Streams

The $58 Trillion in the Room

Tuesday, October 28, 2008

Find out what credit derivatives really are, and how they’ve affected Wall Street during the current financial crisis. Jesse Eisinger is senior writer and Wall Street columnist for Conde Nast, and author of "The $58 Trillion in the Room" for Portfolio magazine.

Guests:

Jesse Eisinger

Comments [13]

james hilferty

I have just read your article " Elephant in the Room" and one almost fatal error was that the print is far too small because I must have downloaded it a few years ago but it is only now that I found a magnifying glass to actually read the article and I agree with it 100%. It reminds me of an article written by Gillian Tett. in the Financial Times a while ago but who in their right mind would trust that rag.However Lord Turner in his utterly inadequate Investigation into the failure of The Royal Bank of Scotland missed the real reasons for it's "Troubles" but claims to have found "a 44 year old fatal flaw" in Economic Theory; so that would put Milton Friedman and the Black Scholes formula in the picture

Aug. 15 2013 01:03 PM
Rick from Manhattan

I feel there is one really major hole in the presentation of this story. It is linked to Leonard and his guest characterizing credit default swaps as "insurance contracts." While such a swap entered into by a party to a lending transaction operates as insurance, the credit default market is much broader. In a real insurance transaction the insured has what is termed in the biz an insurable interest. In the credit swap market there has been no requirement of such a relationship to the credit involved. In other words, Ford could enter into a contract that would pay it if GM defaulted even though Ford was not a lender to GM.

The guest mentioned a lack of regulation in this area, which is true, but doesn't go far enough. Until 2000, contracts like this where the parties had no direct stake in the action could be held as violations of state gambling statutes. In 2000, under Phil Gramm the Congress enacted a law that exempted wall street from state gambling statutes.

Oct. 28 2008 03:11 PM
Steve Smith from Greenwich Village

Does any one remember Ludwig Von Mises and the New York Objectivists? Plainly put, the "Welfare State" was judged such a moral problem that bankrupting the state was preferential to allowing social welfare to exist.

Who is John Gault, indeed...

Oct. 28 2008 01:33 PM
Eliott from Broooklyn

Who made big profits on the finance disaster? There has to be two sides of every bet, so when losses took down AIG and Lehman and Bear and everyone else it seems, what group made an enormous fortune on what the aforementioned owed to derivative counterparties? Should the winners be made to subsidize the bailouts or be taxed?

Oct. 28 2008 01:33 PM
ericf

if spreading risk reduces risk for those spreading it without reducing the total amount of risk in the system, does spreading risk tend to encourage more risk? IE, sort of parkinson's law effect?

Oct. 28 2008 01:32 PM
ericf

did competition between regulated commercial banks and unregulated investment banks contribute to the problem?

Oct. 28 2008 01:30 PM
char from greenwich, ct

I worked in OTC derivatives when credit default swaps started. They were always inconsistent with market efficiency, which is the cornerstone of derivative risk management.

The triple A's were getting a fee for magically improving the rating of a structure, making a "profit" while siphoning off their credit worthiness. It was even referred to as "renting out our balance sheet" or "renting our credit rating".

Why aren't the agencies (who were aware of the risk they were rating in structures) not being called out for not reflecting this risk in the bank ratings?

Oct. 28 2008 01:29 PM
nostradamus from new york

is it my imagination, or did the CPA/auditors drop the ball here (along with the Fed, et al)? all of these firms get audited. did the auditors and the bond rating agencies just not understand the instruments involved? Being a CPA, it smells to me like the typical giant-audit-client/CPA firm relationship wherein the partner in charge of the audit doesn't want to lose a high-paying client, so the client is allowed WAY too much leeway on their balance sheet.

Oct. 28 2008 01:26 PM
RC

Leanord,

Book Timothy Sinclair, who has a book out on the credit agencies.

Oct. 28 2008 01:20 PM
RC

Wasn't Sarbanes Oaxley suppose to prevent items and risk going off balance sheet? Didn't crack down on Special Purpose Vechiles and the like?

Oct. 28 2008 01:19 PM
jlsfgs

role of regulation in this narrative??

Oct. 28 2008 01:18 PM
Hugh Sansom from Crown Heights

This sounds vaguely like the age-old system at Lloyds of London with its "names" -- the people, investors (if I understand it right), who contracted to support Lloyds in the event of trouble.

Oct. 28 2008 01:14 PM
smithered

back in 2000/01 i remember that the big topic was "how to valuate derivatives". at that time i worked alongside key execs at a major accounting consultancy firm. right up until 9/11 it was "the" issue. after 9/11 it lost importance, given all the new business from andersen's collapse, new rules, crisis planning and outsourcing. the accounting scandals ironically freed all the remaining firms to do as they liked. sufficed to say today's mess was easily predictable and very much expected. of course, 7 or 8 years of exec profit also leaves many of the inventors of this scheme very much retired. my only surprise is that the financial system had the capacity to support the scheme for so many years after that button got pushed.

Oct. 28 2008 12:31 PM

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