How The Disaster Happened

I recorded the following audio clip from the Thom Hartmann show last year. In it Bill Seedman, the former head of the Resolution Trust Corporation and inventor of tranched, mortgage-backed securities (more commonly known as CDO's), discusses how his team went to the Federal Reserve to ask how their new financial instruments should be regulated, to which Alan Greenspan responded that they wouldn't be regulating them at all. He considered it to be a test of his free-market ideology. Now that the results are in, can we get rid of that debunked economic theory?

The clip is practically unbelievable.

Total Cost of the Bailout?

I'll just copy and paste this story from Bloomberg, it's short and sweet:

July 20 (Bloomberg) -- U.S. taxpayers may be on the hook for as much as $23.7 trillion to bail out financial companies, according to Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

Barofsky made the estimate in testimony prepared for a congressional hearing tomorrow.

(emphasis added)

Department of Justice Launches Probe into Credit Derivatives

The anti-trust division of the Department of Justice has opened an investigation into the Markit Group over their role in the Credit Default Swap market.

Who exactly is Markit Group? They provide pricing data on the CDS market and has developed many of the most closely-watched derivatives pricing benchmarks in it. And who are the shareholders in this group, which was set up in 2001? You guessed it: JPMorgan Chase, Goldman Sachs, Deutsche Bank, Bank of America and Morgan Stanley to name a few. That list may look familiar, it is almost identical to the list of major counterparties who benefitted from the bailout of AIG.

Why is the DOJ investigating the Credit Default Swap market? As the above graph shows, the CDS market grew from literally nothing in 2001 to over a $60 trillion market in only 6 years. Keep in mind, according to the World Bank, the GDP of the US in 2008 was $14 trillion and the GDP of the entire globe was only around $60 trillion. Looking at those stats, how was the size of the CDS market even possible?

Why do I have a feeling these banks were doing something wrong?