In economic news…Holy Crap

Filed in National by on August 16, 2007

Today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.

Reading about this uncertainty and the ungodly lack of transparency in the financial markets, I feel like taking the HUGE tax hit and closing my 401k account and invetsing it in guns and a water purification system for the compound.

About the Author ()

Jason330 is a deep cover double agent working for the GOP. Don't tell anybody.

Comments (6)

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  1. When Castle first came out for some
    sec review of hedger activity I was happy enough.
    Now it just looks like a hustle to avoid blame when the shit hits the fan when the pensioners funds have lost all equity.
    He advocated an extremely limited sphere of oversight action – soley for hedge fund assets controlled by pension managers (who take a raping level of money for their time).

    Why did Castle limit his interests of these massive. market profit skimming scams to pensions when the entire market is effected?

  2. Rebecca says:

    Sure glad we didn’t let them privatize Social Security.

  3. donviti says:

    no shit rebecca…

  4. this link from Esachaton:
    http://bigpicture.typepad.com/comments/2007/08/the-negativity-.html

    “I keep hearing people say that there is “too much negativity out there.”

    Investors should understand that the way this is typically presented, it is merely an opinion. (“I think, I feel, I believe”).

    However, I prefer quantitative metrics — hard numbers — to feelings/opinions. Dougie Kass sends along these two data points:

    • The cash positions in mutual funds stand at 3.8%, slightly below the 3.9% low established in 1972.

    • Margin debt as a percentage of the S&P market cap has climbed to 2.4%, an all-time high. The previous peak? Early 2000, at the height of the Internet bubble.

    Data always trumps anecdotal evidence.

    ~~~

    What’s in your wallet sentiment model?”

  5. jason330 says:

    R –

    He meant that in a nice way.

    nancy,

    That was a good link. Bottom line: When more people are betting with borrowed money than are betting with their own money. Badness ensues.

  6. Rebecca says:

    Another link:
    http://www.dailykos.com/story/2007/8/16/12229/3590

    I glad that the Fed isn’t going to bail out these greedy bad guys.