While Congress and the rest of the country scratched their heads trying to figure out how
we got into this mess, 60 Minutes decided to go to Frank Partnoy, a law professor at the
University of San Diego, who has written a couple of books on the subject.
Ask to explain what a derivative is, Partnoy says, “A derivative is a financial instrument
whose value is based on something else. Its basically a side bet.”
Think of it for a moment as a football game. Every week, the New York Giants take the
field with hopes of getting back to the Super Bowl. If they do, they will get more money
and glory for the team and its owners. They have a direct investment in the game. But the
people in the stands may also have a financial stake in the ouctome, in the form of a bet
with a friend or a bookie.
“We could call that a derivative. Its a side bet. We dont own the teams. But we have a bet
based on the outcome. And a lot of derivatives are bets based on the outcome of games of a
sort. Not football games, but games in the markets,” Partnoy explains.
Partnoy says the bet was whether interest rates were going to go up or down. “And the new
bet that arose over the last several years is a bet based on whether people will default on
their mortgages.”
And that was the bet that blew up Wall Street. The TNT was the collapse of the housing
