CBS 60 Minutes: The Bet That Blew Up Wall Street

[Murrican]

Explosive article all should read if they missed 60 Minutes

http://www.cbsnews.com/stories/2008/10/26/60minutes/main4546199.shtml?source=mostpop_story

The Bet That Blew Up Wall Street

CBS 60 Minutes

Oct. 26, 2008
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(CBS) The world's financial system teetered on the edge again last week, and anyone with more than a passing interest in their shrinking 401(k) knows it's because of a global credit crisis. It began with the collapse of the U.S. housing market and has been magnified worldwide by what Warren Buffet once called "financial weapons of mass destruction."

They are called credit derivatives or credit default swaps, and 60 Minutes did a story on the multi-trillion dollar market three weeks ago. But there's a lot more to tell.

As Steve Kroft reports, essentially they are side bets on the performance of the U.S. mortgage markets and the solvency on some of the biggest financial institutions in the world. It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages.

It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea.

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While Congress and the rest of the country scratched their heads trying to figure out how we got into this mess, 60 Minutes decided to go to Frank Partnoy, a law professor at the University of San Diego, who has written a couple of books on the subject.

Ask to explain what a derivative is, Partnoy says, "A derivative is a financial instrument whose value is based on something else. It's basically a side bet."

Think of it for a moment as a football game. Every week, the New York Giants take the field with hopes of getting back to the Super Bowl. If they do, they will get more money and glory for the team and its owners. They have a direct investment in the game. But the people in the stands may also have a financial stake in the ouctome, in the form of a bet with a friend or a bookie.

[Murrican]

60 Minutes does what it does best and tells us stuff and why the full implications are still scarily fuzzy.

Must reading for everybody...

Best reporting on TV in years.

M

[pinky]

....eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea......When the Republicans were in control.

[Murrican]

Actually, it's my recollection that the TV show said it was passed and signed in 2000, before Bush took office. That means both parties are to blame. And the way these bills are cooked with add-ons and pork, the critical paragraphs could have come from a single Republican or even <gasp> Democrat... Problem is, these bills are so overloaded that often only a few insiders jnow what's in 'em and what the implications are...

Let's find the legislation 60 Minutes referenced and see who voted for it. It appears to have been signed by President Clinton...

M

[Richard Tafoya]

I believe it's this:

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

It would appear that the House and Senate versions of the bill were introduced just prior to the Christmas holiday in December of 2000, following George W Bush's (first) election (in November of 2000), while then-President Clinton was serving out his final days as President. The bill was never debated by the House or Senate. The bill by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes. In substance, it appears that the leadership of the Republican-controlled Senate and House incorporated the deregulation of credit default swaps into an omnibus budget bill (without hearings or recorded votes)at a time when the outgoing president was in no position to veto anything.

[Murrican]

Yep, bi-partisan-sponsored bill, signed by Bill Clinton as a lame duck President in December 2000.

Lots of blame to go around. No hearings in House or Senate. 11,000 pages. Big rush due to looming Christmas holiday break. No due diligence at all.

But, Richard, you have left out some useful facts, methinks.

M

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

Commodity Futures Modernization Act of 2000
From Wikipedia, the free encyclopedia

The Commodity Futures Modernization Act of 2000 or CFMA (H.R. 5660 and S.3283) is United States federal legislation which repealed the Shad-Johnson jurisdictional accord, which had banned single-stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.

This act was incorporated by reference into H.R. 4577, an omnibus spending bill. It was passed by the 106th United States Congress and signed by President Bill Clinton on December 21, 2000; the legislation thus became law as a part of H.R. 4577 - Public Law 106–554, §1(a)(5).

The act has been cited as a public-policy decision significantly contributing to Enron's bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the bankruptcy filing of Lehman Brothers and emergency Federal Reserve Bank loans to American International Group and to the creation of the U.S. Emergency Economic Stabilization fund.

Further (from same cited source):

The Republican leadership of the house included "The Commodity Futures Modernization Act of 2000(H.R. 5660)" by reference, as Section 1(a)(7), in a long and complex conference report to the 11,000 page long "2000 omnibus budget bill" formally known as "The Consolidated Appropriations Act for FY2001(Labor, Health and Human Services, and Education Appropriations Bill) (H.R. 4577)." 157 Democrats and 133 Republicans voted for the appropriations bill. 51 Republicans and 9 Democrats opposed the appropriations bill vote results in the house. The Senate version passed by "Unanimous Consent."

So, more Democrats voted for the bill and more Republicans opposed it in the House of Representatives, while the Senate just rubber-stamped what the House had done.

That means it was passed by the Democrats and signed by a Democrat President, Mr. Pinky, not exactly what you implied by your partisan shot. Also, 80 Housesters didn't vote at all...

See the names of the voters at: http://clerk.house.gov/evs/2000/roll603.xml

Notably, Chris Cox, now head of the SEC, voted NAY and Charlie Rangel voted YAY... and Nancy Pelosi didn't vote at all. Interesting reading.

M...

[Richard Tafoya]

The voting was for the Labor, Health and Human Services, and Education Appropriations Bill. No debate or vote ever took place around the Commodity Futures Modernization Act, as it was rolled into the appropriations bill by the House leadership to avoid debate or vote.

[Murrican]

The voting was for the Labor, Health and Human Services, and Education Appropriations Bill. No debate or vote ever took place around the Commodity Futures Modernization Act, as it was rolled into the bill by the House leadership to avoid debate or vote.

No. Not exactly. The voting was for the Omnibus bill, which by reference included the Commodity Futures Modernization Act of 2000. It was there. And that's always risky, as there so many hidden shoals in omnibus bills which often aren't fully vetted and/or debated. That risk has come home to roost.

Every word of the Commodity Futures Modernization Act of 2000 was accessible to those voting for it or against it. It wasn't added after the fact or hidden in a drawer.

to wit:
This act was incorporated by reference into H.R. 4577, an omnibus spending bill. It was passed by the 106th United States Congress and signed by President Bill Clinton on December 21, 2000; the legislation thus became law as a part of H.R. 4577 - Public Law 106–554, §1(a)(5).

The problem, as Steve Kroft, noted, was that it created a monster whose full scope we still don't know.

I'd be interested on why some of the current notables chose to vote YAY, NAY or not bother to vote at all. Christmas holidays for the latter?

M

[Richard Tafoya]

Here is what was voted on. In a bill like this, it's impossible to attach a vote to support or opposition to any single section or line item.

http://www.congress.gov/cgi-bin/query/z?c106:H.R.4577:

[Murrican]

Here is what was voted on. In a bill like this, it's impossible to attach a vote to support or opposition to any single section or line item.

http://www.congress.gov/cgi-bin/query/D?c106:5:./temp/~c1069XZ1KM::

Precisely. Which is why some Presidents have asked for a line item veto. And some Presidential candidates have made stands against earmarks and pork and they will veto any bill containing them.

However, you are implying, it appears, that some of those who voted YAY to the Omnibus Bill didn't want to vote YAY to the empowering of the Commodity Futures Modernization Act of 2000. Is there a list somewhere? Do we know if anyone spoke out specifically about the provisions which turned Wall Street into a casino district? I'd be interested in seeing that.

Omnibus Bills are risky, as I've stated previously, if people don't do their homework, and it appears clear that a lot of folks did not. It was sponsored by Republicans and Democrats and passed by a Democrat majority vote. Who opposed it? What did they say? Did Bill Clinton express any reservations before signing it?

It sounds disingenuous to blame the provision's location in an omnibus bill for the fact that it was passed by a Democratic majority and put into law by a Democratic President. Of course, that single provision couldn't be removed. Unless, of course, if enough Representatives had voted against it, and forced a new bill to be introduced. Which is the usual way it's done.

M

[pinky]

Actually, that bill, passed in 2001, was passed when the Republicans held the majority of both Houses of Congress.

[Murrican]

Actually, that bill, passed in 2001, was passed when the Republicans held the majority of both Houses of Congress.

No, you clearly can't read.

The Commodity Futures Modernization Act of 2000 <ahem> was passed by Congress, and signed by Clinton in December 2000. In the lame duck House of Representatives more Democrats voted for it than Republicans, ensuring it passed. As quoted above "The Senate version passed by 'Unanimous Consent'." They do that when they want to get home for Christmas and a bill has already been passed by the House...

Read the wikipedia article at least.

And, hey, I liked Clinton. Still do. Pulled the US out of recession in 92-93 like it was easy. If Obama wins, he'd better be the number one adviser.
And you're a moderator? Gawd help us all...

[pinky]

If you bother to read the link posted by Richard, you might see that H.R. 4577 is listed as 2001.

You, a journalist, use wikipedia as a source? I sometimes use it as a starting point, but nothing more.

[Incident]

If you bother to read the link posted by Richard, you might see that H.R. 4577 is listed as 2001.

You, a journalist, use wikipedia as a source? I sometimes use it as a starting point, but nothing more.

You have got to be kidding, right? H.R. 4577 became law December 21, 2000. It was for the 2001 budget, comprende?

To quote murrican And you're a moderator? Gawd help us all...

[Murrican]

If you bother to read the link posted by Richard, you might see that H.R. 4577 is listed as 2001.

You, a journalist, use wikipedia as a source? I sometimes use it as a starting point, but nothing more.

No, it was passed in 2000 for the 2001 budget year. Read again.

Houston, we have a problem. You didn't even use it as a starting point. And that's where it is handiest, especially when citing something for comfortable consumption online. Now you claim to have misunderstood something Richard posted. Which is the same source I used: Wikipedia ( http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 ) Indeed, we were independently researching to answer a rhetorical question I raised, and went to the same source though we quoted different passages. But if you read it, then you read about when the bill passed and its name. Caught in your lie.

Hint: it's in the name: Commodity Futures Modernization Act of 2000...

The Commodity Futures Modernization Act of 2000 or CFMA (H.R. 5660 and S.3283) is United States federal legislation which repealed the Shad-Johnson jurisdictional accord, which had banned single-stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.

This act was incorporated by reference into H.R. 4577, an omnibus spending bill. It was passed by the 106th United States Congress and signed by President Bill Clinton on December 21, 2000; the legislation thus became law as a part of H.R. 4577 - Public Law 106–554, §1(a)(5).

Where does that say it was passed in 2001... Nor did you get it right who voted for it.

157 Democrats and 133 Republicans voted for the appropriations bill. 51 Republicans and 9 Democrats opposed the appropriations bill vote results in the house.

And 80 members of the House of Representatives didn't vote at all...

See the names of the House voters and non-voters at: http://clerk.house.gov/evs/2000/roll603.xml

You claim I am partisan but when I presented non-partisan facts you attacked in a partisan, inaccurate manner:

Quote:
....eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea......

When the Republicans were in control.

The reality is that both parties have blame, including the 80 House members who failed to vote at all. But blaming it on Republicans is as inaccurate as blaming it on Democrats. There were both Democrats and Republicans in the Republican-dominated Senate (e.g. Kerry and McCain) and the Senate passed it "unanimously"....

This has crushed the world. Let's understand why. It's not an election football.

Gettings facts straight is a good starting point.

[pinky]

I will acknowledge that I misread and made a mistake.