Is it enough?

A personal opinion

By R. T Hayes




As the second bail out makes its’ way through the Senate, the question remains: will it save our economy? I hate to be a naysay, but I am beginning to get the feeling that it’s too little too late. And all the money in the world may be too little. And perhaps it’s just throwing good money after bad. Or borrowed money is a more realistic term. I’m not sure we are going after the reasons this melt down occurred in the first place.


The deeper I dig into the cause of this decession (not quite a depression but more than a recession}, the more skeletons start to surface. If you understand derivatives your farther ahead than most of us and surely much farther ahead than our elected leaders.


But for the sake of simplicity, I’ll try to explain my understanding of the of the sub prime mortgage mess. This particular type of derivative is now infamous as a Sub prime CDO. (Collateralized Debt Obligation)


These investments were basically bets that borrowers with a poor credit rating or no job at all could make his mortgage payment on a home worth less than he paid for it. Then when his payment went up due to an interest rate adjustment a few years into his mortgage he would surely be able to make the higher payments as well.


Because the borrowers had such poor credit or no credit, it meant the banks and mortgage lenders could charge high fees and rates. Then sell the loans off to unsuspecting investors. It looked very attractive to banks and hedge funds to get hi yields in a time of low interest and low inflation. The risk appeared to be low and the return appeared to be great. Until the borrowers stop making payments on homes that they cannot afford and are not worth what they owe.


Now you have to remember these Collateralized Debt Obligations (CDO’s) derivatives are really bets that are bought on an enormous amount of leverage.


For example, any wealthy individual could put down one million dollars and then leverage this amount 3 times. Thus holding $4 million (one million in equity and three million in debt). The fund can then leverage this $4 million another 3 or 4 times and invest then in a hedge fund; then the hedge fund can take these funds and leverage them another 3 or 4 times and buy derivatives like sub prime CDO’s which are often leveraged 9 or 10 times. You get the picture in the end: the initial $1 million of equity can become a $100 million investment. But $99 million of that is debt.


There was no regulatory body watching out for the public or protecting the greedy bankers and brokers from their own greed. This has created the largest credit bubble in history.


If you expand this to the global economy the figures are astronomical. In 5 years the global derivatives market grew from $100 trillion to almost $600 trillion.


The Financial Times in June 25 2008 reported that “…total global losses from the coming financial meltdown could easily reach $25,000 billion to $30,000 billion”. This can plunge us into the deepest deleveraging since the Great Depression.


Now you see where all the money went. It never really existed in the first place. Remember the $99 million in debt in our example. It only takes a 1% drop in the investment to wipe out the $100 million that the investors are carrying on their books.


Now here is the Kicker. The amount the traders have to put down in order to place there derivative bets is based upon their credit rating. If their credit rating is downgraded they have to put up more money to cover their purchases. To Do that the banks, hedge funds, money market funds private equity funds, etc must sell their investments. But no one want to buy the CDO’s. So they must sell their good investments. Which causes the market to drop and causes further selling, and further downgrades and so on and so on.


This has the potential to wipe $20 trillion to $30 trillion off the global exchanges. We have all ready seen $10 trillion wiped off the global stock exchanges in just a month and that was after central banks pumped a trillion dollars into the system.


So now when we look back and remember the SEC granting the investment bankers the ability to go from 8 to 1, to 40 to 1 reserve how devastating a decision that was. And the bill that Phil Gramm pushed to allow the banks, insurance companies and investment bankers/brokerage houses to merge how significant that was. And when Alan Greenspan remarked that he didn’t understand how derivatives worked and we should look into regulating them. But no one did or seemed to care in Washington.


There is not enough money in the world to fix this problem. No a lot of business will go bankrupt and a lot of families will suffer because of greed and lack of oversight.


Is it really going to “Change”. with government officials that thumb their noses at paying their fair share of taxes and Business leaders that give themselves bonus and outlandish salaries at the taxpayers expense and 20 lobbyist for every elected official. Who do these people think they are? We should require that they pass a IQ test and insist that they must take a course in morals, then give them lie detectors test every 6 months. And require refresher courses in morals just to make sure their uppity positions don’t let them get too far away from reality.


Is it going to change? I think Not, but I pray it will.


Robert Hayes , Feb 3 2009