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.

Please God - I don't want to see Matt Damon In a Feature Documentary about Malaysia entitled 'From Boom to Bust' - Subprime Bust Part 3

(Reposted because of posting error - Apologies)

I TOO WAS AN ADDICT. Easy credit? It is really a contradiction in terms. I got my first taste when I was only 26 years old when a foreign bank operating in Malaysia sent me a pre-approved credit card with a maximum limit of RM20,000.00. I initially ignored their earlier courtship of me when they offered RM25,000.00 pre-approved personal loan. But at 26 and the thought of carrying 20 grand of credit in my wallet was just too tempting. So many girls to chase, so many toys to buy and so little money, you see. The eternal conundrum of a fresh graduate just out of law school.

EASY CREDIT. If easy credit was channeled towards cost of the production of good and services, that is not too bad. I need to increase purchase of noodles for my wantan mee stall, I need the money to tide by my operation because I keep being bothered by the local town council enforcement officers. But to a large extent, easy credit is utilized to finance our never-ending desire for consumer goods and services. A new iPhone. A new handbag. The new PS3. The latest Armani perfume. The new Mont Blanc pen. Beef Burger enlivened with Fois Gras…. The story goes on and on… To infinity and beyond, says Buzz Lightyear.

WALL STREET. The easy access to credit, often non-documented and failing the standard credit review is also reflected in commercial credit and finance. So now everyone can go bankrupt and lose their houses. Oh but wait. I don’t think any of the CEOs in Wall Street have lost their palatial mansion in the Hamptons. Oh no, it’s the poor Joe in Middle America that’s having to pay his rising housing loan instalments while the value of his house is sinking into the quicksand of reality.

AND NOW IN MY BACKYARD. The government of Malaysia has announced an initiative called the Kuala Lumpur International Financial District – which is a multi-agency, multi-billion dollar project to enhance KL as an international financial hub. A large chunk of downtown real estate will be alienated for the purpose of developing an international financial centre, replete with entertainment, residential and travel infrastructure to accommodate the hordes of financial professionals anticipated to flock into the district.

I AM NOT CRITICIZING. I AM ONLY RAISING QUESTIONS. I will resist the impulse to attack this project, which may have good collateral effect on the city and the country as a whole. But in my brain, there is a question bouncing about, and it is this – How do we attract the merchant and commercial banks into the KLIFD if we are not able to provide the regulatory regime which they most desire? And are they not interested in a less regulated system which would permit them to structure and ‘engineer’ such magical concoctions like the synthetic collaterized debt obligations and other voodoo financial instruments? I hope I am proven wrong. I really do.

I AM A MALAYSIAN... WHEN THINGS ARE GOOD. If the international banking sector, as well as the commodities and currencies trading have all become essentially an open casino – how will we attract the biggest gamblers if we do not allow them to make the biggest bets. The main problem with trillion dollars bets is that there is also a trillion dollars downside. Can Malaysia cope with the downside? Will the Malaysian authority charged with regulating KLIFD have the expertise and the chutzpah to deal with the silky smooth presentations and goobleedegook chatter of international investment bankers and money managers? Something which even the SEC and the Federal Reserve of USA themselves failed to do. Or has each stakeholder involved in this project already purchased a home somewhere overseas, ready to pack the bags and migrate at the first hint of a financial fiasco?

THE INNOCENT MAJORITY. There are countless tens upon millions of people out there who don’t have a clue about Subprimes, CDOS, 1st Floor and Mezzanine levels of toxic bond towers, and off-balance-sheet liabilities. They are farmers and restaurant owners. They are factory workers, teachers and civil servants. They have nothing to do with the elevated conversations of investment bankers, money managers and commodities and currency traders. But they will be ones to suffer if the monolithic banking / securities / currency / commodities derivatives behemoths are poorly managed. Or even worse – barely regulated. Because in the modern world, all things are connected. And a credit squeeze will affect everybody. See Iceland, Greece, Spain, Portugal in the ever-growing list of countries either borrowing or printing money to climb out of their fiscal indiscipline.

DEAR KLIFD PROMOTERS - So go ahead if you think that the KLIFD can benefit the country. With the necessary and effective safeguards, Chinese walls, risk analysis and enforcement, it may work. But if you are trying to replicate the same 'pure' free market formula which has proven to be disastrous over the years in Wall Street, London, Dubai and other ‘international financial hubs’, then please sirs, think again.

A couple of years down the road, I don’t want to see Matt Damon in a documentary on Malaysia entitled KLIFD - from Boom to Bust. Click here on my earlier posting entitled ‘Subprime Bust Part 2 - INSIDE JOB THE MOVIE’ and a related posting entitled ‘Michael Lewis (Wall Street Insider) Mikhail Taufiq (Venture Capitalist) and the Subprime Bust’ –Click here.

188. Paper Promises
Paper money make poor substitute
For gold and silver,
A mode of transaction
On human promises.
And oh, how well
We know of man
And his paper promises!

Have a financially prudent day, pet.

Pax Taufiqa.