Wealth destruction gathers pace

[Dover]

Wealth destruction gathers pace
By Julian Delasantellis

In the Old Testament story of Exodus, the liberation of the Hebrews from slavery in Egypt, those Israelites with the sign of the blood of the lamb on their doorposts were spared God’s wrath; those Egyptians without it were not. Today, it is now apparent that the market for what is called "auction rate securities" will not be spared the wrath of the fearful God of credit market crisis now wielding a terrible swift sword over the world’s capital markets.

In this, auction rate securities take their place alongside the subprime mortgage market, the collateralized debt obligation market, the market for asset backed commercial paper, structured investment vehicles, mortgage insurers, and undoubtedly many more to come, laid low and to waste as the unfolding judgment day continues and intensifies for the great credit creation boom of the past 10 years.

If it is true that idle hands do the devil’s work, then the skyscrapers of Wall Street’s great houses of investment banking must surely be among the holiest places on earth, for lately they have been very busy indeed.

At its core, investment banking is a very simple enterprise. On the one side are lenders, those currently with money who are willing to collect some measure of remuneration for deferring their current consumption to some point in the future. On the other side are the borrowers, those who need and want money now and are willing to pay interest to get their hands on it. Investment banks bring the two groups together, and in doing so are richly rewarded in the process.

But in the same manner in which the average American shopper now has more consumer choices available to him in the cat food aisle than the average Soviet consumer would have had in the whole store, the top in their class Wharton MBAs and Massachusetts Institute of Technology math PhDs ( those with lesser grades had to settle for less important work, like working for NASA) have fashioned a dizzyingly diverse credit market architecture, called financial engineering, in which the transfer of money from lenders to borrowers could occur as readily and as seamlessly as possible...cont'd

http://www.atimes.com/atimes/Global_Economy/JB20Dj09.html





The breakdown of Wall Street alchemy

The much-touted resilience of the US economic system has moved a notch closer to myth as the auction-rate securities market joins subprimes, asset-backed commercial paper, SIVs, and the monolines in failing to pass muster in today's post-bubble risk revulsion backdrop. The music has stopped for another game of musical chairs. (Feb 19, '08)

http://www.atimes.com/atimes/Global_Economy/JB20Dj03.html

[eridani]

1. We're in luck that it isn't real wealth n/t

[Warpy]

2. The derivatives market

is an esoteric branch of high finance that is basically a casino on steroids, where securities which have no intrinsic value but which represent bets on other securities are traded for ridiculously high paper profit.

When that puppy finally goes, it will likely take much of the larger economy with it as pension funds, banks, brokerages and other institutions holding worthless hedge fund paper are forced under by tremendous losses.

Deregulation is always a bad idea. It just lets the thieves back in.

[Warpy]

3. A snowstorm with thunder woke me up at 3:45 this morning

and I finally gave up and turned the box on. Link TV has an early morning program focusing on the European economy. One story featured the mess at the Societé Generale and how in ordinary times they'd be ripe for takeover. Now they're just getting lukewarm "we're studying it" responses for bailout bids from bigger banks.

This mess is worldwide, folks, and led by the shenanigans at hedge funds across the globe. It's the hedge funds that laundered bad loans into traunches of CDOs and pretended they represented real wealth.

I don't know what the realignment is going to bring long term, but I do know that in the short term, we'll all be a lot poorer for some time to come.

[mainegreen]

4. This article mentions kudzu.

:snicker:

Good article, even without the kudzu.