The Industry That Led The World Into Crisis

Frontline on PBS “Money, Power, and Wall Street” 

Episode 1

Source: Frontline on PBS

In 1994, a team of young JP Morgan bankers went on a retreat to Boca Raton, FL where they created a derivative that would change the world. Credit Default Swaps, or CDS’s, are a kind of derivative that ensures a loan against default. Instead of a company taking the risk of the loan on them, they swapped and compensated another company to take it. Because of this, “credit, which is the vital part of the lifeblood of an economy, became a more readily available asset” according to Blythe Masters, Head of global commodities at JP Morgan.

As other corporations discovered what this could do for business, they began swapping more than corporate loans. They began bundling mortgages. However, these new corporations didn’t understand CDS’s as well as those who had created it and thus, while it fueled a worldwide credit boom, they began to build a bubble that would eventually pop. Frank Partnoy, author of Infectious Greed, said, “I think finance may have gotten too complicated for anyone to understand.” More and more companies began to offer mortgages and swap the bundled risks, using dishonest tactics such as high rate subprime debt, until the bubble finally burst.  Daniel K. Tarullo, Federal Reserve Board Governor, explained, “It was quite clear to me that a number of really quite large financial institutions had not has the kind of management information systems which allowed them even to know what all their risks were.”

The outfall of this has been devastating. People have lost their houses, children who have graduated are having to move back in with parents, and unemployment rose. David Wessel, The Wall Street Journal, aptly summed up the view of most Americans with, “most Americans think, and with good reason, that Wall Street got bailed out and Main Street didn’t.” This is shown by the banks receiving help while others lose their homes and jobs.

The episode sums up with these thought provoking words from Dick Kovacevich, Chairman of Wells Fargo: “It should never have happened.”

Smith, Martin, prod. "Episode 1." Prod. Marcela Gaviria. Money, Power and Wall Street. Frontline on PBS: 24 Apr 2012. Television.