I was one of the most inept soldiers who ever wore a uniform, but I still savor military history. I’m even worse at finances than at close-order drill, but I’ve long enjoyed accounts of American capitalism in action.
This interest started in high school when I was researching a term paper for a Colorado history class. It was about the collapse of silver mining in 1893, which led me to the demonetization of silver in 1873 and the effort by Jay Gould and James Fisk to corner the gold market in 1869. That came after the Panic of 1857, perhaps the real cause of Colorado’s 1859 gold rush.
Reading about all those booms in lands, railroads, mines and sundry commodities, followed by busts, crashes and panics, made me into a savvy non-investor — that is, one who believes that Wall Street is a big casino, and at a casino, the house always comes out ahead. The games are set up that way. The smart course is to stay out of it, although it’s impossible to escape entirely, this side of a backwoods survivalist compound.
Anyone who survived the Reagan years in Colorado knows that real-estate prices don’t always go up. So I was surprised that some Wall Street players got into the action of buying mortgages and converting them into securities while assuming that the law of market gravity had been repealed.
I’ve been reading a lot about the latest crash, trying to figure out what happened to cause failure among the “too-big-to-fail” masters of the universe.
So far, my favorite has been “The Big Short” by Michael Lewis, wherein he follows a few investors who saw the collapse coming. They knew there were too many securities based on too many bad loans, and they found ways to profit from their research.
It reminded me of my favorite movie, “Dr. Strangelove.” Emotionally, you keep rooting for Major T.J. Kong (played by Slim Pickens) to complete his mission, even though intellectually you know that if he does reach his target, it’s the end of civilization.
Similarly, “The Big Short” sets you up to root for some eccentric fund managers, even though you know that if they get their rewards, the world’s financial system will teeter on a collapse that our great-grandchildren will still be paying off.
In “The Big Short,” I learned that home mortgages and other consumer debts were packaged into “Collaterialized Debt Obligations.” And you could get a form of insurance on them with “Credit Default Swaps.”
But this was bizarre insurance, because you didn’t have to have a financial interest in the asset in order to insure it.
How would this work with something tangible? Let’s say you have a new, $40,000 car. The inept “ratings agency” that you pay says you’re a great driver, and so you get a good insurance rate, say $2,000 a year.
However, I’ve done better research than the ratings agency, and I know you’re a pedal-happy drunk who’s just been lucky so far.
If this worked like the weird world of Wall Street, I could also buy an insurance policy, at $2,000 a year, on your car. And when you wreck it, I collect $40,000. You, too, would collect if you were insured, along with other investors who thought like me. The total payoff might be in the millions over one $40,000 asset.
That’s a screwy system, and doubtless Congress will come up with some new regulations after indulging in some show-trial theater with Goldman Sachs executives. But the main thing you learn from reading American financial history is that no matter how many laws are enacted, the swindlers always find a way to fleece the rest of us.
Ed Quillen (ekquillen@gmail.com) of Salida is a regular contributor to The Denver Post.
