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Wall Street Shadow Markets The Cause of Our Nation’s Financial Crisis

October 5th, 2008 · 1 Comment


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With all the talk about the bailout plan being debated in Congress, I’ve heard all kinds of reasons why people think the market is failing. I’ve heard it’s because of Fannie Mae, shady mortgage lenders, stupid consumers that can’t comprehend that their payments will go up eventually on interest only loans, President Bush’s economic policy, and a bunch of other bizarre explanations. I don’t believe the American public really has a firm grasp on why many of the major Wall Street firms and financial institutions are going belly up.

Steve Kroft of 60 Minutes sets the record straight on who really is to blame for the huge financial crisis our nation is currently facing. Kroft reveals the shadow market in which Wall Street firms sold bundles of risky mortgages as investment securities to investors at banks and pensions funds without disclosing the inherent risks. Inflaming the crisis even further, the same Wall Street firms then sold the same investors an instrument called credit default swaps which was supposed to insure against any defaults.

This piece is definitely a must watch for anyone trying to understand our current crisis.

Tags: Market Forecast · Mortgages · Real Estate Tips · SW Orlando Bulletin · Videos About Real Estate

1 response so far ↓

  • 1 ted in pdx // Oct 6, 2008 at 11:07 am

    Steve Kroft’s segment on 60-minutes zeroed in on the heart of the matter. The same people who paid themselves bonuses in the hundreds of millions for engineering the financial crisis are now claiming they didn’t understand what they were doing by risking depositor funds and shareholder investments in their firms. I spent a few hours reading up on concepts like ‘mortgage backed derivatives’ and ‘credit default swaps’, and even I figured out what was wrong with them. In simple terms, the most highly compensated executives on Wall Street saw an opportunity to sell securities they knew full well were suspect (sub-prime mortgages to underqualified borrowers), package them as over-the-counter equities using arcane mathematical techno-babble which supposedly quantified the risks, but backed that up with what was sold as insurance, but under a name which allowed it to escape regulation: ‘credit default swaps’. At every step along the way, knowledgeable insiders were skimming commissions and paying themselves performance bonuses for apparently increasing assets and share prices. According to one report, last year, $29-Billion in compensation was shared by 50 executives, many of them so-called ‘hedge fund managers’.

    One of the financial experts interviewed by Kroft referred to their conduct as ‘criminal negligence’, and made emphasis on the word ‘criminal’. Meanwhile, the Bush administration will be negotiating with many of these same executives over how much the taxpayers are going to pay to their firms in order to offset losses they incurred.

    I can only hope that the incoming administration is sufficiently committed to the idea of ‘real change’ to include ordering the DOJ to investigate these people for criminal conduct. I suspect they were careful to avoid the most obvious violations of law with respect to their own industry. However, we have a more general statute, and it’s called RICO.

    That stands for: Racketeer Influenced and Corrupt Organizations. Here’s what the Department of Justice handbook on RICO prosecutions says:

    The purpose of the RICO statute is “the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce.” S.Rep. No. 617, 91st Cong., 1st Sess. 76 (1969). However, the statute is sufficiently broad to encompass illegal activities relating to any enterprise affecting interstate or foreign commerce.

    We’re talking about widespread ‘criminal negligence’ on the part of individuals who were highly compensated precisely because they were expected to understand the complexities of risk associated with their fiduciary responsibilities to investors and bank depositors, and ultimately to this country. Their actions, collectively will likely end up costing this country Trillions of dollars.

    Is the electorate willing to demand of the next administration that these people be prosecuted, and their ill-gotten gains recovered? I guess we’ll find out in January.