THE NATION’S FINANCIAL CRISIS, Part II
Fifty plus years ago, when the Glass-Steagal Act separated banking from brokerage, investing was basic and simple. The investor would purchase shares for value, growth, yield and/or a combination of these features. The gambler would venture forth by selling shares short. The short-sale investor was the big roller of dice in the 1950s.
Going fast forward fifty years, with a new generation of investors, a psyche of higher mathematics came into play. Permutations and combinations were the mathematical tools for the young Einsteins inventing rockets, nuclear projects and space flights. When Glass-Steagal disappeared in 1998, banks could become brokers and sell the financial instruments they created with their financial Einstein business school geniuses.
The business schools trained their students about risks and insuring against them. The days of the short sale of stocks as the big risk were over. Exotic derivative instruments were created like swaps and others under a range of descriptive words. When you sold shares short you risked the cost of the dividend that was paid. To cover this risk, you went to AIG and others and insured against this risk of the short sale. Thus the 1950 1,000-share short position became an insured 100,000-share short position in 2008.
The swap and exotic derivatives became the leveraged way to make a big buck. Insuring against commodity prices, exchange rates of currencies, and similar risks became part of the Wall Street casino game and these gamblers became one of the banks major sources of income. The borrowers, i.e. hedge funds, venture capitalists, and other crapshooters, were the banks’ big clients. They got credit and the bank loaned out your savings bucks for five and ten times more than the interest they paid you, if any. Your deposit accounts were safe since they were FDIC insured and they made big bucks on the loans and other “advisory” services.
The banks could not lose, they thought, and their executives got the big rewards in bonuses and salaries. When the market hit the wall, the spam hit the fan. Loans had to be paid by the gambling banks and their “clients” i.e. borrowers and buddies. The exotic derivatives and swaps became flops. AIG and the banks had to be rescued to “save the economy.” Who were the rescuers? The taxpayer, you and me. In the meantime the crapshooters are bailed out by Uncle Sam and bankruptcy is avoided so that these bandits and boobs can get the bonuses and benefits the American taxpayer finances.