How Many Financial Crisis Can We Afford?

Last night I watched 60 Minutes. The piece they did on credit default swaps was excellent. I know not enough people watched the show, but that should not be a surprise. The financial crisis that this nation experienced recently was not only man made, it was created by the passage of legislation by our Congress that made it legal for the credit default swaps to exist. There is a big difference between hedging a position, or buying a futures contract so you can have a commodity you need at a future date and lock in your price, and making a side bet that your neighbor will default on their mortgage when you have no reason to be betting on your neighbor defaulting on their mortgage. And yet, that is exactly what happened when Congress permitted Wall Street to create and trade credit default swaps. As the program last night correctly put it, credit default swaps was like buying an insurance policy on a bet that your neighbor would default on his mortgage. When the sub-prime mortgages defaulted, the people that sold the insurance contracts did not have reserves (money) to cover the insurance contracts they sold. AIG sold credit default swaps and owed several companies a lot money. The Federal Government loaned them $180 billion to cover those credit default swap contracts. Goldman Sachs got $12 billion from AIG because they had bet that the mortgages would go into default. They also were the sellers of the mortgage-backed bonds that eventually went into default as well. So, they made money selling the mortgage-backed bonds and they made money on the credit default swaps that they bought from AIG, when AIG was bailed out by the U.S. Treasury. Nice work if you can get it.

Congress did not know what they were doing when they passed the legislation to exempt credit default swaps from normal insurance regulations. But, there were people that did, and they were not listened to. Money talks and bull shit walks is the way Washington runs and Wall Street knows that only too well. The lobbyists that got the necessary legislation passed so Wall Street could sell credit default swaps did their job, but the rest of the country suffered. This country will continue to suffer until enough people understand what is going down and stop it. Congress can not know everything, and they don't. But the people must try to elect men and women that will read the legislation before they vote. We also need to get more money out of politics. How many more financial crisis can we afford?

Stay tuned.