in understanding how we got to where we are today because it goes back to rivet is and long term capital management which is discussed in this book inventing money also a key. point in the history let's talk a long term capital management for a second and derivatives and what your take this was the huge hedge funds that. collapsed in one thousand nine hundred eight actually the last time that russia defaulted. and it was a lot of turmoil and the global markets around that time. was seemingly unconnected to all of these things but was pulled down by the volatility in the markets and was bailed out by a consortium of the world's biggest investment banks and at the time it seemed that that was a warning shot across the bows of regulators around the world that the shadowy over the counter through this market was something that needed to be examined a bit more carefully and i wrote that book with partially to try and put that warning across and we saw. instead. over the following to cade's and we got to where we were today which is a much bigger crisis than. all right now long term capital management ma

to save long term capital management because it was wound down its founders lost their money and that was the end of the business but it was really to save the counter parties or the long term capital management which was the likes of j.p. morgan deutsche bank u.b.s. you name the guys in that space so it was the links between this this giant hedge fund the big dealers and over the counter derivatives that they couldn't be allowed to fail and they still can't be allowed to fail today was really the link that we need to make let's talk about derivatives a little bit. most people gets stumble on a term but you could distill it into one very simple concept and that is it's a bit. absolutely it's a bet on some kind on the line to see whether it's an interest rate a current stock price or a credit default something like that it's a bet they can go either way it's called no purpose except to convey that bet it doesn't have a memory overall of who did it it's neutral with the girls the purpose so you want if you're going one side you can be protecting in something you gain the other side you

we saw this in 1998 with long-term capital management. one had ever heard of it and this hedge fund got into trouble and it was dmed by w wall street and the federal reserve to pose a systemic risk to the whole financial system so we never heard of it but had to bail out. gerri: do we need more regulation? that is the first in a lot of people wouldld say? >> first thing regulators want to do is regulate and they want a lot of complicated regulation. i don't think that is the answer but bringing this stuff out into the sunlight making these shadow banks show what sort of risks are opposed to the system would be a really good start so at least we have a ense of what is going on. gerri: for the regular american out there there's a whole world that is completely closed to them, has nothing to do with them but at the end of the day could make big trouble for regular investors. give us an example of how this could unwind. >> as we saw with money-market funds which was for mom-and-pop investors but what you had was something people thought was s

they have the long-term capital gains and pay theselves with carried interest. the fiction is they are paid to manage the money and generate profits. they have a percentage of the returns -- we tax them at the marginal rates. and the fiscal cliff legislation. >> the new secretary of the treasury is jack -- the chief of staff to the president. let me read something i picked up on wikipedia. he was named the chief operating officer of the investment unit and then they say -- the group he oversaw invested in a hedge fund that bet on the housing market to collapse. how can we expect a government with hank paulson out of goldman sachs -- how can we get the average person a fair shake? >> that is an example -- a lot of them took short positions and derivatives with speculative debt on how mortgages perform. they would make a profit -- and other hedge funds opposed the market and they wanted the housing market to go bad. they would make money if it happened. in one, the volker rule will prevent that kind of activity. >> why has it taken two years? >> i don't know. the pace of regulatory reform is not that g

doing it and being public and having to manage the company for quarterly earnings and sort of making tradeoffs in long term investments. you don't need the capitalhe public currency to do that, then you're better off staying private until you do need those things. >> how much of your personal money, i gather a big slug of it is in? >> yes. this is an interest, very unusual deal. the company is 13 years 0e8d. we bought control from the founder a little less than four years ago. but there is money and i believe this is a great business. we got google and a great match. >> it's been something we've been talking to them for a while. dave lawery is joining our board. i think this is a relatively new thing for them to invest in later stage companies like ours. they can help us grow internationally. we're real excited to work with one of them. >> your wife works famously at facebook. i want to come to a party at your house. i think that would be fun. but your early career was involved in digital music. and i wonder what your impressions are of the big players? digital music today from apple to pandora to tsanga. >> there's a lot of great things happeni

we can get access to the very best alternative managers that like having the long-term patient capital not going to be able to do that. and you would not want them to get in to sort of second-tier funds in the alternative area because they are just going to pay a lot of fees and not going to do very well. so we're looking for net fees and we are an attractive, real returns. you know, in second es of 5% or 6%. and we have the team to go out and find those kind of people to do that for us. >> scott, thank you very much for joining us. and we want to wish you the best of luck tonight. we're going to be watching. >> thank you very much. go irish. >> that's right. go irish. when we come back, a new tax that could shock some car owners. details are just ahead. also at the top of the hour, dick kovacevich will join us. >>> coming up in the next hour, former wells fargo chairman and cho richard kovacevich is going to join us to talkebtceiling, the markets and much more. take a look at futures this morning. red arrows across the board. "squawk" is coming right back. [ male announcer ] how can p

capital, that's managed by mortgage hedge fund managers, maybe 60 billions. that's over $10 trillion outstanding. compare that to long sho shore equity managers. the managers have been able to take advantage of. >> in terms to try to produce those type of performance numbers you've been able to achieve? >> absolutely. what i would say is there is so little capital in mortgage hedge unds relative to the size of the market that most managers are seasoned. they lived through tough times. you see the average manager live through 2008 and probably 1998. so have a much better perception of risk, and can capitalize on inefficiencies that occur. that's basically, if you look at the equity markets, the s&p today, you know, is going back to levels where it was five years ago. even if you were fortunate enough to nail the bottom of the stock market in 2008, you doubled your money. >> right. >> if you see how mortgage manages have done, they've done better than that. >> you're flat if you stayed and invested through everything. in your letter, your expectations for 2013, i want to quote here, we say we expect the fed will continue with its accommodating stance as long as chairman bernanke is at the helm in the curre