Heads Up: tonight's Frontline, "Inside the Meltdown," sounds like must-see TV

[WilliamPitt]

'Frontline' sorts through the Wall Street carnage
By Samuel G. Allis
Globe Staff / February 17, 2009

"Inside the Meltdown," which airs tonight on WGBH, provides the clearest explanation I've seen of how last year's catastrophic collapse of our economy occurred. It is an indispensable primer on the financial carnage. As the title of the program connotes, this is an insider's view of the story. We get knowing analysis by experts speaking in plain English, rather than unfathomable Wall Street argot. Michael Kirk, the gifted documentarian who wrote, directed, and produced "Meltdown," provides the other element crucial to a good story: tick-tock - the term journalists use for close linear coverage of a chain of events. Kudos to Kirk for the clarity of his writing and to Jim Gilmore for heroic reporting.

The pacing of the show moves crisply through the series of nightmares. There is tension throughout the one-hour program despite the fact that we know vaguely what happened. The two leading actors in this drama are the unlikely pair of now-former treasury secretary Henry Paulson and the current head of the Federal Reserve, Ben Bernanke. Paulson, the former CEO of Goldman Sachs, is purely a man of Wall Street; Bernanke, a former Princeton professor with expertise in the roots of the Great Depression. Together they decided to throw out the window the concept of "moral hazard" held dear by the Street. "Moral hazard poses the question: If you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake?" says Joe Nocera, a New York Times business columnist.

The dismissal of moral hazard was a shock to Paulson's core. (His travails form a story all by themselves.) The man who prospered under the theory that the best government is no government suddenly found himself forced to lead the charge for massive government involvement to save the economy. This went against everything Paulson believes in, but he had no choice given the gravity of the situation. The other term that comes up often in the program is "systemic risk," which describes how the failure of one institution can lead to the downfall of others given their interdependence. Also, see: "contagion."

"Meltdown" shows us exactly how systemic risk works. We start with the subprime mortgage collapse and move through the falls of the investment houses Bear Stearns and Lehman Brothers, and the near collapse of AIG, the insurance giant interlocked with other institutions all over the world. To properly tell the story, Kirk also takes us to Washington, where we follow the politics of the $700 billion bailout under the Bush presidency. The program is blessed with a superb group of journalists and experts, all of whom bring great knowledge of what really happened. Paul Krugman, a Nobel laureate in economics and New York Times columnist, weighs in along with great reporters from The New York Times and The Wall Street Journal. Nocera is particularly good.

http://www.boston.com/ae/tv/articles/2009/02/17/frontline_sorts_through_the_wall_street_carnage/?p1=Well_MostPop_Emailed2

[blondeatlast]

1. Will definitely tune in. A "r" goes better with a "k," so here one is. nt

[truebrit71]

2. Already have it lined up to be DVR'd...

...

[Time for change]

3. Thank you -- That sounds like a great show

[Cleita]

4. Thanks for the heads up. I won't miss it. n/t

[Bozita]

5. Michael Kirk showed clips on Charlie Rose last night. VERY worthwhile!

Recommended.

[PatSeg]

6. Thanks for the headsup

I have it set to record, but I might have overlooked it.

[Misskittycat]

7. Thanks for the heads-up.n/t

[Born_A_Truman]

8. Looking forward to watching it

Have my DVR set to record. Frontlin.e is one of my favorite programs.

[Brucie Kibbutz]

9. I didn't know this was on tonight.

Thanks for the heads up. :fistbump: K&R

[ms liberty]

10. I believe I'll be DVRing this...Thanks for the heads up, Will! K&R n/t

[slipslidingaway]

11. Hope they mention the part derivatives played in this mess....

http://www.contraryinvestor.com/2008archives/moapril08.htm

Wagging The Dog

"...Alright, fine, so how does the credit default swap market relate to equity market sector volatility of the moment? It is absolutely clear that the "acquisition" of Bear avoided triggering Bear Stearns related credit default swaps and swaps against CDO, SIV, etc. positions they may have held (assuming a potential Bear BK would have forced a mark to market event), which would indeed have happened had Bear formally entered bankruptcy and their bonds/debt became potentially very meaningfully impaired. There is simply no question whatsoever in our minds that this was the key reason a theoretical acquisition of Bear HAD to happen...


...Sorry, back to the issue at hand. So Bear avoids formally blowing up and the credit default swaps written against their liabilities/investment positions, etc. now become a moot point as JP Morgan (or for the true problem credits, should we say the Fed) is the new creditor and market based asset price discovery is avoided. Hurrah for those folks who had written these default swap contracts. They dodged a massive bullet that was heading one hundred miles per hour directly to a certain spot between their eyes. But what about those "investors" who had purchased the CDS contracts/insurance against a potential Bear default? Whether they did this against existing credit market investment positions for insurance reasons or were simply holding them as a trading position is immaterial. Those CDS contracts purchased which probably had been very profitable, and zoomed straight up in value as Bear was in the process of disintegrating, became worthless with the stroke of a pen (and a $6 billion write down to come)....


...Believe us, we're dragging you through this line of reasoning because we believe in the current environment it is nothing short of critical to understand and keep in mind these very important intra market relationships. We need to understand how what we see in one sector of the financial market can have meaningful implications for asset price movement in many other parts of the very same broader financial market. What we see in the headlines on TV is shallow, and what we "hear" on CNBC is almost meaningless. It is the actions and unintended consequences underneath the headlines that are crucial to "see" and understand. Can the CDS and other derivative markets influence equity market outcomes? The derivatives tail is indeed wagging the greater financial market dog. And it is understanding this that we believe is the key to both risk management and successful investment outcomes as the process of credit cycle deleveraging and reconciliation is sure to continue to play out ahead...."

[truedelphi]

12. Can anyone in the media mentionthe derivative mess?

I mean, we the people, need to be kept in the dark - that way we can continue to pile one trillion dollar BailOut effort after another. Always at our expense and only rarely to our benefit.

If someone sat the nation down collectively and said, "Look there is no real way to payoff the 550 trillion bucks oweed on the derivative losses - so we might as well let the banks that made themselvees into casinos simply fail, and nationalize what we need to ahve as our new banking financial centers, then the bankers and Wall Street would be so out of luck. But Wall Street ain't gonna let that happen.

[slipslidingaway]

14. Well they did mention the derivatives and how they played

a large part in placing our financial system in danger which led to the 700 billion bailout bill in September.

It's just nuts that people do not more attention to this robbery :(


This article is from 2004...

http://www.bloomberg.com/apps/news?pid=nifea&&sid=acZ53mLfqWHs


"...Since last November, the Fed job has been in the hands of Timothy Geithner, 42, a former U.S. Treasury undersecretary who, unlike most of his predecessors, is neither an economist nor a banker. That means Geithner will have to work hard to find his footing, says Goldman Sachs International Vice Chairman Robert Hormats, 61.

``The Federal Reserve is a unique and complex institution, so there will be a learning curve,'' Hormats says. ``Geithner will have to establish credibility in financial markets.''

Other Fed watchers were disappointed that someone with an established reputation as a regulator didn't get the job.

``Geithner's appointment raises questions about the willingness of the New York Fed to aggressively supervise financial holding companies in its territory because there is very little in Geithner's resume that shows experience in regulatory issues,'' says Tom Schlesinger, 55, executive director of the Financial Markets Center, a Philomont, Virginia-based nonprofit group that monitors the Fed....


...``You see a lot of liquidity sloshing around, just as we did in early 1997,'' Rhodes says.

The risks aren't confined to emerging markets, says former Federal Reserve Governor Laurence Meyer, 60. ``Alan Greenspan has highlighted the role of systemic risk coming out of government- sponsored enterprises,'' he says.

Fannie Mae, Freddie Mac

Meyer was referring to the Fed chairman's February Congressional testimony warning that the unrestrained growth of Fannie Mae and Freddie Mac, which own or guarantee 49 percent of the $7.3 trillion U.S. mortgage market, may trigger instability in the nation's financial system...."



Former Bear Stearns Executive Now at Fed

http://www.foxbusiness.com/story/markets/economy/bear-stearns-executive-fed/

"The former chief risk officer at investment bank Bear Stearns Cos., which nearly collapsed in March, is now a senior official of the Federal Reserve division that supervises U.S. banks...

...The appointment is apt to raise questions because of the key role Alix played at Bear Stearns and given the Federal Reserve's role in Bear Stearns' sale to JPMorgan Chase & Co. after its breathtaking slide. In his new job at the central bank, Alix will help oversee the financial safety and soundness of banks, which are inspected by Federal Reserve examiners.

"That's incredible," said James Cox, a Duke University law professor and securities law expert. "This is not reassuring. ... What is there in this person's experience and skill package" that qualifies him for the Fed position?..."

[mojowork_n]

16. I'm glad you heard them talk about derivatives, I missed that part.

With the program focusing so much on specific personalities, dates and events --
more narrowly than I would have preferred -- I was listening for the words "credit
default swaps" too, I did some channel-switching, with the Marquette/Seton Hall
basketball game.

I did hear the Frontline guys talking about how, "the whole nation of Iceland
suddenly went bankrupt... toxic assets" but that was my big disappointment. They
never really explained how some "assets" came to be toxic, that I heard, either.

They kept returning to 'the professorial Princeton man, Bernanke' and the 'free
market believer, Paulson' as though that made any difference, in how the meltdown
had developed.

That was the part I was most interested in. I was disappointed. (On the other hand,
Marquette was down 3 at the half, but came back nicely.)

[slipslidingaway]

18. They mentioned CDS quite a bit, but maybe I was listening

for that and just dismissed the other comments. They did not go into details or who should have been sounding the warning bells on derivatives which would have been helpful.

So many people contributed to this disaster, it would take at least a week every night to cover the entire story.

:(


Glad the game went your way :)

Transcript is not up yet, but this should be the link.

http://www.pbs.org/wgbh/pages/frontline/meltdown/etc/tapes.html

[mojowork_n]

20. Thanks for the transcript, I will take a look.

I first heard the term "derivatives" a couple of summers ago, before this stuff ever met one fan blade.

The arithmetic was there. It wasn't rocket science, just a lot of big, big numbers, adding up to a bubble.

The mechanism of how that was even allowed to happen, in the first place...

I'll take a look at the transcript. Thanks, again.

[slipslidingaway]

26. YW, I need to review the show again as well...

the first time I heard of derivatives was sometime in late 99 or early 2000 from the message boards on Silicon Investor. Of course one then learns of a variety of sites which were discussing the issue and the housing bubble that was building, the risky mortgages that were being bundled and sold to everyone / everywhere.

So when I hear 'if we only had more time' or 'who could have foreseen this coming' from our elected reps I get a little ticked.

:(


March 2008
see link for tables

http://www.contraryinvestor.com/2008archives/momar08.htm


"...What is obviously apparent, we believe very meaningful, and perhaps little understood in the greater investment community, is the growth in magnitude over the 2004 to present period in the CDS market. From about $1 trillion in notional value outstanding at year-end 2003, we're looking at just shy of $14 trillion in notional exposure as of September 2007 for the US banking system singularly. A near fourteen-fold increase in three and one half years. We ask you, do you see this fact being discussed or at least being mentioned on the "front page", if you will? Do you even see this mentioned in discussions or articles regarding what led up to the current mortgage credit debacle? Do you see Senators and other assorted politicians grandstanding in their demands for investigations about how this could have come to pass? We need to at least think through potential investment consequences if indeed credit default swaps become the next credit market shoe to hit the floor in some manner. Why? Because at the periphery it’s already starting to happen.

Very quickly, who are the major players among the US banking system elite? The usual suspects, who else? Here's how it shakes out at present:


(see link)


"...As you might have guessed, the "usual suspects" listed above account for 99.6% of total US banking system credit derivatives exposure. Concentrated? How about massively as perhaps a stab at a characterization. It’s no wonder the big banks have one huge vested interest to make sure MBIA and Ambac don’t fall off the face of the map, no? As you already probably know, US banking system notional exposure to credit derivatives now stands at 85%+ of US GDP. At year-end 2003, that number was 9%. Of course what you see above is so-called notional value exposure. But in the credit derivatives world, a potential loss against an insured credit that goes belly up can literally be maybe 50 to 60 cents on the dollar of the total outstanding bond issue against which the credit derivative is written. True actual nominal dollar loss potential is not really found in the "value at risk" measure or against notional values, but in dollars and cents against the amount of total bond issuance which is being insured. And you'll be thrilled to know that in the CDS market, many an outstanding corporate bond issue has insurance written against it covering two to three times the total actual bond issue being insured. This is exactly the case with GM/GMAC. Why? Because like so many derivative vehicles these days, it's no longer about creating a specific insurance product, per se, but rather it has become about “trading” and ever expanding array of leveraged financial vehicles. None other than Fitch puts out periodic reports that cover their interpretation of the character of the CDS market. The latest hit the Street in the summer of 2007. Specifically in the report, Fitch states the following:



"However, while continuing to use CDS as a hedging vehicle, banks increasingly cite ‘trading’ as the leading rationale for employing credit derivatives. As a result, these aggregate results hide significant variation in the position of individual banks, with many actually reporting positions which show them to be major sellers of protection"

[truedelphi]

21. Thank you for psoting that link n/t

[slipslidingaway]

27. YW, although when I checked the link this morning I still do not

see the transcript.

As noted below this is the first in a three part series.

[truedelphi]

32. Program One - the non-mention of the derivatives that total

the Five Hundred and fifty Trillion dollars outstanding.

I guess that is what is referred to when the program and Paulson talk about "toxic assets"

So we as a people are now going to have to try and bail out the banking industry's five hundred trillion bucks of bets placed against the housing bubble. We are being told these are "assets" These are no more assets than the tickets scattered about a racetrack when the horses go back to the stable.

Program One ignores the actual reality - the creationm, starting in 19999 of the banking reform Act signed by clinton, of a de-regulatroy process allowing banks to be casinos and the casinos to ignore risk analysis.

The Frontline TV Program sets up a canonization process for Bernanke, and Paulson. Oh, what hard times they faced. Oh how they stayed awake at night.

Well actually in a saner society,they would not be sleeping at all now, as they would be jailed. Period.

The banks did this to themselves, while Bernanke, Paulson, Geithner and the other big shots stood by, allowing it to happen. Then they stiffed We the Taxpayers for the bill brought about by the criminal behavior.

[slipslidingaway]

33. I agree with your last sentence...

"The banks did this to themselves, while Bernanke, Paulson, Geithner and the other big shots stood by, allowing it to happen. Then they stiffed We the Taxpayers for the bill brought about by the criminal behavior."

Hopefully they'll go into more detail in the next two shows and that includes going back to the 1990's when derivatives started to play a larger role, the people who fought regulation and transparency, the bills congress allowed to make the large players larger etc.


But we need to keep in mind the different figures we hear about, notional vs. actual dollars, and then the different types of derivatives. In this case the credit default swaps were the culprit.

Notional values and actual dollar values...

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x351988#352021

"....Let's get one thing straight, one must draw a clear distinction between notional values and actual dollar values. The whole premise of derivatives transactions is that a few real dollars can be spent to control a large amount of notional dollars. Hence the leverage..."


"...In futures trading, the ``notional principal amount'' refers to the value of the underlying assets in a futures contract. For example, in a corn futures contract to take future delivery of 5,000 bushels three months hence, the notional principal amount of the contract would be the price of a bushel of corn times 5,000. If the price of corn were, for example, $2.00, the notional principal value of the corn futures contract would be $10,000. But the actual price of the contract, however, is the margin set by the exchange; the CBOT, for example, requires $270 be paid to purchase a futures contract that on May 15 had a notional value of $11,637.50..."

Another snip...

"...With what are now called derivatives, we move from investment, and purchases and sales of hard commodities, to speculating on the future price or yield performance of what were once investments, and relatively simple, economically necessary transactions. It would be like going to the horse races to bet, not on the race, but on the size of the pot. Who would care about what's involved with getting the runners to the starting gate?..."

[mistertrickster]

13. Just watched it. What a YAWNER! Jeez, 60 Minutes did this way better.

This is an exciting, compelling story told with the gusto of a financial report.

Leave it to PBS to suck the life out of the most important story of our time . . .

On edit: this is classic Frontline . . . still photos of gov't officials while some white guy in a suit talks and talks and talks.

Not only that, their definition of "moral hazard" wasn't right. When the gov't bails out a company that engages in risky business, that's not exactly a moral hazard. Bailing out GMC because they insist on building SUV's is not quite a moral hazard.

The true meaning of moral hazard is passing the risk on to someone else while keeping the profits for oneself--that's exactly what the big mortgage brokers did with BushCo de-regulation connivance. Frontline didn't even mention that.

[mistertrickster]

15. There's only one reason that this happened in 2007 and not 1997 or 2017:

Gov't de-regulation and wilfull negligence by the BushCONs who cling to free-market theology.

That's the one and only true cause.

[many a good man]

17. You wouldn't know that by watching the show

Worst Frontline ever. I expected much better.

[mistertrickster]

19. Exactly . . . it was all framed as "free-marketeers have change of heart."

Wow. Hard-hitting. Not.

[mmonk]

23. I missed it. So it wasn't good?

What a shame.

[WilliamPitt]

24. Could have been better.

:(

[yy4me]

22. I watched too and was left with the feeling that it must be a two

hour show because so much seemed to be missing. I suppose the exposé must start somewhere but this could have been better. I find myself feeling that there is much more I need to know.

I also felt that the coverage showed us that we don't have any idea what has really gone wrong and how to really fix it.

My sympathy to President Obama. Only the most strong and intelligent among us will ever be able to fix this huge, broken system.

[slipslidingaway]

25. This is the first hour of a three part series...

http://www.pbs.org/wgbh/pages/frontline/story/2009/02/the-making-of.html

"...Twenty weeks later, the Kirk team has delivered the first of its three hour-long reports on the crisis, called Inside the Meltdown -- a riveting account of how the richest economy in the world came apart at the seams..."

[WilliamPitt]

28. Ah!

Makes more sense now, thanks.

[slipslidingaway]

30. YW, I know many were less than thrilled with the show, but I am

glad they focused on CDS as being a main reason for the bailout money.

Hopefully they will connect more dots in the next two shows.

[TNOE]

29. Yea, I want to get to the "Oceans 16" part

Where the group of thieves (Bush, Cheney, et al) set up the grand plan to further empty out the Treasury to their boys. The ones who didn't get the cut off the Iraq and Afghanistan Occupations.

[florida08]

31. thanks

I watched it last night and again online. Thought it was good myself. You could tell it is laying the ground for further reporting.
If you go to the website there are more in depth interviews with people like Sheila Bair. She discusses predatory lending.
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/