The Bet That Blew Up Wall Street

The TNT was the collapse of the housing market and the failure of complicated mortgage securities that the big investment houses created and sold around the world.

“As the market began to seize up and as the market for the underlying obligations began to perform poorly, everybody wanted to get paid, had a right to get paid on those credit default swaps. There was no money behind the commitments. All rights reserved.

While Congress and the rest of the country scratched their heads trying to figure out how we got into this mess, 60 Minutes decided to go to Frank Partnoy, a law professor at the University of San Diego, who has written a couple of books on the subject.

Ask to explain what a derivative is, Partnoy says, “A derivative is a financial instrument whose value is based on something else. But the people in the stands may also have a financial stake in the ouctome, in the form of a bet with a friend or a bookie.

They are called credit derivatives or credit default swaps.

When 60 Minutes last spoke with Eric Dinallo, he was insurance superintendent for the state of New York. But we have a bet based on the outcome.

“It’s legalized gambling. And a lot of derivatives are bets based on the outcome of games of a sort. Every week, the New York Giants take the field with hopes of getting back to the Super Bowl. We don’t own the teams. Morgan for pennies on the dollar, Lehman Brothers was allowed to go belly up, and AIG, considered too big to let fail, is on life support thanks to a $180 billion investment by U.S. It’s basically a side bet.”

Partnoy says the bet was whether interest rates were going to go up or down. “And the new bet that arose over the last several years is a bet based on whether people will default on their mortgages.”

“We could call that a derivative. And people came up short. It was updated on Aug. They have a direct investment in the game. It was very illegal 100 years ago,” Dinallo says. It was illegal gambling. And so that’s to a large extent what happened to Bear Sterns, Lehman Brothers, and the holding company of AIG,” he explains.

As correspondent Steve Kroft first reported last fall, they are essentially side bets on the performance of the U.S. Bear Stearns was sold to J.P.

Copyright 2008 CBS. It was triggered by the collapse of the housing market in the United States and magnified worldwide by the sale of complicated investments that Warren Buffett once labeled financial weapons of mass destruction. Zero, as far as I can tell,” Dinallo says.

In other words, three of the nation’s largest financial institutions had made more bad bets than they could afford to pay off. Not football games, but games in the markets,” Partnoy explains.

“Yes, and it used to be illegal. 26, 2008. And there was no ‘there’ there. And we made it legal gambling…with absolutely no regulatory controls. It’s a side bet. If they do, they will get more money and glory for the team and its owners. mortgage markets and some of the biggest financial institutions in the world – a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages. But the rocket fuel was the trillions of dollars in side bets on those mortgage securities, called “credit default swaps.” They were essentially private insurance contracts that paid off if the investment went bad, but you didn’t have to actually own the investment to collect on the insurance.

Think of it for a moment as a football game. He says credit default swaps were totally unregulated and the big banks and investment houses that sold them didn’t have to set aside any money to cover potential losses and pay off their bets.

“I mean it sounds a little like a bookie operation,” Kroft comments.

This story was first published on Oct. . 27, 2009.

Anyone with more than a casual interest in why their 401(k) has tanked over the past year knows that it’s because of the global credit crisis.

And that was the bet that blew up Wall Street. taxpayers.

It would have been illegal during most of the 20th century under the gaming laws, but in 2000, Congress gave Wall Street an exemption and it has turned out to be a very bad idea

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