From Black Friday to Derivatives Saturday

Back in the crash of '08, clueless underlings such as myself suddenly were made aware of a mysterious component of our financial system called "derivatives."

What is a derivative? you may ask. Funny you should ask. I didn't know either, and I still don't. Although I have been trying to figure it out for seven years now, every time I think I know what a derivative is, I encounter acronymic terminology such as MBS, CDO, CDS or SEC.

These slimmed-down nomenclatures should simplify things, but they do, in fact simplify nothing. Although everybody knows SEC stands for Southeastern Conference, which is the football conference where the best American football is played, and where my alma mater LSU exercises its right to excel in athletics, except when teams like Alabama or Florida are on the field.

But I digress. I was explaining to you what a derivative is and I mentioned some of the simplifying terminology.

For instance, as alluded to above: MBS.

Well some well-positioned bloggists of the worldwideweb identify an MBS as a Masters of Bullsh*t, which is attained through much blood sweat and tears and dedicated gamesmanship acquired at a venerable institution, such as Barnwell University or Cayman College. The MBS is attained through years and years of shoveling potentially useful data into HFT, which produces a yield from which its index is derived, and lucrative assets which are then deposited into accounts on behalf of the bullish denizens of WallStreet. These rich deposits build up the notional value of our economy as a hole, thus enriching all of us, not only those who are forever horsing around on Wall Street, but also you and me and all the folks on Main Street, Easy Street and Ventnor Avenue.

Somebody has to do it. I don't mind doing my part, working with a shovel. Keeps me in shape.

Anyway, that's not the MBS of which I spake. I'm talking about Mortgage Backed Securities. I think Uncle Freddie Mac and Aunt Fannie Mae gave these instruments as gifts back during the holidays of 2007, when life was oh simple then, before time had rewritten every line.

My understanding of a Mortgage Backed Security is that they're something like an Arkansas RazorBack, which is probably why they didn't work out so well for investors, although Arkansas is ranked third in the SEC west, behind Florida and--excuse my language--Ole Miss.

After that is my LSU Tigers, presently in fourth place of SEC west, but as always and forever will be, bound for greatness.

It's quite complex to describe just how LSU could be in fourth place, because its position in the rankings is derived from the ratio of victories to losses, divided by the number of footballs passed beneath the legs of a center when he hikes the ball to the quarterback during any given play of the game.

Nevertheless, as I was saying before, a derivative is derived from the outcome, that is to say the, rear-end of a complex financial instrument.

Now I'm sure you're wondering, as any serious investor is wondering, about the real question here, which is: how much is it worth?

One thing that my research has revealed, and one thing I can tell you with surety is this: The value of any particular derivative is derived from fluctuations in the value of the underlying asset.

Here's an example: how much is my ticket to this season's Sugar Bowl worth? Well, at this point it's an open question, but let's just say this: I'll give you my ticket to the Sugar Bowl for your two tickets to the Orange Bowl.

Meanwhile, back at the ranch (Texas Aggies be forewarned), the guys who are shoveling out in the barn are asking what's the real value of these derivatives. And as I explained before, you remember that the value of any particular derivative is derived from fluctuations in the value of the underlying ass-set. That should come out plain enough.

As for the collective value of all the derivatives, this figure is derived from its notional value, which is calculated based on the notion, as defined by the US Treasury, the Fed, the NYSE, and the AP sportswriters, that whatever goes around comes around, so therefore if the value of the aforesaid derivatives passes through enough piles of assets then when it comes out the other end nobody really knows what its worth, so that it can be revalued at the going rate.

This is unpredictable, of course, as the LTCM affair had indicated back in the Glass-Steagall days, but it is bound to be worth, somehow somewhere when you least expect it, more than it was in January of 2009. So that's progress, although the Progressives may not agree with me. I don't pay much attention to all those freaks on the fringe anyway.

And you understand, of course, that all this has taken place after Cronkite passed from the scene. Before that, it was pretty much everybody working together in America toward the same values and goals. But that was then and this is now. Derivatives happens.

I'm glad I could clear this up for you. As for the Sugar Bowl and the Orange Bowl, may the best team win, as it frequently does, but sometimes not.



Glass Chimera

Bankers, Banksters, Bernanke, Black and Beethoven

How's a fellow to make sense of it all? Who you gonna call? Who you gonna believe? What's the world coming to? What's it to ya? and Who's in charge here?

I've been trying to figure out a few things about our financial system.

About a week ago I loaded Ben Bernanke's book, Courage to Act, and have been reading what the former Chairman of the Federal Reserve has to say about those events of 2007-8 that brought this country to its money-grubbing knees.

http://www.amazon.com/The-Courage-Act-Memoir-Aftermath-ebook/dp/B00TIZFP0I

Now about a quarter of the way through Bernanke's explanation of things, I must say I like the guy. He has a personal mission to bring more transparency to that enigmatic institution known to us as the Federal Reserve. I think he really wants regular folks to understand our financial system and the function of the central bank which, having been founded by Congress in 1913, tries to keep a rein on the nation's banking system so it doesn't become a runaway horse.

Nevertheless, the System did morph into a kind of bucking bronco back in the fall of 2008. The crash and crisis of that time may have seemed quite sudden to many of us, but in fact the collapse of Wall Street et al during September-October of that year was the culmination of a bunch of misadventures and misdeeds that had begun a year or two or more before it all came crashing down.

I vividly remember, during that time seven years ago, sitting in my car in a parking lot, a few minutes before 8 am when I would enter my day-job, and hearing on the car-radio with dread or fascination about the demise of such formerly venerable institutions as Lehman Brothers, Washington Mutual, Bank of America, Wachovia, Countrywide, Golden West, AIG, Fannie, Freddie, even General Motors, and then about how Hank Paulson and Wall Street and the Fed, Bernanke and the President and Congress would deal with the degenerating situation by instituting TARP which was rejected by our Representatives and Senators before it was passed and implemented a week later after Hank and Larry and Tim put the fear of god in the legislators' minds or whatever it was they told them to convince them that they should loan the distressed banks $767 billion so the whole dam bailiwick wouldn't fall apart and drag us into another Depression, or so they said.

The world was changing. Have you ever watched the world changing? It is an awesome thing, to see history being made.

What a time a time oh what a time it was. . . a time of innocence (lost), a time of confidences (lost forever), as Paul Simon once sang. Oh what a time it was. Eventually the dust settled and the country lapsed back into normalcy or something like it but not really.

Things were different after that. You know what I'm talking about. . . the Great Recession, everybody and their brother deleveraging, budgets tightening, layoffs and downsizing, fading into perpetual "jobless recovery" with wage deflation, rising unemployment, then descending unemployment but with more part-timing and less money. . . stock-crunchers and media fixated on monthly numbers from the Fed, the gov, BLS, etc, a languid economy generating fewer jobs, then a few more jobs, then leveling out and stabilizing and lapsing into destagulation and blah blah blah. . .

And it was about that time, or actually a year of three later by n' by, that the Occupy Wall Street crowd came along.

My wife and I visited our son in Seattle during fall or early winter of 2011. I woke up one morning and strolled down Pike Street. I stopped at the Westlake Center and entered a Starbucks where I settled in for a while. I was observing through the large glass storefront, the Occupiers who had gathered across the street in Westlake Park.

After a while I noticed among all those protesters, many of whom were carrying signs (mostly say hooray for our side) . .here comes an especially noticeable fellow with a sign. He was tall, scruffy, with a long beard. He looked like the classic cartoon image of the street-corner doomsday prophet, and his sign said:

"Jail for Banksters"

Well that's interesting.

Now, yesterday, November 7 2015, I recalled having seen that fellow and his sign, and I was thinking about what his sign said.

I had been reading Uncle Ben's very informative book--his plainly-written, quite "transparent" explanation of what had happened back in '08, when the low quality of vast numbers of subprime mortgage loans catapulted those same home-loans into default, and subsequently cast a ubiquitous monkey wrench into the vastly complex financial machinery of sliced/diced tranches of mortgage-backed-securities and collateralized debt obligations and credit default swaps, etc etc and then wall street came crashing down and all the Fed's horses and all the Treasury's men couldn't put humpty dumpty together again (not for a while anyway) and the world changed forever, or so it seemed at the time and for quite a long time after that, even until now.

Yesterday, I had made note of this sentence from Ben Bernanke's book:

"As the chain from borrower to broker to originator to securitizer to investor grew longer , accountability for the quality of the underlying mortgages became more and more diffused."

And I was wondering, if the accountability had become more and more diffused, then who was responsible for this mess?

My own personal answer to that question is: Human nature, collectively. Shit happens.

Not everyone sees it that way, though. Some folks feel the need to investigate, litigate, prosecute, execute, and. . . as the protester's sign said, send the "banksters" to jail.

So here I was yesterday, having taken a break from reading Uncle Ben's book, and I was fiddling around online when I landed upon an interview that Chris Martenson did with Bill Black.

http://www.peakprosperity.com/podcast/95125/bill-black-why-banksters-winning

Now Bill is well-informed fellow; he's an academic like Ben Bernanke, but from a totally different perspective than Ben's. Bill is a regulator, investigator, earth-shaker, litigator who is crowing that Eric Holder, former Attorney General and head of the U.S. Department of Justice, should have prosecuted the banksters for their corruptive abuse of the system. In his interview with Chris that I listened to yesterday, Bill Black said:

"Every dollar by which you inflate an asset inflates capital by a dollar and creates an additional dollar you can steal. . . they lied and they lied to the extent of trillions of dollars. They lied and made stuff that was really in the trade, right. So the bankers are actually calling these things toxic in their internal memorandum. And they are simultaneously rated Triple A, which is supposed to mean that they are equivalent to United States Treasury and are “risk free” by which they mean credit risk."

Furthermore, whistle-blowing Bill Black says that culpability for the crash also includes the Fed's complicity, when Bill says:

"You say Bank of America has got 50 billion of these things. They sell them to Fannie/Freddie.

Next thing we know, Black Rock is in there with the Federal Reserve helping the Federal Reserve decide which tranches of MBS to go out and buy. And the Federal Reserve vacuums up 1.25 trillion or thereabouts of these mortgage backed security pieces of paper. Here is the question. What is the chance that the Fed preferentially or accidentally (but I am going to think preferentially) went out and vacuumed up some of the worst of these things so that they could die quietly on its balance sheet rather than do damage to bank balance sheets?"

So Black is implying that Bernanke shares some of the blame for the Crash of '08.

But in my reading of Uncle Ben's version, I see a very smart man, an honest man, who was trying to do his job--that job to which he had been appointed by the President and approved by the Congress of the United States. He was striving, as best he could, trying to stop the nation's calamitous slide into financial oblivion. Ben writes:

"Just as the bank runs of the panic of 1907 amplified losses suffered by a handful of stock speculators into a national credit crisis and recession, the panic in the short-term funding markets that began in August 2007 would ultimately transform a 'correction' in the sublime mortgage market into a much greater crisis in the global financial system and global economy."

From Chairman Ben Bernanke's perspective, he was doing his job-- using every tool in his Reserve tool-chest to arrest to the "panic" that would eventually impose a "much greater crisis" in the global financial system and global economy.

You can't blame a fellow for trying to do his job. And that's how I make sense of it all. I try to do my job, while I see everyone else doing theirs, and that's what makes the productive world go around.

Although, every now and then shit does happen. Then, as Schumpeter said. . . it is creative destruction, and somebody's got to clean up the mess. Jobs for everybody, cleaning up the mess from places high and low. And then reconstructing it all, a vicious (or inevitable) cycle. It's been going on for 10,000 years. But now with hi-tech, everything goes faster and faster, until it grinds again to a screeching halt and. . . can you hear it? The music of the ages.

https://www.youtube.com/watch?v=TEbyBINYBfo

Glass half-Full