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4 Cold turkey for financial
addiction By James Cumes
The time for financial detoxification
seems to have come. Indeed, it seems to be long
past due.
The addiction started with the
junk-bond craze and the smart takeover merchants
of the 1980s. Those junkies were on relatively
soft drugs and they were fringe people - most of
the serious investors and financial institutions
saw them as market outlaws or barely legal
cowboys. They were what I then called
"adventurers, marauders and buccaneers". Some
crossed the line and were
convicted on serious criminal
charges.
In 1988, in How to Become a
Millionaire, I asked, "How true is it that
'what is happening in the financial markets today
bears the same relationship to what happened in
the "go-go years" of the 1960s as Caesar's Palace
bears to the local bingo game'?" Were we, I asked,
"turning the financial markets into a huge
casino"?
In the years that followed, we
all should have gotten the answer. Soft drugs gave
way to hard. Addiction spread. The drugs
diversified; so did the addicts. Into the 1990s
and dramatically more so into the 21st century,
many of those in the top-drawer financial world
became addicted. Many became more, more became
most, and most in the past few years became all:
the biggest and most respectable financial
institutions, financiers, creative investors and
even regulators joined in with a sense of
benevolent enthusiasm that defied any remaining
scaremongers.
When everyone in the house
is crazy, only the sane seem like fools. So it was
when the financial addiction spread everywhere.
Then everyone who was not taking his daily dose of
heroin or cocaine became the fringe-dweller, the
oddball, the brake on progress, the party-pooper
at the greatest no-cash-down, how-to-spend-it
shindig that our planet has ever known. Debt piled
on debt everywhere: in households, corporations,
public finances and international deficits, in
magnitudes that had never been even glimpsed in
the most creative imaginations before.
But
the universality of drug-taking does not mean that
deadly drugs will not harm and cannot kill.
The deadly nature of the addiction was
obscured by the extraordinary variety, complexity
and obfuscatory nature of much of the so-called
structured finance: credit derivatives, commercial
paper, hedge funds, CDOs, CDSs, SIVs, ABCP and the
rest. They all looked not only creative but also
splendidly professional and expertly managed.
Mathematicians joined their creative genius to
that of accountants and others to conjured up
"models" that were guaranteed, reliable,
blue-chip, fail-safe.
Even the most
respected rating agencies spread their Alpha
ratings around with such glorious abandon that
anything else seemed to have gone out of style.
Such was the chorus of acceptance that these
instruments came to be regarded, above all, as
secure as the banks or non-bank issuing or trading
institutions confidently presented themselves as
being.
So the final accolade was conferred
on financial instruments that, in any world except
one in which the entire population had gone crazy,
would have been condemned as the deadly
instruments of financial, moral and other ruin
that they surely were - and are now proving
themselves to be.
As one analyst writes:
"Before this mess finally ends, there are going to
be scores more hedge funds, pension plans,
mortgage lenders, and possibly even banks carted
out in a wagon wishing they never heard the terms
'swap', 'swaption', 'conduit', 'MBS', 'CDO',
'CDS', 'SIV', 'Mark to Market' and probably a
dozen other terms as well."
Perhaps the
credit derivatives, in all their manifestations,
were the most addictive. They were as modern and
creative as the latest technological marvel. From
the initial concept in the late 1990s, they gave a
dream ride to the mostly young, very smart people
who were able to ride to financial glory on a tide
that quickly swept along even the most staid,
respectable and financially distinguished
institutions in the United States and, in
surprising measure, also around the world.
If some were spared addiction in the early
years, they became fewer and fewer right up to
July 2007. The regulators, including central
banks, international agencies and others, did not
regulate the ever thicker jungle of financial
enterprises and their innovative financial
products because, more and more, the addicts lay
outside the banking system and therefore largely
or wholly outside their jurisdiction.
The
banks did not stay aloof from "structured finance"
of virtually every kind, but they managed their
participation in it, for the most part, in ways
that avoided interference by the regulators - if,
that is, the regulators might have been disposed
to interfere. Increasingly, they accepted some
form of "moral hazard", just as major banks at the
very top of the financial heap did in their
dealings with Enron in the course of its fraud and
failure at the end of the 20th century and into
the 21st.
So the addiction grew and spread
without restraint - it became a sort of global
financial frenzy sans frontieres - and the
law-enforcement officers, having no powers of
enforcement and/or no will to enforce, either
cheered them on or snored at their desks.
Until now. Even yet, they are not wide
awake, but they have now begun to stir.
When they do become fully alive to what
has happened, they will be even more appalled at
the terrifying financial situation that confronts
them than many of us among the non-addicted are
now. Their attempt to resolve that situation in
any way that can be called acceptable will reveal
both their culpable negligence in the past and,
ultimately, their despair of finding any "cure",
any "magic elixir" or any "soft landing" in the
period ahead.
They will discover that they
and the speculators, high rollers and just plain
gamblers in global finance have been indulging an
addiction for which there can be no painless
detoxification. The addiction has persisted for
too long and has become too deep and widespread.
To begin with, the addiction is too huge.
The "value" of the creative financial paper
circulating the globe is calculated, as close as
one of our "experts" can reasonably count it, to
be US$480 trillion. The Bank for International
Settlements puts its count at $600 trillion. In
fact, we do not know what the precise sum may be,
but we do know that it is so mind-boggling that it
seems to lie outside all reality.
What is
certain is that somewhere in that massive sum are
debts that have to be repaid and creditors who
have to be satisfied; and we know that it is a
domino game. If the creditors of the first debtor
aren't satisfied, then they will become, in their
turn, defaulting debtors for their own creditors;
and so on down the line and around a global
mulberry bush.
Global gross national
product s calculated to be about $50 trillion a
year. So the figure of $480 trillion is close to
10 times the entire global annual GNP, and $600
trillion is about 12 times. Alternatively, we can
say that the "notional value" of the various
pieces of financial paper circling the globe at
the moment is probably somewhere between 40 and 60
years of the United States' GNP. It is several
times the estimated market value of aggregate
global wealth.
How much of this is
double-counting? How much of it requires the
liquidation of real assets to satisfy a
structured-finance debt? We don't know, just as we
don't know the answers to many of the magnitudes
involved in what is undoubtedly the greatest, most
complex and most intimidating financial problem
that national economies or the global economy as a
whole have ever faced. William Wordsworth wrote
about "huge trunks, and each particular trunk a
growth of intertwisted fibers serpentine
up-coiling, and inveterately convolved". He could
well have been
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