SeriousBull

You’d thunk they’d see it coming??

Tags: Economy + Greenspan + housing + loan defaults + sub prime + Treasury + wall street

The US has done it this time–syndicated a global financial crisis through the export of sub-prime loans. But for all of Wall Street’s shamelessness and former Fed Chairman Greenspan’s chutzpah to counsel the US Congress to permit unbridled derivative contract sales so banks could “offload risk,” aren’t investors somewhat to blame? 

Robert Begley, a SeriousBull reader, wrote to ask: Wall Street packaged their exotic mortgage products with names like Bear Stearn’s:  ”High Grade Structured Credit Strategies Enhanced Leverage Master Fund. With an eight adjective, one noun, name any Money Money Manager would surely think twice before investing their client’s money, right? You’d be wrong if you answered in the affirmative.

Another reader then gave a hand to underscore how whipped-up the American mortage mania became. He provided the definitions on each adjective in the Bear Stearn’s fund:

                                    High Grade: high grade means not investment grade, in other words often not rated

                                    Structured: means that it has been broken into parts for resale–not good.

                                    Credit Strategies: means transferring debt at great cost to the holder

                                    Enhanced: means a futures or options strategy to hedge risk

                                    Leverage: means purchased on margin or borrowed money

                                    Master: simply a throw-away word to imply competence or exclusivity

But still one must wonder why risk reputation and the possibility of failure? The answer unfortunately is that this financial crisis can be chalked-up to the big Investment Banks playing the system and knowing the rules.  First they knew that most people think with their eyes (Congress and the investor).  Secondly they know most people jump on the bandwagon forgetting the motive that bankers selling products often have: profits reign supreme. And thirdly, don’t forget the ‘too big to fail’ rule Wall Street had tested just a few years back when the Internet/Telcom debacle unraveled–shareholders were fined, but the well-connected made out just fine so there was little, real risk.

August 2, 2008 - Markets, Politics