Bucket Shops circa 1929

Not long ago I was watching a news program discussing the outlawed bucket shops of old, their role in the crash of 1929, and comparing their role at that time to the present trading in some financial instruments. The implication is that the government never learned their lesson and thus our present financial crisis.

From the link:

At the moment I can’t get my head around whether what’s happening today is a result of the kind of betting on financial instruments that occured back then and was subsequently outlawed.

Can you help me out?

Heard on an NPR Marketplace report on the drive home:

Outstanding bonds in the US Market: $5 trillion. Outstanding credit default swaps: $50 trillion. (I’m pretty sure that those were the numbers given, but even if I’ve gotten the precise figures wrong, I’m absolutely sure that the correct latter figure was 20x the former.)

A credit default swap is a sort of insurance policy for a bond. I agree to pay you a fee annually, and you agree to reimburse me for the value of my bond if the bond issuer defaults. But the market for credit default swaps is unregulated, and nothing prevents you from buying a credit default swap for a bond you don’t own; if you do so, you are essentially placing a naked bet that the issuer will default. The NPR report suggests that about 95% of outstanding credit default swaps represent such bets.

That’s exactly the sort of betting on financial instruments you described, with bonds standing in for stocks.

So would this be like buying several insurance policies on my car in the expectation I’m going to total it ?

Perhaps, but it’s likely that it’s more like me buying an insurance policy on your car in the expectation you’re going to total it. Can I buy you one for the road?

I think it would be more like everyone on your block buying insurance policies on your car with the expectation that you will total it. Of course it seems it is even more complicated because then your neighbors may have sold those policies to others who want in on the action.


Grrr, 10x. And apparently, it was still All Things Considered rather than Marketplace. Here’s a link to the transcript.

**So how long can this go on before somebody cuts your brake lines?
Clearly there was great incentive for the whole thing to crash or am I wrong? Trillions of dollars betting that the whole thing will go down? I’m surprised that any one was surprised. Alan Greenspan was shocked, shocked that it crashed. This may actually get me believing conspiracy theories again.:frowning:

I’m thinking the same thing. If you want a return on your investment, you want someone elses bonds to tank.

This new knowledge leads me to the next question.

Could the banks have converted their suspect mortgage holdings into bonds, then get these bonds “insured” with credit default swaps and other investors jump in expecting a return when the mortgages fail? And Greenspan didn’t see the crash coming?

I was under the impression that gambling debts are not legally collectible. Does this fact not let the people who were taking the bets off the hook?

That would be great, if the gummint declared all the credit default swaps that were bought by people not actually holding the bonds, were legally considered “wagers”. :smiley:

While that was true at common law, it’s no longer the case in many states.

But the point is, while these kinds of derivatives are fuctionally a wager on whether the market will go up or down, they’re not technically one. Because you actually are buying something concrete on paper, even if it’s really an excuse. It’s not like a bucket shop. (So-called, according to my old Corps professor, because when they took your money, instead of making a trade with it, they just dumped it in a bucket.)


Slight hijack: I always imagined bucket shops to look like this. I know it’s called a stock exchange division in that description but see the people sitting in front of the boards watching the numbers? See the lines of people at the counter at the end of the video? It looks more like they are betting on stock movement then actually trading stocks.