Sunday, 16 October 2011


Don’t give up. You may not know it, but you’re being heard, appreciated and you might be the only lobby the silent majority ever had. There are millions who are cheering for you, and silently wish they could help you. You have struck a very sensitive nerve in the bodies of rich, poor and those somewhere in between. Depending on where they are in the economic spectrum, they are embarrassed, frustrated, confused, or damned mad and not prepared to take it any more.
You know who you are, and whom you represent, and so do millions of others. You represent the heretofore silent majority, the fabric of democracy, that enormous group with absolutely no lobby. Sure, it could be argued that the vote is, and always has been their lobby, but forced to choose from among a group of profligate, deficit-spending and professionally lobbied candidates, they really have no choice or lobby at all. In other words, the silent majority has been doomed to a special status: the piggy-bank of the politicians and the lender of last resort to the world’s financial engineers.
These financial engineers, all players in the world’s financial playground, have masterminded and created an extremely elegant business plan, a virtually risk free program that could best be described as, “Heads we win, tails we win.” Phase I of the business plan was to ensure that the regulatory framework of the jurisdiction in which they operate is, and continues to be friendly and permissive. To achieve that benign regulatory framework, the financial engineers needed to ensure that the government of the relevant jurisdiction was bought and paid for. The U.S. was a primary example of such a jurisdiction. Over 40% of campaign contributions originate on Wall Street. “Why not buy ourselves a government?” they asked themselves. Simple. They control the regulators.
Having established ideal playing conditions, the financial engineers were free to launch phase II of their elegant business plan. To do this, they had to identify market targets for their enterprises. Targets, in the case of the recent U.S. sub-prime mortgage crisis, were troubled mortgages. In the case of the European Union, those targets were the troubled debts of the PIIGS, (Portugal, Ireland, Italy, Greece and Spain). Once the targets were identified, it was time for the elegant business plan to get busy. It was time to bet against those troubled debts. To put lipstick on their bets, the financial engineers hired quants who invented a very nasty piece of paper: the credit default swap, or C.D.S. The C.D.S. is ostensibly an insurance policy. Cleverly calling it a swap, instead of a policy, eliminated the requirement that the counter-party collateralize its position in the bet. In other words, the party insuring the debt against loss did not have to prove it had sufficient capital to pay the ‘insured’ in the event of default.
The C.D.S. was a terrific deal for both parties. For a relatively small “premium’ cost the party betting against the troubled debt stood to collect the entire principal of that debt if the debtor defaulted. The party insuring the the troubled debt enjoyed the constant income stream of annual fees, (premiums), while posting no collateral. If the debtor kept up with payments, the fees, (premiums), kept rolling in. If the debtor defaulted, however, the ‘insured‘ got paid, and the party insuring the troubled debt stood secure in the knowledge that it could collect from the lender of last resort: the taxpayer. All that party had to do was go to the taxpayers and plead, “Too Big to Fail.”
Hence, Phase III of the elegant business plan was launched. Its goal was to ensure that both parties to their nasty pieces of paper were indeed, Too Big to Fail. To achieve this they set out to execute a lot of those nasty pieces of paper, so many that if it actually became necessary to pay for the loss(es), they could tap the lender of last resort. They could go to the taxpayers and warn them if they don’t pay, (bail us out), the fallout, (contagion), will lead to the destruction of the world’s financial system, (depression).
The financial engineers never planned to appear in person, hat in hand, tails between their legs, to the taxpayers. No. Their elegant plan was to do it in style: send the government, their paid representatives. The government, so directed by their masters, the financial engineers, also elected not to appear, hats in hand, tails between their legs, before the taxpayers. They elected instead to do it in style, masking the event with pomp and circumstance. There are numerous examples of such appearances, but one of the best is happening as I write. The finance ministers of the G-20 countries have chosen to do it in Paris, France, one of the most expensive cities on the planet. Arriving in expensive jets, riding in expensive limousines, staying, eating and drinking in expensive hotels, they are preparing their presentations. Then, stone-faced and sinister, with the capable assistance of the media, they will ask the taxpayers to bail out, (re-capitalize), their masters, the financial engineers.
This, and other dog and pony shows like it, remind one of that day in November of 2008, when Rick Wagoner, CEO of General Motors flew to Washington in its $36 million corporate jet. The purpose of the visit: a bailout to avoid bankruptcy of one of the world’s largest employers. His pitch, “Too Big to Fail.” 
So keep going. Keep protesting. Do not give up. Concentrate on the Big Casino and don’t waste your time with corporations. They’re guilty as charged, particularly in the area of excessive executive compensation, golden parachutes and rewarding failure. Compared to the Big Casino, however, this activity is chump change, minor collateral damage. The real atrocity is the C.D.S., the derivative, Warren Buffet’s weapon of mass financial destruction. If you want beneficial and permanent change, you must identify and deal with three things: the motive; obscene wealth, the weapon; the C.D.S., the perp; the financial engineers. Be warned. They are armed and dangerous and they have a big head start. Do not expect the government, the perp’s paid representatives, to help you. They’re too busy drinking champagne in Paris.   

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