The Bet That Blew Up Wall Street

There was no money behind the commitments. 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.

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. It’s a side bet.

Copyright 2008 CBS. They are called credit derivatives or credit default swaps.

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

This story was first published on Oct. 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. 26, 2008. And there was no ‘there’ there. Not football games, but games in the markets,” Partnoy explains.

“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. We don’t own the teams. “And the new bet that arose over the last several years is a bet based on whether people will default on their mortgages.”

“Yes, and it used to be illegal. 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.

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.

“We could call that a derivative. Bear Stearns was sold to J.P. 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. It was very illegal 100 years ago,” Dinallo says. . They have a direct investment in the game. And people came up short. If they do, they will get more money and glory for the team and its owners. 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.

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

When 60 Minutes last spoke with Eric Dinallo, he was insurance superintendent for the state of New York. 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. It was updated on Aug. It’s basically a side bet.”

Partnoy says the bet was whether interest rates were going to go up or down. But we have a bet based on the outcome. And we made it legal gambling…with absolutely no regulatory controls. 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. Zero, as far as I can tell,” Dinallo says.

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. taxpayers.

“It’s legalized gambling. 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.

And that was the bet that blew up Wall Street. Every week, the New York Giants take the field with hopes of getting back to the Super Bowl. And a lot of derivatives are bets based on the outcome of games of a sort.

Think of it for a moment as a football game

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