Let's talk about greed
A few years back an outfit called LTCM got involved in some serious spread trades. Actually, convergence trades. And along came a market discontinuity and all of a sudden, the fabulously wealthy Masters of the Universe (for these were the guys from Salomon) took one on the chin. The huge trades that they put on "went south." Funny, if they had been allowed to expire, the whole thing might have made money. But they had to come up with margin and people wanted out. So they unwound the fund and killed the goose that laid the golden eggs -- because the damn thing had bird flu and contagion could kill the rest.
So the Fed Chairman called a group of prominent New York Bankers (I heard that some took the "fast jet" over from London to attend) and told them exactly what was going to happen to save the day.
The trouble is, "we" didn't learn from LTCM. Instead bankers wet themselves to find young punk traders to set up "hedge funds" guys with a few years experience at Goldman, CSFB, Lazard, UBS ... fill in the blank. Why? Well, the fees earned by the same bankers on the transactions was stupendous. A money machine. So now we have everyone trying to make or create "value" by gearing themselves up to make risky trades that would have made the LTCM gang blush.
The big banks and financial institutions are only looking at the quarterlies -- and the traders pray that this all holds together so that they can collect a few more bonuses.... Instead of experience scaring us away from risky trades and the risks of market discontinuities the industry hires the best minds from MIT and similar places that they can find to cook up new products. They came up with a doozie: sub-prime debt. Really not very exotic at all.
So get this: we lend to a group of people whose credit is so bad that they shouldn't be buying houses in the first place, then packages the mortgages up, sanitize them through credit rating agencies and the addition of some better risks in the portfolio, and sell these off to people who want higher returns on their money. These folks then leverage themselves to the eyeballs to add to the kick to the returns -- and their bonuses. Adding cocaine to your heroin to produce a speedball. That killed Belushi and now it looks like killing us.
Consider that the US's growth over the past few years has been basically driven by housing, property development and the increase in wealth "enjoyed" by Americans (who promptly spend it on SUVs and plasma TVs) by virtue of the greatly increased values of their primary asset -- their house. My $250K shitbox is now worth $500K!! Let me re-finance at "those low-low rates" and spend some of that loot. Or heck, I can sell this one and buy one for $750K, take a nothing down mortgage and pocket the diff. And when the house is worth $1 million, I'll do it again. The American dream. Only this dream is predicated on cheap money and all of a sudden, people are looking at the risks of holding this garbage (debt) and want to get out. Or look at it this way, a lot of fat men all at once decided to exit via a very thin door.
So the US has been living on illusory wealth for at least 8 years (remember the dot.com stuff was just shifted into the real estate market). Someone, somewhere and sometime has to pay the piper. And that time may have just arrived, and you and I may be the ones to pay.
Incredible, really. And the greed is such that hedge funds around the globe are feeling the pinch. Everyone has those fancy mathematical models ( I am sure they are selling them at the cafeteria at MIT) and everyone suddenly feels the need to get out. And there is no Fed Chairman and single room in which orders can be given and followed. This time it is not a golden goose, but a bunch of punks selling duck turds.
So the Fed Chairman called a group of prominent New York Bankers (I heard that some took the "fast jet" over from London to attend) and told them exactly what was going to happen to save the day.
The trouble is, "we" didn't learn from LTCM. Instead bankers wet themselves to find young punk traders to set up "hedge funds" guys with a few years experience at Goldman, CSFB, Lazard, UBS ... fill in the blank. Why? Well, the fees earned by the same bankers on the transactions was stupendous. A money machine. So now we have everyone trying to make or create "value" by gearing themselves up to make risky trades that would have made the LTCM gang blush.
The big banks and financial institutions are only looking at the quarterlies -- and the traders pray that this all holds together so that they can collect a few more bonuses.... Instead of experience scaring us away from risky trades and the risks of market discontinuities the industry hires the best minds from MIT and similar places that they can find to cook up new products. They came up with a doozie: sub-prime debt. Really not very exotic at all.
So get this: we lend to a group of people whose credit is so bad that they shouldn't be buying houses in the first place, then packages the mortgages up, sanitize them through credit rating agencies and the addition of some better risks in the portfolio, and sell these off to people who want higher returns on their money. These folks then leverage themselves to the eyeballs to add to the kick to the returns -- and their bonuses. Adding cocaine to your heroin to produce a speedball. That killed Belushi and now it looks like killing us.
Consider that the US's growth over the past few years has been basically driven by housing, property development and the increase in wealth "enjoyed" by Americans (who promptly spend it on SUVs and plasma TVs) by virtue of the greatly increased values of their primary asset -- their house. My $250K shitbox is now worth $500K!! Let me re-finance at "those low-low rates" and spend some of that loot. Or heck, I can sell this one and buy one for $750K, take a nothing down mortgage and pocket the diff. And when the house is worth $1 million, I'll do it again. The American dream. Only this dream is predicated on cheap money and all of a sudden, people are looking at the risks of holding this garbage (debt) and want to get out. Or look at it this way, a lot of fat men all at once decided to exit via a very thin door.
So the US has been living on illusory wealth for at least 8 years (remember the dot.com stuff was just shifted into the real estate market). Someone, somewhere and sometime has to pay the piper. And that time may have just arrived, and you and I may be the ones to pay.
Incredible, really. And the greed is such that hedge funds around the globe are feeling the pinch. Everyone has those fancy mathematical models ( I am sure they are selling them at the cafeteria at MIT) and everyone suddenly feels the need to get out. And there is no Fed Chairman and single room in which orders can be given and followed. This time it is not a golden goose, but a bunch of punks selling duck turds.
posted by Zaphod at Tuesday, August 14, 2007
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