Tuesday, September 20, 2011

Golden Bull does Credit Crunch at Wall Street - The Disconnect between Risk and Profit, Action and Consequence

95. Oh stop it, you! (Blogged in providence)
Oh stop it, you!
Playing Moses
To my Aaron.

While you are communing
On top of the mountain,
I have golden bulls
To deal with down here.

BULLS AT WALL STREET. I find it interesting how the financial sector is sometimes called the financial industry, suggesting that it actually builds or makes something. I think essentially, the financial sector is a service sector. It is important to remember this, that the original aim of banking is to facilitate credit to finance the manufacturing, building, agriculture and infrastructure sectors.

CREDIT CRUNCH 2008. The credit crunch of 2008, the effects of which is still reverberating to this day arose when the bank or finance house which issues out the housing loans sell the loans to investment banks, who in turn packages the loans into CDOs (something like bonds/private debt securities), which in turn is rated as AAA by rating agencies (even if some or much of the loans in the CDOs have been given to subprime borrowers aka people who have little or bad credit history), and thereafter sold by the investment banks to investors all over the world. That in one sentence is basically what happened in 2008. So basically Mr. Joe Banker doesn't have to worry one bit whether Mr. Al Borrower will actually pay the loan. Because the risk of default has been passed way down the line to Mr. OMG Investor. And to make things worse, because of this disconnect between action and consequence, Mr. Joe Banker prefers to give the loan to subprime borrowers. Why? Because in subprime housing loans, the interest rates are much, much higher. So increase in the Bank's profit but at zero increase in the bank's risk. It's like magic!
The magic never lasts...

TEMPORAL BULL OR SPIRITUAL BULL? So when Moses came down the mountain and found his flock performing some ghastly dance around the golden bull (or is it golden calf? Oh who cares...), he was faced with a spiritual challenge. And he resorted to resolve this spiritual problem with the intensity for which Moses is well known for. The Golden Bull of Wall Street may appear at first instance to be a wholly temporal bull. But this is not so. Otherwise, why did Jesus chase the money lenders out of the temple?

The spiritual problem with credit is essentially two - Firstly, it is the creation of value (meaning the loans banks can give out) from nothing (whereby you put a capital of USD1 but by some magical legislative alchemy, you are able to lend out USD10. Where did that USD9 came from?) In financial jargon this is called leveraging. In spiritual terms, this is called trying to usurp the attributes of God, the Only One who can create something out of nothing. I say 'trying' because you cannot actually usurp any Divine Attributes. You simply create a lie and convince humanity to believe the deceit.

Secondly, this 'easy credit' is an enabler. In the current slang introduced to me by Heche, enabler is not a nice term. It suggests someone or something which enables or creates the scenario which is conducive for someone else to do something not nice - Like being greedy, selfish and foolhardy (with other people's money). The 2008 credit scenario above is an advanced example of greed permitted to grow into a global cancer with the connivance of the regulators, the banks, the rating agencies and the investment banks.

THE OLD WAYS. In the olden days things weren't so bad. Pre-Reagonomics, high street banks (ie. retail and commercial banks) were not permitted to speculate with their depositor's money. That is left to investment banks, who were then mostly partnerships - in other words even if they do speculate, they do so with their own money (more or less). During Reagan's time, the clear demarcation between high street banks and investment banks were broken, and high street banks were permitted to speculate with their capital and depositor's money. This led to the Savings & Loans debacle in the USA in the 1980s. That decade also saw investment banks becoming public listed companies, which basically means that they are not playing just with their own capital anymore, but investing public's money too. 
Any suggestions, sunshine?

Oh well, this is the world we have inherited now. I don't have any clever suggestions to make. I wish I did. Perhaps you have a solution?

DIVINE CREDIT. While you are thinking about it, I hope you will have a beautiful day, sunshine. But if it turns out to be a beautiful day, please... I don't want any credit. It's all God's.

wa min Allah at-taufiq.

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