Where the Money Went

If you’re like me and really didn’t understand why the taxpayers needed to fund this bailout — other than to “free up credit” so businesses could meet payroll, people could get mortgages, etc. — the article I’m linking to below should shed some light on the situation. It’s certainly given me an indication of how big this iceburg could be, and I’m only seeing the tip of it.

I’m starting to realize what “too big to fail” means.

These words have been thrown around a lot. Even if we’re not economists, we know the market is hurting. We know we’ve lost 30% of our retirement in a matter of weeks. We know our jobs are in jeopardy and we know the global economy is in crisis. We don’t need to know the details.

Or maybe we do. If I’m “learning” correctly, it seems that our elected officials are not giving us the straight story at worst, and at best they just don’t know what’s going on or how to tackle the problem and they’re just giving $700 billion to the Secretary of the Treasury because he claims he can “fix it.”

If you really want to know where your $700 billion plus is going in the “financial bailout,” the article I’m linking to (below) from moneymorning.com has the best explanation I’ve read about how we got where we are, particularly with the AIG situation and why at least part of that money has already been spent there.

What they’re not telling you, and what I’ve heard only a few commentators and economists note, is that this is just the beginning. And when you start looking at what’s causing the problem, the entire magnitude of this situation starts coming into focus.

I still don’t get it entirely, but I’m starting to. And I’m starting to think that we are just throwing antibiotics at a disease.

Anyway, I digress. To learn more, you should read about CDOs at Wikipedia, then Credit Default Swaps. It’s thick reading, I know, but it’s so worth it to try to understand what’s going on right now and where our money is going.

Then check out this NPR piece for a more simple explanation, and then this excellent, thorough article at moneymorning.com and see why no one knows (or seemingly *can* know) what we’re really dealing with when it comes to finding out how much this credit crunch and AIG crisis is really going to cost us, and then think about how quickly everyone in government has “reacted” to this crisis (the matter of a couple weeks at most):

Individually, CDOs are hard to value. Suffice it to say, legend has it that constructing the cash flow payments on the first theoretical 3-tranche CDO (the simplest type of CDO) took a Cray Inc. (CRAY) supercomputer 48 hours. Now try and value credit default swaps on them!

Because there are so many different individual CDO securities, and because there are so many credit default swaps on so many of these CDOs, and so many swaps on individually referenced entity debts and loans, the only way to value them in a portfolio is by indexing.

That’s right, there are indexes, and guess what? You can trade the indexes!

I wonder how many people knew about this $60 trillion COMPLETELY unregulated financial market? Certainly those who were making a lot of cash from it wanted to keep it from ordinary people — citizens who didn’t have investments and who were just working day-to-day trying to make ends meet — who might question what was going on. Of course, as long as the money keeps coming in, people tend to just turn a blind eye to this sort of wild speculation. And now no one knows how much these CDOs and swaps are worth, we don’t know who’s paying whom, and the American taxpayers just threw a paltry $700 billion to one guy in some frantic bid to stave off a recession or a total financial collapse.

What a racket these guys had going for them.

Now, AIG wasn’t in on this alone, and certainly not all $60 trillion of insured worth will need to be bailed out (presumably SOME businesses and individuals will continue to pay on their loans), but to get a perspective on how much $60 trillion is, Wikipedia says that “The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008 before dropping below US$50 trillion in August 2008. That’s all publicly traded companies in the world. This is how much money is wrapped up in this market.

I don’t know how much your house is worth, but how about I just keep paying you a thousand bucks at a time and you tell me when we’re square, OK? What? You don’t know how much it’s worth either? You don’t know who has the mortgage? No problem. I want the house or I’ll be homeless. We’ll figure it all out later.

Does anyone care that the guy we just gave this $700 billion to selectively hand out to a few businesses will be out of a job in January? And where do people go when they leave government?


The mind reels.

Now, I know this is a global market, not just the US and not just AIG. And I know I still don’t completely understand the depths of what happened here. I know lots of people knew about it, and did nothing to regulate it or to keep it from being abused. But I’m starting to get an idea. And I’m starting to feel really really sick.

I’m starting to understand what “too big to fail” means. Until today, I didn’t really understand what that phrase meant. Now I do. At least, from my little spot here in NY and not being an economist, I think I do.

And it’s scaring the shit out of me.

One thought on “Where the Money Went”

  1. But you do know that it gets worse, right? hedge funds are able to make outsized returns in part because they use truly *massive* amounts of leverage. so imagine the # of massive funds out there right now, that leveraged themselves 10 to 1, 20 to 1; and used the money to buy……deeply leveraged assets. Woops.

    You dont hear about that part quite as often, but the delevering of this market is what is going to make the recession last so long. at the height of dot com bubble insanity, at least we were talking equities; sec regulated; max leverage was what, 50%? that got ugly for lots of folks. but there’s no such check on the debt market. there were funds leveraged fucking one HUNDRED to one. the dot com bust is beginning to look like a happy go lucky minor stumble in the road compared to where we are now. it’s only going to be the massive MASSIVE strength of our overall economy that is going to prevent a true 20s style depression. but we’re in for a mighty roman-noodle eatin’ two years of recession here.

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