October 7, 2008 General 1

A Look At Wall Street’s Shadow Market, 60 Minutes: How Some Arcane Wall Street Financial Instruments Magnified Economic Crisis – CBS News.

Let me highlight something in this video:

They are private and largely undisclosed contracts that mortgage investors entered into to protect themselves against losses if the investments went bad. And they are part of a huge unregulated market that has already helped bring down three of the largest firms on Wall Street, and still threaten the ones that are left.

Before your eyes glaze over, Michael Greenberger, a law professor at the University of Maryland and a former director of trading and markets for the Commodities Futures Trading Commission, says they are much simpler than they sound. “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.

But he says there was a big problem. “The problem was that if it were insurance, or called what it really is, the person who sold the policy would have to have capital reserves to be able to pay in the case the insurance was called upon or triggered. But because it was a swap, and not insurance, there was no requirement that adequate capital reserves be put to the side.”

This how our banking sytem runs right now.  It all starts with the fed and has tentacles in every aspect of hte economy..it’s called credit.  It’s really nothing more than borrowed money and there’s one word for borrowed money…debt.  Everyone knows debt is a bad idea and all of these companies have done everything they can to not use the debt word.  Debt is at the core of this problem and this is going to continue until folks stop incurring more and more debt.  Listen closely.  Wall Street sold these insurance policies on risky investments knowning they could not pay off the debt if it tanked.  This is totally criminal and these companies and CEO’s should be criminally procescuted.