[coberst (OP)]

60 Minutes and 60 Trillion Dollars of Credit Swaps

Any business that is in the “insurance business” must meet certain regulatory laws, i.e. they must hold a certain ratio of cash to outstanding insurance in which to pay off possible claims. 

Certain ‘Investment Giants of Wall Street’ managed to get around this regulation by claiming that they were in the “Credit-Swap” business.  They would basically insure certain types of highly risky investments and called these “swaps” rather than “insurance”.  They sold the risky investments and then insured them thereby leading the investor to think that the investments were very secure because they were insured investments.

“"The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."

With its clients clamoring for safe investments with above average return, the big Wall Street investment houses bought up millions of the least dependable mortgages, chopped them up into tiny bits and pieces, and repackaged them as exotic investment securities that hardly anyone could understand.

“People don't know what they're made up of, how they're gonna behave," Kroft remarks.

"Right," Grant replies.

But it didn't stop ratings agencies, like Standard & Poor's and Moody's, from certifying the dodgy securities investment grade, and it didn't stop Wall Street from making billions of dollars selling them to banks, pension funds, and other institutional investors all over the world. But that was just the beginning of the crisis.”

No one seems to know how big this pool of swaps might be but it is estimated to be from 40 to 60 TRILLION dollars, that is to say this pool equals 4 to 6 times the GDP of the United States.

You can watch this “60 Minute” video and also read the text at the following Internet site:

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[Don_1]

I have my own opinions on the shady and underhand dealings of the financial institutions, their bosses and the links to politicians, but I'm not sure it has a great deal to do with science.

Politics, yes, but science???

[Andrew K Fletcher]

I think this does make a very good scientific point about relying entirely on complicated mathematical models. The slightest error and just like the worlds financial situation, the model comes tumbling down with far reaching fall out.

Hard evidence on the other hand is dependable as it is accessible to everyone and anyone can test it. Whimsical theory’s about events that took place allegedly several billion years ago are of zero use to our lives today.
Yet just like in the film, these ideas are spun with countless people finding them too complicated to entertain and apathy among more down to earth people propels them into becoming more and more far fetched, until some unanticipated hard evidence arrives.

One paradigm holds up against all challengers today as it has always and always will hold up against human nature. This paradigm is undeniable because it is Truth.

Build everything on truth and trust will follow.  Build a financial system on truth and it will become robust and stable.

Build it on greed, lies, deceit, fraud and corruption and it will tumble. If the Mafia had been so bold as to have robbed billions of dollars from people, would our governments be as keen to reward them with many more billions of dollars?

Yet this is exactly what has just happened. The message is clear. Make the crime big enough and we will have to support you.

[coberst (OP)]

I have my own opinions on the shady and underhand dealings of the financial institutions, their bosses and the links to politicians, but I'm not sure it has a great deal to do with science.

Politics, yes, but science???

I think that you have too narrow a view as to what science is about.  Have you not heard of political science, or the science of economics, or human science, or the science of art?

[Don_1]

Yes, thank you.

[Soul Surfer]

The problem has been perfectly obvious to scientists with an interst in the financial process for many years.  Unfortunately a lot of real scientists are rather more interested in real science than the vaciaries of ecoonomics.  Frankly I am surprised that the financial structures have held up as long as they have although the last couple of years things have been a bit frantic.  However we must all suffer the results of the problem which will probably take ten or more years to work its way out of the system.

One of the biggest problems with economic theory is that it is totally dependant on "growth" and sees a stable balanced state as something bad not something to strive to achieve.  The real underlying problems will not be solved until the overall economics of the stable state in which any expansion requires a balancing contraction is understood and accepted.