Daily Archives: September 23, 2008

Marcy Kaptur Lays it On the Line

Congresswoman Marcy Kaptur took only 5 minutes to describe the administration’s shell game, propose a solution that protects the American people and call for an independent counsel to investigate the architects of this colossal economic failure:

Oddly, she seems disinclined to give the architects of failure a building permit for more failure.

I like her proposal. A lot.

These people created the “$10 trillion global over-the-counter credit derivatives market.” $10,000,000,000,000,000 is a lot of money. It’s a whole lot more than $700,000,000,000. Here, I’ll line them up so you can see the difference:

700,000,000,000

10,000,000,000,000

Notice those extra zeroes? Not really impressive when you see it that way. Hmmm…

How about this:

If you had a 4″ stack of $1 bills, you’d have a million dollars. Imagine what you could buy with a million dollars!

Now, if you had a billion dollars, that stack would be 47.35 miles high. Your arm would get really tired.

If you stood all those $1 bills on their sides and packed them together, you could drive from Burlington to Montpelier and half way back without driving over the same bill twice.

Imagine how many bridges we could replace with all those $1 bills!

Now for the bailout: if you had 700 billion dollars in $1 bills, you could do two round-trips from Burlington, VT to Washington, DC on them, and still have enough left to make a few side trips to Allentown, PA (in case you wanted to see some abandoned steel mills), or a one-way trip to Boston, MA!

That’s just for the proposed bailout’s first installment or $700 billion dollars (remember, it’s a floating window. They can keep spending, but there can only be $700 billion outstanding at one time – so they sell something, pay back a part of the $700 billion, then turn around and buy something else to bring the total back up to $700 billion – it’s like a magical refilling debit card).

Now back to that $10 trillion dollars in voodoo they call “over-the-counter derivatives.” That’s the bailout times 14.29. You could drive around the earth 19 times on those $1 bills, plus a couple dozen side trips to Montpelier.

Most of those “derivatives” are really just bets that the value of mortgages would continue to go up.

But the bets weren’t placed against actual individual mortgages. Instead they were placed on collateralized mortgages. To collateralize mortgages, you take all the mortgages held by your bank, and toss them into a giant mortgage Cuisinart.

It doesn’t matter if the mortgage is good, bad, whatever – in it goes. The output is then divided up into “bad,” “not so bad,” and “looks good to me” batches, then those batches are sold off to the highest bidder.

The derivatives folks didn’t really want to buy the things, they only wanted to place a bet on the future value. Someone else owns the actual mortgage sludge, these guys simply own the right to make a profit if a buyer pays more for the sludge than the guy who bought it before them.

The sludge is passed around from investment bank to investment bank over and over: it’s a little merry-go-round o’ sludge. And the derivatives market places bets, takes profits, and everyone’s happy.

Until the day that someone says, “Gee, I don’t think this batch of sludge is worth that much. If you want me to take it off your hands, I’m only going to pay this much.”

Now all those bettors, who were betting on the value to go up owe their bookies. But see, the bets had very long odds. So now they owe their bookies a LOT. Like kajillions of dollars.

Sadly, between the derivatives, actual mortgages, CDOs, insurance swaps, and all the other weird unregulated debt vehicles the financial industry has created over the last decade or so, the amount owed is greater than the entire value of all the treasuries on the planet.

Oops.

It might not be so bad, if the bettors were just a bunch of numb-skulls betting their own money.

But they weren’t. They were investment banks. And they bet our money. Our pension plans, our 401ks, our municipal investment accounts, our IRAs, our CDs. Just about anything that had dollar signs attached was used as the downpayment, with the expectation of large returns.

Now the returns have dried up. And the stuff that’s been promised as collateral … well it doesn’t actually belong to the bettors. And the amount owed doesn’t actually exist on the planet – even if you put every penny from every treasury on the line.

This means someone’s taking a hit.

A really big hit.

And the bettors want it to be us.

And they’ve come up with all these reasons why it’s our fault. After all, we took out the mortgages on the houses whose values kept rising, enticing them to make the bets with the money they were holding in trust for us.

So they want us to refill their pockets with a portion of the money that is owed, so they can quickly pay off their bookie and only get knee-capped instead of being fitted for cement overshoes.

And they want to do it behind closed doors, so we can’t see that even after they pay off their bookies with enough $1 bills that you could drive back and forth from Burlington to DC twice (with side trips to Allentown) without touching the same bill twice, they will still owe enough tightly-packed $1 bills standing on their sides to travel around the world roughly 18.8 times (you’d only end up 4,980 miles from home on that final trip – which is only 700 miles longer from a trip to Wasilla, Alaska!).

Buckle Up, and Enjoy the Drive!

[UPDATE: I dug up the source for the original math – they’d made a boo-boo. So I went to a school web site and downloaded this PDF File and did my own math.

I also clarified that the derivatives are only one piece of the big pile of crud that exceeds the total money actually extant on the planet. Sadly, we’re still in very, very deep doo-doo. Certainly deeper than we’re going to get out of with a silly little $700,000,000,000 bailout, even if it’s a moving window.]