Conspiracy Theory CDOs Anyone.
Today’s economics are not for the timid. Above and beyond knowing the basics of how money works, there is another layer which needs to be fathomed. That layer is called by many shadow banking.
The public would be wise to become very intimate to the games afoot. The alphabet soup of derivatives first must be made comprehensible to be controlled.
The author was fortunate to have been in banking in the mid 90s. That particular banking group was very concerned. It was very clear that swaps and derivatives could cause a financial meltdown. The underlying concern was that greed alone would drive the industry into wilder and wilder financial instruments with no underlying value. It did come to pass. As early as July 2007 the auction system for these kinds of instruments started to fail. Financial institutions backed away from taking on these “same as cash” instruments.
For the bankers the bigger fool theory was the rage by then. Systematically, the institutions such as Merrill Lynch, and Wachovia Securities dumped millions of dollars of these into the hands of unsuspecting companies, and even retirees to get them out of their holding before the wheels fell totally off the cart.
The instruments were created by companies such as Blackrock and Nuveen. By mid-February 08 the market for these seized up entirely. We are talking about a 300 billion dollar market freezing up.
When the CDOs froze, retirees among others found their economic lives were at a standstill. Complaints poured into the Office of Financial Regulation.
The players in the industry feigned innocence. The investigations continued. In the end many small investors got back their principal at least.
Was the press interested? Well, it didn’t boil down to a quick set of soundbytes. Besides, the perpetrators were some of the biggest financial institutions in the country.
Finally, when Bernanke and Paulson held the country ransom for 700 billion dollars the story got media attention.
It is not my ideal of accountability to have the taxpayer pay for the financial excesses of the financial institutions.
The rough condition of the stock market just after the last election was rumored to in part have been due to the rumor that “full bonuses” may not be forthcoming to the architects of the meltdown.
For example, Dick Fuld of Lehman Brothers was know to be facing a cut. His bonuses in 2007 had been a cool 34 million.
Alan Greenspan for one had believed in the Randian notion of enlightened self interest. That is the belief that any behavior will be restrained if it would kill a golden goose. Greed clearly trumped Objectivism much to the shock of Greenspan.
These “Too big to fail” are not national institutions. They are international. The idea of a sovereign nation is a thing of the past.
Is this to be the new world? Wait and see.
