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Blog of Mass Destruction

Masters of Financial Disaster

By The Reverend Published: February 28, 2009

UPDATE link below.

From every industry, trade or profession we are confronted with words, phrases and titles that are only primarily understood by those who work in those industries, trades or professions. Nothing new or profound about that.

During the course of our nation's financial implosion, we have heard new titles and phrases....ones we've never heard before....or at least, most of us haven't. Credit default swaps....collateralized debt obligations....structured investment vehicles.....all stuff that might as well be in Swahili, unless, of course, you work with those names every day.

Yet, the financial activity behind those strange titles have brought about America's worst financial disaster in 70 years. What those titles represent is at the heart of our national meltdown.

Let's consider only one of those strange finance-industry titles. Credit default swaps. For non-expert people, like The Reverend, simple metaphorical explanations of complex issues...are helpful. Like this one...

"Imagine being able to insure a car that you don’t own or use. Imagine it’s the car your neighbors will let their teenage son drive, when he gets his license in a few weeks — and you know the kid is a reckless brat.

Now imagine that, by using financial derivatives called swaps, you can purchase as many insurance policies on this car as you can afford to pay premiums on.

When that car is eventually trashed and scrapped, you — and any friends you clued in on the deal - might collect millions, even billions, of dollars. By contrast, your neighbors, who bought real insurance on a real vehicle, get only its Blue Book value." Link

Let that sink in for a minute....or reread it just for the hell of it. Why? Because the above explanation is the very reason why approximately $100 billion of tax money was handed over to AIG.....and they still aren't out of the woods yet.

If the Masters of the Universe,.....those oh-so-wise-and-highly-sophisticated directors of money.....those who, you know, move and shake our once-great economic engine....created such a system as outlined above....who are we...the non-expert, unsophisticated sluggards that we are....to argue?

While the corporate controlled media, night after night, puffs itself up with faux-rage over junkets, bonuses, and guys named Madoff and Stanford.....nothing, not one peep, is said that explains this about credit default swaps....

"There’s still no rule against them, nor a wisp of regulation."

The foreign sounding title....credit default swaps....in the real world, allowed for the Masters to amass bets against mortgage backed securities even though those placing the bets had no stake, whatsoever, in those securities. Just like unlimited buying of car insurance on the neighbor's teenage kid when it's not your kid and not your car.

As mortgages began to fail over the last couple of years, thus deteriorating the worth of mortgage backed securities, those who didn't own any mortgage backed securities...had no skin in the game, as it were,....began collecting their bets, exhausting most of the capital that AIG (the insurers) had. The government rushed in, with boat loads of our tax dollars, to rescue this still-ongoing Sophisticated financial activity.

Although credit default swaps are only one piece of the overall meltdown puzzle, they are a big piece.

I often hear and read conservative stuff still suggesting that an unfettered free market is the pathway to national prosperity. Let the market breathe freely, they still say. Deregulation is still being advocated.

Credit default swap wizardry is the direct result of an unfetttered, deregulated, 'trust us' approach to the financial industry.

Now, we're all paying for the wreckage.

UPDATE: Demostrating, one again, that The Reverend is slightly ahead of the curve....here's today's (Sunday) New York Times.

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