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Blog of Mass Destruction

Cash Advancing In Order To Gamble

By The Reverend Published: August 16, 2007

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As I type this the Dow is down another 175 points. Since July 19th when the Dow Index hit 14,121, it has fallen over 1300 points or approximately 9%.

Wall Street, needless to say, is a very serious place where "investing" is the central focus. Stock markets are not like those evil gambling houses we now find all over America. Gambling houses are just so.....I don't know......risky. Yes, the serious brokerage people mention risk when selling you stocks but more importantly, they say, is owning a "piece of the rock", you know, investing. And investing is not frivolous or unserious like gambling.

And did you know that gambling is addictive to some people? Yep. Ever see those billboards with the Gambler's Anonymous 1-800 numbers? Big problem. Do you know what you don't see though? You don't see "Stock Market Anonymous" billboards with help line numbers, do you? I wonder why? Do you think it's because market "investors" are "investing" and not, like, gambling?

Though it contains references that are wonk-like, the following paragraph helps to explain why the very, very serious "investing" methods of Wall Street have led to the market's latest (and rather severe) decline.....

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets. Link

In, you know, regular street talk, what this amounts to is huge American "investors" going to their local banks, pulling out their credit cards, cash-advancing as much as they can, then driving to a nearby state gambling house and betting until they lose it all. The ripple effect would include selling any assets left in order to pay the credit run-up, even if it meant selling the house.

That's what's been going on in the stock market lately.

Conventional wisdom suggests if the market moves in a specific direction it is anticipating what's to come to our overall economy in about six months.

So let's say right around March of 2008 we'll be in a recession. Primarily caused by borrowing huge sums of money with which to gamble.

But Wall Street is a very, very serious place where "investing" goes on.

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