I recently ran across an old friend,(let's call him Felonius Funk), and we were discussing the many issues facing this country these days, and as the conversation led us to familiar grounds concerning our two industries, real estate for me, and Wall Street for him, we digressed for quite awhile on recent past history, and the current . effects that it is still exerting on our present and foreseeable future.
What "Felonius" imparted to me was intriguing and maddening at the same time, and I know most people are too busy to pay attention to the players and the moves they are making, because of the smoke and mirrors they use to confuse and obfuscate the true import of their actions. In addition, the complication involved in these manuvers causes people's eyes to gloss over within a matter of seconds of attempted explanation.
This is my small attempt to add to the needed public dialogue about the puppet masters behind the curtain. Without further ado, I give you Felonius Funk, in his own words...
Out of the Starting Blocks
When the private sector manages itself poorly, the only entity remaining to clean up the mess, unfortunately, is the federal government. Pondering events of twenty years ago, one can remember the bailout of hundreds of savings & loans plus a variety of banks of all shapes and sizes. Some of these institutions had strayed so far away from their core businesses that it was impossible to return them to the fold. Imagine small to medium sized U.S. financial institutions with art collections and/or defaulted third world debt on their books. Our larger institutions, at that time, were becoming too comfortable with new trading and leveraging techniques that eventually would lead to the collapse of 2008. These financial instruments often were not itemized on income statements or balance sheets. They were called "derivatives", and they were supposed to be a secret.
The classic definition of a derivative is a hybrid security whose value is tied to the value of another underlying security. Normal derivatives come in a variety of forms. A Treasury zero-coupon bond is classified as a derivative. The FICO zero-coupon bonds that were issued twenty years ago to create the capital needed for the S&L bailout are derivatives. A convertible bond or convertible preferred stock could be classified as a derivative. The budding problems twenty years ago and the huge problems we have today were not caused by the cash-based "normal" derivatives investments that are bought and held. Complicated mathematical formulas tied to mortgages, interest rates, currencies, and the probablility of their failures resulted in the creation of exotic derivatives contracts, exponentially leveraged, with no central exchange on which to trade. Trading to this day is done "over the counter. One of the major new areas of regulation tied to the financial reform bill now in Congress is the creation of a transparent central market where derivatives can be watched daily.
Three years ago a few so-called market "whistleblowers" began spoonfeeding an ignorant/compliant national news media that a mortgage "crisis" was on the horizon. Yes....we indeed have a mortgage crisis today thanks to lax lending practices demanded by a Congress with reelection first and foremost on the minds of many of its members. Fixing the mortgage crisis itself might cost the taxpayers five to ten trillion dollars. This crisis, however, was only the tip of a giant iceberg, a scapegoat and a coverup to the real problem: The real issue, however, is a derivatives market leveraged to the tune of between 600 trillion and 2 quadrillion dollars....depending on whose analysis one chooses to believe. When the dust settled following the Lehman Bros. collapse in 2008, shareholders and bondholders found out that the company was leveraged many times its equity. Remember Enron? Its accounting firm, Arthur Andersen, didn't survive the trial. Lehman shareholders have sued Ernst and Young.
More to come ...