The Bet That Blew Up Wall Street

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Real Estate Broker/Owner with Buyers' Choice Realty

Outstanding segment from 60 Minutes:

"In other words, three of the nation's largest financial institutions had made more bad bets than they could afford to pay off."

"It's legalized gambling. It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell."

"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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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. 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. 

They are called credit derivatives or credit default swaps.

As correspondent Steve Kroft first reported last fall, they are essentially side bets on the performance of the U.S. 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.

Read the rest of the transcript at CBS...

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  1. Kent Dills 09/18/2011 02:35 AM
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Mirela Monte
Buyers' Choice Realty - North Myrtle Beach, SC
Myrtle Beach Real Estate

A great documentary to watch in order to understand what happened, is "Inside Job".

As Realtors, I think it's important to know the reasons we are now primarily dealing in short sales and foreclosures...

Sep 12, 2011 11:41 AM #1
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Kent Dills
Broker, Dills Real Estate - Bellingham, WA
Real Estate 817-495-8028, Bellingham, Washington

Mirela, thanks for trying to keep the financial collapse of 2008 and the root cause(s) on our minds via your blog post on the subject!

If watching that 60 minutes video doesn't concern (even scare) those of us who take the time to watch it, then we haven't fully understood the concept and need to watch the video again.  

Couple of important takeaways are (IMHO):

1. Credit default swaps/derivatives are complex financial instruments that are hard to understand even by the experts (Alan Greenspan now admits he didn't fully understand them when he supported passage of the legislation back in 2000 that has allowed the legalized gambling to occur).  But, this video breaks the concept down enough to understand them as a "black box".  

2. Once we have a "black box" understanding of the catastrophic credit default swaps/derivatives, we all need to go back and review the Frank/Dodd Act - that was supposed to "fix" things - to understand how it did nothing of the sort; we're still at risk of the same financial collapse that happened around 2008 of occuring again.  Really.  No kidding.

3. Finally, we need to start communicating to our political leaders the dire need to actually fix the problem (in spite of and given Wall Street's negative influence) and fast. 

Sep 18, 2011 02:30 AM #2
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Mirela Monte

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