Here's an interesting section from early on in James Lieber's cover story in this week's Village Voice, about how and why the world economy tanked:
Credit derivatives—those securities that few have ever seen—are one reason why this crisis is so different from 1929.
Derivatives weren't initially evil. They began as insurance policies on large loans. A bank that wished to lend money to a big, but shaky, venture, like what Ford or GM have become, could hedge its bet by buying a credit derivative to cover losses if the debtor defaulted. Derivatives weren't cheap, but in the era of globalization and declining American competitiveness, they were prudent. Interestingly, the company that put the basic hardware and software together for pricing and clearing derivatives was Bloomberg. It was quite expensive for a financial institution—say, a bank—to get a Bloomberg machine and receive the specialized training required to certify analysts who would figure out the terms of the insurance. These Bloomberg terminals, originally called Market Masters, were first installed at Merrill Lynch in the late 1980s.
Subsequently, thousands of units have been placed in trading and financial institutions; they became the cornerstone of Michael Bloomberg's wealth, marrying his skills as a securities trader and an electrical engineer.
It's an open question when or if he or his company knew how they would be misused over time to devastate the world's economy.
Bloomberg–he's the guy who's trying to convince us to elect him for a third term, because he's the only mayor who can handle things during a financial crisis like this one, right? Is that because, since he helped create the crisis, it's only right that he should clean it up?
Oh, and for all of you out there who are saying right now, "You can't blame Bloomberg for the recession! He just invented the machines. He didn't tell people to abuse them!"—Yeah, good reasoning. I bet Oppenheimer said the same thing.
You're crazy to blame it on Bloomberg. If you don't like him fine, but this reason is a bridge too far. You should use legitimate reasons to embolden your case. This is reaching. Initially, banks used the cds market to reduce the risk exposure that they had to committed bank facilities. I remember when the market started, and I remember when they created standardized isda docs. I also remember some other notable incidents. What happened towards the end was people buying insurance on their neighbor's house, and then lighting it on fire, essentially. That was not the intention of the market initially, and his very useful machines, (which are largely used for news and messaging,) were not the source of the problem!
ReplyDeleteI'm just saying, the man is not disconnected to the current crisis. No man of his wealth could possibly be. I've pointed out before that Bloomberg's specious argument that he and only he can save the city doesn't make sense. He was Mayor while the financial debacle was brewing and, if he ever saw trouble on the horizon, he never said a word. Do you hire the captain of a ship that ran aground to then steer the ship safely into port? No. You get another, better captain. Also, I'm just pointing out a conclusion drawn by the Village Voice writer, a writer who obviously did a lot of research in writing his in-depth analysis of the crisis.
ReplyDeleteum, anyone who benefited from the boom is not unconnected to the bust. that's at least 95% of the population, probably more.
ReplyDeleteUh, how do you define "benefit." I had a problem with the idea that a small fry who got a small raise or was able to get a mortgage is blamed as much as the robber-barons on Wall Street and Corporate America who raped the system of billions. I personally, a renter living paycheck to paycheck, benefited not at all. But I am certainly paying the price of the recession now.
ReplyDelete