 Minutes report:

    A Look At Wall Street's Shadow Market

    Oct. 5, 2008(CBS)

    Video
    At 08:00 mark, note the non-interview with ISDA CEO Robert Pickel


    On Friday Congress finally passed - and President Bush signed into law - a financial rescue package in which the taxpayers will buy up Wall Street's bad investments.

    The numbers are staggering, but they don't begin to explain the greed and incompetence that created this mess.

    It began with a terrible bet that was magnified by reckless borrowing, complex securities, and a vast, unregulated shadow market worth nearly $60 trillion that hid the risks until it was too late to do anything about them.

    And as correspondent Steve Kroft reports, it's far from being over.


    It started out 16 months ago as a mortgage crisis, and then slowly evolved into a credit crisis. Now it's something entirely different and much more serious.

    What kind of crisis it is today?

    "This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing," says Jim Grant, the editor of "Grant's Interest Rate Observer."

    Grant is one of the country’s foremost experts on credit markets. He says it didn't have to happen, that this disaster was created entirely by Wall Street itself, during a time of relative prosperity. And they did it by placing a trillion dollar bet, with mostly borrowed money, that the riskiest mortgages in the country could be turned into gold-plated investments.

    "If you look at how this started with the subprime crisis, it doesn't seem to be a good bet to put your money behind the idea that people with the lowest income and the poorest credit ratings are gonna be able to pay off their mortgages," Kroft points out.

    "The idea that you could lend money to someone who couldn't pay it back is not an inherently attractive idea to the layman, right. However, it seemed to fly with people who were making $10 million a year," Grant says.

    With its clients clamoring for safe investments with above average return, the big Wall Street investment houses bought up millions of the least dependable mortgages, chopped them up into tiny bits and pieces, and repackaged them as exotic investment securities that hardly anyone could understand.

    60 Minutes looked at one of the selling documents of such a security with Frank Partnoy, a former derivatives broker and corporate securities attorney, who now teaches law at the University of San Diego.

    "It's hundreds and hundreds of pages of very small print, a lot of detail here," Partnoy explains.

    Asked if he thinks anyone ever reads all this fine-print, Partnoy says, "I doubt many people read it."

    These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk.

    "Obviously they turned out to be wrong," Partnoy says.

    Asked why, he says, "Because you can't model human behavior with math."

    "How much of this catastrophe had to do with the instruments that Wall Street created and chose to buy…and sell?" Kroft asks Jim Grant.

    "The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."

    "People don't know what they're made up of, how they're gonna behave," Kroft remarks.

    "Right," Grant replies.

    But it didn't stop ratings agencies, like Standard & Poor's and Moody's, from certifying the dodgy securities investment grade, and it didn't stop Wall Street from making billions of dollars selling them to banks, pension funds, and other institutional investors all over the world. But that was just the beginning of the crisis.

    What most people outside of Wall Street and Washington don't know is that a lot of people who bought these risky mortgage securities also went out and bought even more arcane investments that Wall Street was peddling called "credit default swaps." And they have turned out to be a much bigger problem.

    They are private and largely undisclosed contracts that mortgage investors entered into to protect themselves against losses if the investments went bad. And they are part of a huge unregulated market that has already helped bring down three of the largest firms on Wall Street, and still threaten the ones that are left.

    Before your eyes glaze over, Michael Greenberger, a law professor at the University of Maryland and a former director of trading and markets for the Commodities Futures Trading Commission, says they are much simpler than they sound. "A credit default swap is a contract between two people, one of whom is giving insurance to the other that he will be paid in the event that a financial institution, or a financial instrument, fails," he explains.

    "It is an insurance contract, but they've been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a 'swap,' which by virtue of federal law is deregulated," Greenberger adds.

    "So anybody who was nervous about buying these mortgage-backed securities, these CDOs, they would be sold a credit default swap as sort of an insurance policy?" Kroft asks.

    "A credit default swap was available to them, marketed to them as a risk-saving device for buying a risky financial instrument," Greenberger says.

    But he says there was a big problem. "The problem was that if it were insurance, or called what it really is, the person who sold the policy would have to have capital reserves to be able to pay in the case the insurance was called upon or triggered. But because it was a swap, and not insurance, there was no requirement that adequate capital reserves be put to the side."

    "Now, who was selling these credit default swaps?" Kroft asks.

    "Bear Sterns was selling them, Lehman Brothers was selling them, AIG was selling them. You know, the names we hear that are in trouble, Citigroup was selling them," Greenberger says.

    "These investment banks were not only selling the securities that turned out to be terrible investments, they were selling insurance on them?" Kroft asks.

    "Well, it made it easier to sell the terrible investments if you could convince the buyer that not only were they gonna get the investment, but insurance," Greenberger explains.

    But when homeowners began defaulting on their mortgages, and Wall Street's high-risk mortgage backed securities also began to fail, the big investment houses and insurance companies who sold the credit default swaps hadn't set aside the money they needed to pay off their obligations.

    Bear Stearns was the first to go under, selling itself to J.P. Morgan for pennies on the dollar. Then, Lehman Brothers declared bankruptcy. And when AIG, the nation's largest insurer, couldn't cover its bad debts, the government stepped in with an $85 billion rescue.

    Asked what role the credit default swaps play in this financial disaster, Frank Partnoy tells 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."

    How big is the market for credit default swaps?

    Says Partnoy, "Well, we really don't know. There's this voluntary survey that claims that the market is in the range of 50 to 60 or so trillion dollars. It's sort of alarming that, in a market that big, we don't even know how big it is to within, say, $10 trillion."

    "Sixty trillion dollars. I know it seems incredible. It's four times the size of the U.S. debt. But that's the size of the market according to these voluntary reports," says Partnoy.

    He says this market is almost entirely unregulated.

    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.

    "Well, there's clearly something wrong with the system if all of these leveraged bets, hidden leveraged bets, caused a collapse in the financial system," Kroft remarks.

    "It is something that we all need to look at and learn lessons from. And we all need to work together to understand that and design a structure in the future that works more effectively," Pickel says.

    "My point is, the people that made these mistakes are the people you represent in your organization. And many of them sit on the board. I mean, if they didn't get it right, who would?" Kroft asks.

    "These people understand the nature of these products. They understand the risks," Pickel replies.

    "Well…they didn't or they wouldn't have bought them. They wouldn't have used them," Kroft says.

    "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

    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.

    "You got Wall Street firms, Bear Stearns, Lehman Brothers. You got insurance companies like AIG. Merrill lost a ton of money on this," Kroft says. "Everybody's lost a ton of money. They're supposed to be the smartest investors in the world. And they did it themselves."

    "They did it all on their own," Partnoy agrees. "That's the most incredible thing about this crisis is that they pushed the button themselves. They blew themselves up."

    Asked how much of this was incompetence on the part of Wall Street and the people who ran it, Jim Grant 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."


    60 Minutes requested interviews with top executives at Bear Stearns, Lehman Brothers, Merrill Lynch , Morgan Stanley, Goldman Sachs, and AIG. They all declined.


    Produced by L. Franklin Devine
    © MMVIII, CBS Interactive Inc. All Rights Reserved.

  14. #149
    Chief Antagonist Ninjahedge's Avatar
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    "You can't model human behavior with math"?

    BS.

    But just like any model, you put in the wrong formula or the wrong parameters and you get, guess what?

    The wrong answer.


    They tried to mathematically model a very complex situation and ended up converging on the wrong solution to a very unstable algorithm.... But that is all just gobbledy-gook.

    The thing that is most annoying about this is that the money is not in the hands of the ones we can get at. The originators of these schemes are so far removed, I do not know if we can, or ever will, get that capital back!


  15. #150

    Default

    These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk.

    "Obviously they turned out to be wrong," Partnoy says.

    Asked why, he says, "Because you can't model human behavior with math."
    Obviously BS. Algorithms do not lie. Formulas do not produce wrong results. It's the people who plug unrealistic assumptions.

    I would go even further. Since we do not know what exactly was modeled, it's possible that the math was right every step of the way. Perhaps the task was "please model the scenario where we could get huge profits and give multi-billion dollar salaries and bonuses for at least 5 years, and no need to model what happens after that".

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