“One reason we are facing a financial crunch is sub prime loans. but persons responsible for this state are having a good time.” This feature outlines how privatizing of profits and public funding of losses led to the breakdown of the world’s most powerful economy.
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Author: Rakesh Madan
Blackberry Curve 8900, Javelin a new smart phone from RIM….
First time I read the term sub prime, I was as confused as when I heard the word de-committed. The OED still does not have it; I think it came from the same set of guys for whom problem is an issue and not some one’s child or the latest journal to hit the stands.
First thought which came in to my mind was, how the world most powerful economy can be endangered by a hand full of people, who defaulted on their repayments. but still waters run deep, and waters here were murky and turbulent. May be a clone of Nessie was also lurking some where.
When the smartest lenders on earth start lending to a class of people whose gaps in credentials, creditworthiness and, credibility can be covered by a higher rate of interest, Or rather a higher rate of self interest. The troubles cannot be far behind. After all the boat builder still had to be paid in full. Caribbean cruises were passé. Only the “sub prime” vacationers took it.
First hurdle was crossed; one had an asset on the books, however suspect, so the basic principle of investment was applied, hedge it. How, give it a new name, convert in to a product, uninitiated be wary, now your saving accounts is also a product. And what they hold in trust for you is a liability for them, as the future unfolded, how ironic, that it turned out to be a liability for you. Minor matter, we will take it up on a different day!
The product is baptized as “CODG”, or any such silly acronym, another four letter word, not to be used in a civil society now on wards.New product is sold to the largest insurance company; the same company had insured the original contagion housing loan. Double profits or double whammy!
A hot dog cart seller sells at profit, so does an investment bank, so the first lot of money was made. Bonuses distributed, boat paid for, bank declared a dividend, and all fat cats got their share. More shares were issued privately, of course, at a premium, another tranche of profits rolled in. Share prices shot up on NYSE. Buy, sell, the cycle went on.
The insidious plan was set in to motion. More players joined or were enrolled.
Now every one was selling to every one, new derivatives were designed, but the underlying asset was the same. It was akin to a multilevel marketing scheme.
The last few in the chain had no one to sell to. Banks went under,
Most noticeable was the Bank of Iceland
It was Christmas season. The time for the traditional year end party. No tacky plastic tumblers here, the bubbly flowed from chilled magnums to fluted tulips. It was snowing outside, when did the chill matter to people who had iced water flowing in their veins. Genteel conversation flowed, unmindful of the mayhem created by them in the financial system.
Monies made, a “well” earned break was in order. Every one of them was off to
An exotic location. Surpluses were put in to safe financial havens. This had been going on from time immemorial, recall Ivan Bosky the rogue bond trader of seventies and Nick Leeson of eighties, who single handedly, brought Bering Bank to its knees. Nearer home, we have had our share of them. Privatize the profits and public fund the losses, as Roger Cohen OF NYT said. Corporations who were not even remotely related to or responsible for the crisis were asking the US govt. to fund their losses
Money is private hands now. And no force on this earth can bring it back; no one in US has even alluded to it. In India, at least an aspirant to the prime ministerial post,
Made it a part of his party manifesto, howsoever hollow it sounded at that time
Next time you are in sunny Bahamas, and spot a new boat moored in the jetty,
Likely to be owned by an investment banker, ask the owner for a sail, since you partly own it.
Caesar is dear, and Rome is dearer, but dearest of them all is the truth, now the truth is out, will some one act!
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