Blame The Personal Computer for the Financial Crisis

07/23/95: Steve Kroft investigates what stock derivatives are and the dangers they pose to investors.

This 60 Minutes piece from 1995 highlights the $35 trillion shadow banking market, its origins and risks.  One of the points is that derivatives were inconceivable prior to the advent of desktop computers.  That $35 trillion market has balooned over five times in size since 1995.

One comment left under the video notes: “This is stunningly prescient. I kept checking the date to see that it was 3 years before Long Term Capital Management and 13 years before derivatives came so close to actually bringing down the whole banking system….”

Some of the most prescient quotes from the clip are below:

“Some people believe [derivatives] are so unpredictable that they could bring down the world financial system.”

“When Wall Street fell in love with the computer 15 years ago, it went out and hired a lot of very smart people with Ph.D.’s in mathematics and physics, and not much background in finance, and told them to design ever more sophisticated and creative investments.  It became the financial equivalent of genetic engineering.”

“What the whiz kids, the customers and the brokers have discovered is that derivatives don’t always behave like ordinary investments, they are much more volatile.”

“What has astounded the consumers of these things is that when they are wrong, they are not just a little wrong, they are so wrong they can’t explain it to anybody.”

“I thought I was buying something that was guaranteed, that the principle was safe, and that there was no risk of loosing the invested principle.” Denise Armor, Treasurer, School District, Danbury, Ohio [Relating to Fannie Mae derived mortgage backed securities bought on behalf of the School District]

Cheers, to Nassim Taleb! Vodpod videos no longer available.

more about “Derivatives Video“, posted with vodpod

Source:
Derivatives
Steve Kroft, CBS News, July 23, 1995
http://www.cbsnews.com/video/watch/?id=4501762n

more about “Derivatives“, posted with vodpod
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