Saturday, November 01, 2008

Rested and healed... just in time for the upcoming apocalypse

It's amazing what a couple weeks off from soccer and a few good nights' sleep will do for you. My attitude towards life in general has improved, so has my energy level, and the aches and pains are abating, the abrasions healing, and the pumpkins are carved for Samhain.

I've been listening to a lot of NPR coverage of the crazy financial crisis (including the great shows Fresh Air, and This American Life), and reading through towers of information on Wikipedia, starting here. Through my intensive research and analysis, I have come up with a completely random, unbacked guess as to the underlying issue and it's direct, tragic, consequence:

The U.S. has too much debt. A crisis of some sort would have manifested soon, regardless. If 9/11 didn't happen, if sub-prime lending didn't happen, if credit default swaps were correctly classified as insurance and regulated, if short selling were banned, if the commercial paper market hadn't run dry, if several banks hadn't gone bankrupt, if the stock market hadn't crashed... if none of that happened, the crisis would still have manifested itself in other ways. In other ways just as shocking and destructive. Too much debt. Too many games with money and no real product. For example:

I have a lot of Wachovia bonds, a billion dollars worth, in fact. Wachovia has been in the news a little, and I'm worried that maybe, some time down the line, they won't be able to pay me the interest on my bonds. To hedge that risk, I want to buy a credit default swap (hereafter CDS). I go down to Jane's CDS shop and say "Give me $1 billion if AIG goes under". Jane says "Sure, that will be $2 million per month." Since that's less than the interest I'm making on my Wachovia bonds, I say "Deal", and sign the papers... and watch the market.

Wachovia has a bad quarter, and people are worried that they might go under, including my buddy Bob, who has the same amount of Wachovia bonds as I do. After a tearful, panicked lunch with Bob, I offer to sell him a CDS for his Wachovia bonds. "I'll guarantee you $1 billion if Wachovia defaults on your bonds, for the low cost of $3 million per month". He thinks it over, and says "Deal".

At this point, I'm spending $2 million per month, but bringing in $3 million, and the $1 billion I'd have to pay Bob will be coming from Jane, I'd just have to countersign the check. So now I sell my Wachovia bonds for their current market value, quit my job, and go stock up my bomb shelter with the assets I just liquidated. I'm making $1 million monthly, and have no assets at risk, and no government oversight. Except, I'll owe Bob $1 billion if Wachovia goes under, and I can only afford to pay him that if Jane makes good on her end of the deal.

Things can get more complicated than that, Bob can become an insurer if things get worse, and Jane may have bought a CDS on the cheap from another insurer when Wachovia was making money hand over fist. And it's possible that the point of entry to all this, the source of the $1 billion, should it ever be needed, won't have it. Maybe they've made a lot of bad loans to risky homebuyers who have a history of not paying their credit cards on time, or have rotated minimum wage jobs 5 times in the last year. If Wachovia ever can't pay their bond holders, that could be, like the bullet that killed Franz Ferdinand, the shot heard 'round the world, collapsing all the intermediate companies that will owe their $1 billion to someone.

Ever play Jenga? It's like that. In my opinion, which is worth about nothing since I'm a computer programmer, not a market analyst or financial wizard of any sort, is that something was going to happen now, regardless of whether these specific tragedies were in play, because of all the debt and crazy interdependencies.

Oh, and my 401k is in the shitter, and possibly my dream of early retirement. But since I make my money with my brain and not my back, I can stay employed as long as my brain holds out... or as long as I can fake it, so I'm not worried about survival, just disappointed at all the world traveling I won't be doing.

In closing, it's a good thing I'm all healed up, in case the end times come, and I need to be a little more medieval in my survival strategy. Plus, that should make it a piece of cake to finally lose that pesky last 5 pounds.

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