The news magazine show 60 minutes peaked my curiosity and fanned the flames of anger which had died down a little over the $700 billion bail out plan. The piece aired on Sunday night October 5th entitled “Wall Street’s Shadow Market” indicated the $700 billion is only a drop in the bucket and will not solve the financial crisis perpetuated upon the United States and the world by the actions of the criminally greedy individuals running investment companies and large corporations.
CBS reporter Steve Kroft interviewed Jim Grant a leading expert on credit markets and Grant stated the current 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.”
Monday, October 7th saw the stock market decline drastically and markets around the world declined as well. The economy of the U.S. and the world is in a tail spin and the $700 billion bail-out is not stopping it.
How did this all happen? Once again I will admit I am no financial expert, but the 60 minute piece did cause this inquiring mind to dig deeper for answers.
Some people tend to see the current crisis as nothing more than a gamble taken by Wall Street executives. Well this was no ordinary poker game or chance purchasing of a lottery ticket. Wall Street executives earning $50 to $100 million a year made decisions which a first year Wall Street intern would have known was a poor choice. Perhaps it is not so much that they made poor choices as it is they decided to go from taking a gamble to committing a crime.
Check this out, noted economists state the $700 billion bail out will not solve the problem because there is something hiding in the shadows that was not taken into account when congress voted to go ahead with the bail out. The investment banks and insurance giants like AIG were utilizing something called Credit Default Swaps and these “little gems” are actually even more scary than the bad mortgage debts.
Wikipedia defines Credit Default Swaps as - “ A contract in which a buyer pays a series of payments to a seller and in exchange receives the right to a payoff if an associated credit instrument goes into default or on the occurrence of a specific credit event named in the contract such as a bankruptcy or restructuring.” It also notes the CDS was originally used as a form of insurance against bad debt but it became a tool for financial speculators when the Commodity Futures Modernization Act of 2000 specifically banned regulation of these trades.
Now get this - the company or investor, did not have to own the bond or the instrument they wanted to “insure” with the Credit Default Swap. Also, if the bond failed they theoretically would receive payment. Because the CDS is not actually an “insurance” product it is not as insurance products are, regulated by the states or federal government. This means there is no over sight of theses transactions and this allowed speculators to make money by purchasing a CDS on a company’s bonds, then shorting the stock of the company in great quantity and getting a payoff that exceeded their “risk” of shorting if the price of the company’s stocks declined.
The FBI has spent untold money and man power on tracking and bringing down the Organized Crime, it appears to me they need to turn their resources onto this monkey business, which is “Organized Crime” on an even grander and more deadly scale.
The actions which have taken place by these investors appears to be unethical at best and criminal at worst. I mean come on Martha Stewart was sent to jail for insider trading amounting to less than a million dollars. That pales in comparison to what these guys were doing. Their actions could very well lead to the financial ruin of the United States and other countries around the world.
You may be thinking this is an exaggeration. According to various financial resources the Credit Default Swap is the most widely traded credit derivative product in the world. The Bank for International Settlements reported the notional amount on outstanding OTC credit default swaps to be $42.6 trillion in June of 2007. This was up from $28.9 trillion in December of 2006. It was $13.9 trillion in December of 2005. It appears to me these increases reflect the period when questionable mortgages were being dished out to people to purchase homes they could not afford and credit cards were being issued to college students who were spending beyond their means. It is reported by the end of 2007 these was an estimated $45 to $62.2 trillion worth of Credit Default Swap contracts. The Office of the Comptroller of the Currency reported the amount of outstanding credit derivatives from reporting banks for the U.S. alone by the end of March 2008 to be $16.4 trillion.
Now the information does not get any better. The CIA World Fact Book reports the United States Gross Domestic Product which is one of the measures of national income and out put for our nation’s economy shows that in 2007 our GPD totaled $13 trillion. That means the total market value of all of our nations’ final goods and services totals far less than these Credit Default Swaps which were occurring.
The decline on Wall Street continues. Many Americans are seeing funds for their retirement disappearing. But what’s happening to the guys who gambled and lost? They have Credit Default Swaps that are paying them off. Also it appears they can use that money to purchase the stocks that are being sold at rock bottom prices. Oh yes, they also have the federal government “bailing” them out. There is something wrong with this system. The federal government should be investigating this deregulated “insurance” loop hole that is causing the collapse of the American economy and threatening to collapse economies world wide.
Insider trading pales in comparison to this scheme. This needs to be called what it is. It is not a gamble. It is not a swap. It is a crimeand we should all call upon our elected officials to address this as such. Make a difference, contact your U.S. Senators and Representatives and let them know what you think about this issue.
