Wall Street murders Lady Gaga
Grand County, CO Colorado
Michael Douglas played Gordon Gekko in Oliver Stone’s 1987 film, Wall Street. In the movie, Gekko lived and embodied a philosophy of greed, totally devoid of compassion or scruples. Douglas portrayed the ruthless trader flawlessly, winning the Oscar for Best Actor in the role.
It took us more than 20 years to figure out the movie was a documentary, not a drama.
Investment Banking initially started off simple: “Our clients have entrusted us with their savings and we will invest it shrewdly on their behalf.”
It went like this: if the bank had big investors in petroleum, they bought stock in auto manufacturing. If they had big lumber stockholders, they lent money to land developers to build houses. They kept a little for themselves through commissions on the transactions. The market kept rising; people were happy.
Mr. Gekko changed all that. Investment Bankers began thinking, “Why invest for our clients when we could invest in ourselves? What if we all pretended to go insane at once and gambled away all their money on lunatic schemes where only the bankers win? What if we became too big to fail?”
At this point, it’s pointless to single out the Credit Default Swap from all the shameless, self-serving deals cooked up by Wall Street but it’s worth understanding how they contributed to the worst financial disaster since the Depression.
A Credit Default Swap (CDS) is a contract used by indictment banks … er, excuse me … investment banks, that look like insurance policies but never mention the word, insurance.
In pure and simple terms, they are bets, every bit like black and red on a roulette wheel. Except it happens on a bigger scale than Las Vegas’s wildest imagination.
It’s hard to explain insanity to sane people. Three years ago on Wall Street, if a bank issued a hundred-million dollar bond, right behind it they would sell 20 times that in credit default swaps to investors with no relation to the bond at all; investors who were making side bets that the bonds would default.
Let me bring it home. It is not dissimilar to you and 999 friends each taking out a $1 million life insurance policy on Lady Gaga. Each of you pays the bank $1,000 per month; the bank rakes in a cool $14.4 million annually along with a commission on every transaction. They don’t have to pay a cent unless Lady Gaga meets an untimely demise.
Banks embraced this new revenue source so enthusiastically that by the end of 2007, they had sold $60 trillion worth of credit default swaps, or about four times America’s annual Gross Domestic Product.
But everything’s okay because all this money is backed by the full faith and credit of the US government, right? Nope, it was backed by a pyramid of worthless sub-prime mortgages, brought to us by none other than the investment banks. The whole thing collapsed like the Viking stadium.
It gets worse. Suppose one of Lady Gaga’s investors becomes financially distraught and starts hanging out around fashionable nightclubs. Finally, hiding in the valet shack at New York Dolls, he sees an opportunity and runs Lady Gaga down with his Bentley Azure convertible. Not to mention the bumper repair, now the bank has to pay off a cool billion to all the investors.
But the bank is faced with a difficult question: how much is $1 billion in defaulted mortgages?
In the end, what good is Wall Street? What do they produce that we can sell overseas? They claim they need to be around to finance international commerce, but the truth is that 80 cents of every Wall Street dollar comes from the buying and selling of stocks, bonds and derivatives like the CDS. Only 14 cents of their dollar comes from corporate lending.
I guess the other 6 cents is hiding under the CEO’s sofa cushions.
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