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[QUOTE]Originally posted by wallymac: [QB] Here's some excerpts from the 60 minutes program. It wasn't the SubPrime mortgages that caused the collapse at all. http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml "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. [b]"The instruments themselves are at the heart of this mess,"[/b] 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. ///////////////// "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. ///////// "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 /////////// [b]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." [/b] ///////////////// 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. [b]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.[/b] 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." http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml [/QB][/QUOTE]
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