The Financial Crisis Explained
I know you’ve ALL been waiting-nail biting in fact-to hear my commentary on recent market events. I mean you didn’t actually think you could escape this-did you?
There’s a quiz at the end. So pay attention.
Firstly, I love Bear markets. They cut to the core of reality and peoples true capabilities. I love the nervousness, the white knuckles, the sheer fear and yes-the loss. But most of all, I love the way Bear markets cut through all the bullshit and expose everyone involved for what they truly are. Stupid, greedy and unaccountable. Naked vulnerability is true transparency. I mean isn’t “transparency” the one thing “investors” are always screaming for? You see? A Bear market always delivers.
So-what happened? And who is to blame? The 2 questions always asked after any disaster.
A) The Clinton Administration: Back in 1999, Bill Clinton basically forced Fannie Mae to give mortgages to low to middle income people. In english that meant that Fannie Mae was forced to take on more risk. For anyone who has known me more than 5 minutes, you know I NEVER quote or validate the New York Times, however I should personally send them an apology letter for this amazing article from NINE years ago. And here is the most pertinent quote:
“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people ….. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.“
B) The Federal Reserve: Back in 2001, Alan Greenspan decided that it would be a brilliant idea to keep interest rates at 1% for over a year. This would, in his eyes, create a “soft landing” from the inevitable shit show also referred to as the “dot com bubble.” Well, this allowed thousands of people to borrow money at cheap rates. Of course it was money they couldn’t pay back, but hey, why not create a falsely inflated standard of living? I mean if it’s ok for Michael Jackson, then it’s ok for everyone else.
C) The Federal Government: Who had so prudently regulated the banking system thought that it was just dandy-a ok-for banks to erase loans from their balance sheets. So the banks could sell their loans. How innovative and progressive. The government always does such a good job at regulating things. Especially when they don’t understand them. They’re just so thorough.
D) Mortgage Brokers and Banks: Decided “what the hell? Since we don’t have to keep these loans on our books, let’s just loan money to EVERYONE and then unload it to investment banks who will unload it to hedge funds and other investors. Fuck it.” Well done guys!
E) Consumers: Thought, “We don’t live in a cyclical economy. The value of everything goes up forever. So hey-why not buy a $300,000 home with an interest only loan (a fancy term for “rent”). It will go up in value FOREVER! We study and put more thought into buying a new television than spending $300,000, but since we KNOW interest rates will stay the same forever-then this is a sound and good decision.
F) Investment Banks: Then some brain trust decided to create a new structured financial product called a CDO (Collaterised Debt Obligation). How did this come to fruition? How did this strategic genius come up with the structure? He got drunk one night, picked up an “executive assistant” from the human resources department and took her home. Then he emptied the entire contents of his fridge into a blender and passed it off as “haute cuisine.” She drank it, complimented him on his keen fusion cooking skills and gave him a blowjob. The next day, while he was hung-over, he had an epiphany and thought it was ALSO a great recipe for a “structured investment product.” “Yeah” he thought, “let’s just throw in a bunch of different kinds of debt into a bowl and call it a CDO.” Then his credentialed ass sold it to investors. Not only could HE sell it, but it caught on like wildfire with every other firm. Not only did they sell it to individual investors, but also held huge positions at their own firms.
G) Investors: Thought that CDO’s were the investment vehicle of the future. A sure fire way to triple their money. These were probably the same investors who thought that the dot com boom represented a “new economy”-where a “click” magically turned into revenue. And another thing-when’s the last time an investor actually read an annual report? Might come in handy to know what your money is doing.
This cycle kept happening and as interest rates stayed stable, home prices continued to soar. This enabled people to borrow more against the home that they already couldn’t pay for. I mean how else could they afford a new Plasma TV? And as the CDO’s that carried all this cheap sub-prime debt continued to soar-the investment banks also borrowed more money against them.
Then the mortgage rates got readjusted (not a surprise-they were scheduled to) and E couldn’t make the payment so they defaulted on their mortgage, which made G’s investments tank in value. E could no longer pay for their house so they took their Plasma TV and moved into a friend’s garage. F’s risk management departments had been playing golf and on the 19th hole, got a call. “We’re fucked. Um-you know those things that we have huge positions in and have been trading? Well, we don’t really know how to value them, but we know they’re ‘kinda’ worthless. So how are we going to pay the money back?” “Uh-I don’t know. I’ll call you back after my bridge game.” OOPS!
So they all estimated and wrote down the debt, but didn’t REALLY know how much they were losing (operative word here is “estimated”). And then they went out of business along with the people who moved their Plasma TV into the garage.
Then C decides that it’s the “short selling” that’s causing the market to go into the toilet. Yeah that was it. I mean it COULDN’T be that all these banks are going out of business. No. Absolutely not. It’s those evil short sellers. Oh-so let’s put a ban on short selling-that’ll save us! Of course we forgot that you can still short stock with options and that market makers are shorting stock ALL day because they have to by law in order to create liquidity-a law instituted by-um-it’ll come to me-oh right-by the SEC. Oh and look-the market rallied the next day. See? We were right. WRONG. Ever heard of a short squeeze asshole? And I can’t wait until they lift the ban. Then the Dow will be-let’s say around 8000? But perhaps it’ll hit that before…as no short selling means no short squeeze rallies. So don’t be stunned when the market tanks faster than you think.
Then C decides that perhaps we should bail out all of these motherfuckers. Of course, they don’t really know (nor do I) the ramifications of bailing or not bailing out-much like a sinking ship.
QUIZ:
So whose fault is this?
ANSWER: A, B, C, D, E, F and G
What was done right: “Hey Lehman Brothers? Go fuck yourselves.”
But as I walked past the New York Stock Exchange on my way home from work the other day, I wondered, “why are you people protesting here? Are you retarded? Apparently. Do any of you honestly think that any single person in the NYSE had ANYTHING to do with any of this? Apparently you do. So I guess if a similar thing happened in the beef industry, I would see you protesting your local deli who makes roast beef sandwiches?” It was like the Special Olympics of activism.
So what’s the good news? Yep-the old trading adage/superstition “Buy on Rosh Hashannah. Sell on Yom Kippur.” That’s about as good as it gets right now.
Future Installments:
A Penny Saved is a Penny Earned: Perhaps Benjamin Franklin had a point
Marking to the Market: The Newest Math: Why the term “fair” value is utter horseshit. If they couldn’t value it then, then you won’t be able to value it now.
Short Selling: The True Sure Thing
US Treasuries: Your Savings Account Has a Better Yield
Risk Management: Knowing When To Skip Golf in Order to Avoid a Global Financial Collapse
Structured Financial Derivatives: Structured Means….Structured!!!!
Credit Card Companies: Why Those Bankruptcy Laws You Lobbied So Hard For Won’t Help You Now
Mortgages: The Not So Fine Print: Yes, You Do Have to Pay Back The Money. It’s Part of the Deal.