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.
In the case of knowing about the world of shadow banking, sadly, ignorance is not bliss
In the mid-90s while in banking, it was clear at least in the little unit that I was in, that swaps, and derivatives could cause a meltdown. The fear was that by becoming increasingly opaque, that the force of greed would eventually drive the creation of increasingly idiotic instruments that would be foist on the wary and unwary alike. As early as July 07 the auction system for debt backed securities (CDOs) started to stutter. http://en.wikipedia.org/wiki/Collateralized_debt_obligation Institutions were backing away from taking on the touted “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.
Who created these? Companies like Blackrock and Nuveen. The market for these froze by mid-Feb 2008. 300 billion dollars of “same as cash” assets were so much dead meat.
I emphasize, that individuals and businesses had been told that these things were money market accounts, (same as cash). Many businesses and personal economic lives came to a screeching halt. The Organization for Economic Co-Operation and Development Financial regulation institutions were flooded with complaints.
The players in the industry feigned innocence. The investigations continued. In the end many small investors got back their principal at least.
The press ignored the story. It must be a coincidence that the wrong-doers were also major sponsors.
What got the press to cover the story was the total meltdown in September 08. When Bernanke and Paulson demanded 700 billion dollars for Wall Street the story started to unfold to the public.
Where is the accountability you may ask? It isn’t too much a stretch to get the idea now in November of that year that to a large degree the money being paid back to investors for the CDOs will effectively come out of the pockets of the US Treasury.
The market shook shortly after the Presidential Election. Rumors flew that the market was not pleased at the idea that bonuses could be impacted.
Specifically Dick Fuld of Lehman Brothers is being cut off at year end with no Bonus. His bonus in 2007 was a clear 34 million. dollars.Alan Greenspan’s discipleship of Ayn Rand gave him a blind spot in the area of regulation. On October 24th 08 he was quoted as saying to the House Committee on Oversight and Reform, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief.”
Clearly Rand’s notion of enlightened self-interest did not trump raw greed for the banking industry. For more on Rand, see Objectivism and the 1957 novel “Atlas Shrugged”.This all plays nicely into the capital C Conspiracy Theorists who are ready to gloat over the “I told ya so’s”.
Bailing out the international “Too big to fail” shows that the notion of national sovereignty is a thing of the past. The public has been asleep as the barbarian bankers not only got past the gates but quietly took over.
Will the New Vikings prevail? Stay tuned
James Horne has been a financial analyst for over 10 years. He is CEO of Pure Reason LLC, the home of Shadowtraders. His voice has been heard by hundreds of students learning to trade Futures with Shadowtraders online day trading strategies. Before you purchase any trading software, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen
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