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Leveraged Risks, Collapse and Bailouts: A Modern History of Wall Street

Posted Nov 10, 2009 09:00am EST by Heesun Wee in Investing, Newsmakers, Recession, Banking

Peel away the headlines on last year's meltdown and taxpayer-funded bailout and an interesting nugget emerges: Many recent debacles in American financial history share a common trait -- mortgage debt.

"2008 wasn't the only bond market debacle we've ever had, and not the only bond debacle where mortgage bonds were at the epicenter," says our guest Charles Gasparino, an on-air editor for CNBC and author of a new book, "The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System."

Mortgage debt. Beyond last year's meltdown, mortgage-backed securities played a role in (1) Orange County, Calif.'s bankruptcy in 1994 (2) the collapse of the hedge fund Long Term Capital Management (LTCM) in 1998 and (3) the S&L crisis of the late 1980s. If the federal government didn't bailout bailout LTCM for about $5 billion (a paltry sum by today's standards), Lehman would have buckled -- possibly Merrill too, Gasparino speculates.

Such financial history begs key questions:

  • Is Wall Street chastened by the recent bout of risk taking and eventual collapse of Bear Stearns, Lehman Brothers and Merrill?
  • Do bailouts simply encourage bigger bets and bigger bubbles?
  • Were any lessons learned on Wall Street in 2008, or is history destined to repeat itself?
Charlie sits down with Aaron on Wall Street, risk, and the repercussions of bailouts.

128 Comments

popey
popey - Tuesday November 10, 2009 09:15AM EST

Addicted to risk, Wall Street needs intervention - cold turkey

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:16AM EST

Mortgage debt is only the means.. the underlying reason is smart and risky people with no moral values filling up Wall Street.. with the less smart counterparts in the administration working together to cook one of the greatest crisis... It's a sad era of utmost regulatory failure.

MikeD
MikeD - Tuesday November 10, 2009 09:17AM EST

Key questions: No. Yes. No, Yes.

ryan j
ryan j - Tuesday November 10, 2009 09:21AM EST

This was looting by the banks, period. How can it be that everything is ok now when the banks were on the brink of destruction. Wake up people, they will steal more money again.

ryan j
ryan j - Tuesday November 10, 2009 09:21AM EST

This was looting by the banks, period. How can it be that everything is ok now when the banks were on the brink of destruction. Wake up people, they will steal more money again.

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:23AM EST

That’s a great story. I can’t wait for the sequel; when all the fat cats are beheaded in front of the New York Stock Exchange. That will be so AWESOME!

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:25AM EST

Wall Street needs a Nip and Tuck

Rick
Rick - Tuesday November 10, 2009 09:25AM EST

Guys ... I hate to say this but the only place to put your money is in the game right now. The govenment funded ... bank run ... ponsi scheme is in full working condition right now ... free money + ponsi scheme = plenty of room for the stock market to go up ... just make sure you time it perfect, because once the house of cards fall ... IT WILL BE UGLY and no auto stop/sell will save you!

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:26AM EST

If the administration lacks the will and brains and balls to reform the financial industry, perhaps the only way is to get the people to do it.. draw all and keep your $$$ for a week to show the administration and wall street who really matters.. you don't have to wait for the next election.. See if the banks can continue to pay huge bonus...

william
william - Tuesday November 10, 2009 09:28AM EST

so what??? lest we forget we live in a capitalist society... risk taking is fundamental to capitalism... government intervention is part of that risk taking... think about it people... the government (taxpayers) are part of the process... at times more or less... stop whining and get on the train...

Ron
Ron - Tuesday November 10, 2009 09:31AM EST

I have no idea how Bernanke could get into the position he is in. He has now clue what is going on, had absolutely no forsight into any of the bubbles and colapses we have had. Is this the best that the US gov. can offer?? I am just a joe on the street, and I could have made better decisions!!

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:38AM EST

I know I will continued to be screwed. I will take my anger out on politicians with my vote.

long
long - Tuesday November 10, 2009 09:43AM EST

william It's nice to see other 10% ers posting for a change. It gets old even to me to be the only one calling these whining little girls out on there constant bitching. I would be embarresed and not surprised most hide behind a yfu handle. bunch of pussys

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:44AM EST

GS = Vampire Squid

thomasromancer
thomasromancer - Tuesday November 10, 2009 09:51AM EST

We already know that the fundamentals of the market are screwed. It just means that the United States is in more trouble than at any time before. The really dangerous aspect is that nobody seems to care any longer. There is no longer any national integrity or will of the people. I think this post pretty much defines the last America that will be remembered. Who ever Randall is.. 'You Rock!' +++++++++ Randall - Monday November 09, 2009 05:46PM EST "China actually makes things, be they cheap or what ever. We (America) only have our Ponzi schemes."

frankmargel.com
frankmargel.com - Tuesday November 10, 2009 09:52AM EST

Hey Mister! Listen to me...The jobs on Wall Street are going go next. Grab a mop and broom and sweep up the mess. The market will correct and the middle income workers will get all the blame for not flipping these assets higher. Its all your fault, don't ask me to bail you out! Hit the street, grab a mop! This is what is inline for all you Wall Street Zombies. The squirrels and nuts are truly your only friends...BUY BUY BUY! smiles...Now that's a WARNING! Laughs!

donfurio
donfurio - Tuesday November 10, 2009 09:52AM EST

Short ticker short ticker, hahhaa

Yahoo! Finance User
Yahoo! Finance User - Tuesday November 10, 2009 09:54AM EST

Here is the history of the crash, that was written before the crash and came out to be true: http://www.tradingstocks.net/html/prepare_for_market_crash.html

Terry
Terry - Tuesday November 10, 2009 09:55AM EST

WOW! So many master crooks in the same room at the same time. Wake up... No Senator should be in office more than 2 terms (12 years) and no Congressmen/women should be in office more than 3 terms (6 years) otherwise they do too much harm to us all. VOTE OUT the INCUMBENTS in 2010.

Helga
Helga - Tuesday November 10, 2009 09:56AM EST

WHILE CRUSHING MY SPOUSE IN THIS MORNING'S ROMP; MY LOVED ONES SCREAMS REMINDED ME OF MY INVESTMENTS; THEY ARE SCREAMING ALONG BUT THEY SHOULD BE DEAD.

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