More About Money

While flying cross country today, I got fully engrossed in The Ascent of Money by Niall Ferguson, still determined to know enough about what a credit default swap is to be able to explain it in less than a paragraph.

I'm not there yet, although I do understand that "they" are the reason for the collapse of the global financial markets, and perhaps, if one is as pessimistic as Barbara Ehrenreich and Bill Fletcher, Jr. in The Nation, March 23, 2009 issue, the end of capitalism.

Credit default swaps were as phony as the ENRON scheme, creating something to sell out of nothing, with no independent evaluation, no collateral, no reserves, no nothing. As I said, I'm still am not quite sure what "they" are.

ENRON like the Madoff investments, was all glitter and not much else, although as a cautionary note, by the end of 2000, just a year before it collapsed, ENRON was the fourth largest company in the US, employing 21,000 people.

However, Ferguson does explain five stages of a financial cycle, and we need to learn about these so that we don't get tricked again.

1- Displacement: Some change in economic circumstances creates new opportunities for profit, like technology innovations, energy discoveries, deregulation that permits new forms of "securities" to be devised by wicked and clever lawyers and folks with MBA degrees.

2- Euphoria or overtrading: rising expected profits lead to rapid growth of share prices, like the insanity with IPOs in the dotcom era and ENRON, and now with these risky mortgages that got bundled with more secure ones and sold, and AIG agreed to insure.

3- Mania or bubble: easy capital gains attracts first time investors, people who are not regulars in the stock market, but who are lured there, often by unscrupulous brokers, by the idea of making a quick profit.

4- Distress: insiders understand that the end is near and pull out from the market. In the months before ENRON's collapse, the insiders--Ken Lay, Skilling, et al. sold millions of dollars of ENRON stock. Bernie Madoff's wife withdraw millions from his supposed legitimate investment company just weeks before he confessed.

5-Revulsion or discredit: and it all falls down.

NEWS FLASH: Today the NAACP filed suit against Wells Fargo and HSBC banks for racial discrimination, for selling mortgages, often sub prime mortgages, that charged African Americans higher rates.