Derivatives are financial weapons of mass destruction.
DEAR Grandpa Oligarch,
My mother also told me to send “Congratulations” cards promptly. I’ve been remiss.
Thank you for publishing your letter today. Let me remind you, also, of why I’m writing you today. Just over two years ago, in September 2008, our country faced an unexplained and sudden economic meltdown. The first questions to ask is, how? The second is, why?
For exactly how did we get ourselves into such a hidden economic meltdown position in the first place? The next question I ask is, who benefits most from the above mentioned financial meltdown position…and how did they benefit or protect themselves, their friends, and family with properly maintained, adequate, and prudent risk controls that failed everyone else.
I’ve asked myself these questions many times now, over and over, for how could Capitalism and its Darwinian cousin of risk control not function better, and to have disappointed us all so. Disappoint in fact, and to such a large degree, that the entire free world was suddenly and entirely insolvent, and filing for bankruptcy on Monday morning without Government financial support from taxing wealth away from its’ hard working citizens.
So, it wasn’t truly an economic meltdown, but it was rather a financial liquidity shakedown event.
Fannie Mae and Freddie Mac, (who were both indirectly, yet instrumental, in supplying the Bankster’s and yes Berkshire’s main engine for creating macro demand growth for its’ suite of products and services), were also incorrectly perceived by all as strong government sponsored entities, and had been falsely rated by one of your Moody holdings, and seen as financial pillars that were in fact always “broke” without the much-needed aid of taxpayer assistance. Capitalism never truly supported them for good reason, for Gmen would, and as a result, by not having adequate regulation or supervision of our entire mortgage land chattel and legal system of the courts, they had to be forced into conservatorship.
At that same time, several of our largest commercial banks were teetering (for some reason / who even cares) – the one you own, Far FromWell, was even paying more for overnight capital. One of our largest Wall Street competitor, a giant investment bank, had recently gone bankrupt (for some reason-who cares), and the remaining three were poised to follow like falling dominoes for they were not regulated to avoid common disasters (for some reason/who cared), apparently. A.I.G., the world’s most infamous insurer, was also at death’s door due to poor risk management and self-destructive tendencies that we will not discuss at this time. But why, and how, can they all be broke, at the same time, you might ask?
Well, many of our largest industrial companies, your payroll even, are dependent on commercial paper financing. That one, specific, source of capital for most companies suddenly dried up and had disappeared. At this point, we were weeks away from companies exhausting all their cash resources, resources (credit facilities) that the bankers controlled were pulled just in time for a ransom note.
The next step was an important one. One Problem – but with many possible solutions and outcomes but with ultimately only one option being discussed and voted upon (Taxpayer’s $800,000,000.00). What if we would have initially ring-fenced the bad (busted and bankrupt) banks (including bad iBanks), and on that fine Monday morning, instead open up, as a new $1.6 Trillion dollar (50% private sourced capital/50% government guaranteed capital) lending source of mortgage, business, and payroll capital.
The result, new overnight tapes downloaded from old (bad) banks to these new (good) banks – who would also be paying 4.5% APR to attract and win your savings, with the end result of having good new ibanks taking over from likely corrupt, insolvent, non-lending bankrupt ones. See, no immediate meltdown – but no shortage of issues either as it still is a hard “reset” moment short-term but how is this decade going to change in the longer term with these type of choices being made in the past?
Indeed, all of corporate America’s dominoes were lined up, almost as if on purpose, ready to topple at lightning speed on a moment’s notice – as they always seem to be during a period of confiscation. Although your own company, Berkshire Hathaway, might have been the last to fall, maybe it should have been the first, for without proper risk controls it may not have lasted and be here today without public government funds providing counterparty-risk protection and last-minute taxpayer intervention.
Slide up close to the fire and let me tell you a story. It was just not business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’sand money-market funds of these citizens had seemed secure to the taxpayer lemmings. Then,virtually overnight, everything began to turn into pumpkins and mice.There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed. Boooo! Now wake up, Uncle Sam, for it was all a Bankster’s dream. Delusions, whether about tulips or Internet stocks, produce bubbles.
So, again, Grandpa Oligarch, thanks to you and your Gmen counterparty aides. Often you are revengeful, and sometimes you are bullying. On occasion, you are down right maddening to the investor class. But in this extraordinary emergency, you came through better and stronger than you should of – with the aid of my tax money and I wonder if the U-6 unemployment rate would also have looked far different today if we had free market interest rates.
Your grateful grandson who, as of today, now owes exactly $176,074 according to the US Debt Clock,
Contra_Man is Chief Editor and CEO of the ContraMan Fund, a long/short contrarian investment-model driven financial portfolio blog.
p.s. After the NYT Op Ed, an award to boot: http://www.reuters.com/article/idUSTRE6AG4MU20101117