60 Minutes just aired one of the best video segments I’ve seen (to date) that sheds some new light on the 700 Billion Dollar Bailout Question in regards to Wall Street:
What caused the current financial crisis?
In the segment, 60 Minutes tapped credit market expert (Jim Grant from Grant’s Interest Rate Observer) to delve into a few lesser known areas of “Wall Street’s Shadow Market” and explain exactly what happened to cause this financial crisis, why it happened, and the future implications of the fallout.
Grant’s short answer was as poignant as it was precise:
The truth is that on Wall Street, a lot of people just weren’t very good at their jobs. It’s as simple as that.
Since 60 Minutes is a prime time TV show, the economics lesson is explained in layman’s terms. Which is perfect for me since economics is well… somewhat complicated and very boring. That is, until you hear the figures discussed in video segment.
Not to discontinue with the “shadow like” theme the segment portrays, but I’m glad someone finally cleared up the smoke and mirrors surrounding credit default swaps with an easily understandable definition.
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. – Michael Greenberger, Law Professor, University of Maryland.
So basically, a credit default swap is a nothing but a clever rewrite for a generic insurance policy.
According to Greenberger, by simply using the word “swap” instead of “insurance”, Wall Street (companies like Bear Stearns, Lehman Brothers, AIG, etc.) was able to sell insurance products on those infamous sub-prime mortgages. All the while, they were avoiding traditional insurance related regulations requiring an insurer to have cash reserves equivalent to the amount they were insuring.
Obviously, they didn’t have the cash when the bottom fell out. And here we are!