The collapse of several financial institutions has sparked a media blame game that continued on CBS’s “60 Minutes” Oct. 5.
Correspondent Steve Kroft attacked credit default swaps – sales designed to transfer credit exposure, in this case mortgage-backed securities, between parties. Kroft said a “huge shadow market” coupled with “greed and incompetence” ultimately caused the financial crisis.
“The result is a huge shadow market that may control our financial destiny, and yet the details of these private insurance contracts are hidden from the public, from stockholders and from federal regulators,” Kroft said. “No one knows what they cover, who owns them or whether or not they have the money to pay them off.”
Kroft detailed how the economic crisis was set into motion – as even admitted it was sparked by homeowners who defaulted on their mortgages, causing two fragile investment banks to go out of business.
“When homeowners began defaulting on their mortgages and Wall Street’s high-risk mortgage-backed securities also began to fail, the big investment houses and insurance companies who sold the JPM) for pennies on the dollar. Then Lehman Brothers declared bankruptcy. And when AIG, the nation’s largest insurer, couldn’t cover its bad debts, the government stepped in with an $85 billion rescue.”
Kroft interviewed Frank Partnoy, a professor at the University of San Diego School of Law and author of two books assailing “greed” on Wall Street. He said credit default swaps were the heart of the financial crisis.
“They were the centerpiece, really,” Partnoy said to “60 Minutes” “That’s why the banks lost all the money. They lost all the money based on those side bets, based on mortgages.”
However, Gary Kaminsky, former managing director of Neuberger Berman, said on CNBC’s Oct. 6 “Squawk Box.” that the tool of credit default swaps aren’t to blame. The smoking guns of the financial crisis, he said, were simply bad business decisions.
“I guess, I’m guilty of the fact that for 20 years in the investment business, I have always from day one believed that short sellers – going back to when I started with Mark Howard, who is one of the best short sellers ever – short sellers cannot put a company out of business,” Kaminsky said. “Only a bad business model, only bad management can do it.”
CNBC “Squawk Box” reported that the federal government is negotiating with IntercontinentalExchange (NYSE: ICE) and the Chicago Mercantile Exchange (NASDAQ: CME) to create a market for the “shadow market” of credit default swaps. As Kaminsky pointed out, that may have stemmed the tide of financial crisis, but the failed financial institutions’ overleveraging was still the root cause – not short selling credit default swaps.
“Now certainly they [short sellers] can help the velocity – so I think everybody agrees that having a transparency for CDS can help. It will not save financial firms who take on 30-to-1 leverage, make bad bets and don’t basically unwind. That’s not going to change.”