Sunday, 24 July 2011

Not rocket science pt.1

Science is mind-blowingly complex yet vast wodges of it are successfully communicated to us ordinary punters every day via the telly, radio, books and what no. Finance is not as complex as science yet is unsuccessfully communicated to us via much the same media every day as well, which is a shame because finance is continuing to fuck everyday lives every day. I encountered a practical example of this yesterday when a fabulous person explained they couldn’t tell the difference between the stream of gibberish, including the currency cat pictured above, presented satirically as financial news by The Day Today and what actually gets presented to us as news.

Mebbe you could look to the vested interests running thru the core of most of the talking heads presented to us as financial or economic “experts” and how of course they’re going to big up the complexity to justify the need for their apparent expertise. There’s also probably some socialisation shit going on as well in that these talking heads overuse jargon because everyone they work besides does the same. But, feck that I reckon its more constructive to simply spell out some of the shit that’s happened using here the example of monoline insurance and the associated catastrophe that was the monoline wrapped bond.

Oh no I’ve used jargon, except its no really. Monoline insurers are so called because they started off having only one line of business, hence mono. And they’re insurers because well they’re insurance companies. A wrapped bond? Well a bond is simply a type of debt and the “wrapper” wrapped round it an insurance policy taken out against the debt not being repaid cos the borrower(s) defaulted. “Wrapping” bonds like this sounds like a good idea what with the additional peace of mind it presumably gave which in turn made people more willing to lend to those wanting to borrow via bonds.

Except, it didn’t work out that way for some related reasons. One, swathes of the monoline industry sold far more insurance against residential mortgages defaulting than they could ever, EVER pay out against in the event of things going tits up. Two, this reflected the fact the premiums/cost of the insurance policies sold were teeny relative to the amounts being insured i.e. when you’re charging say the $77,500 premium for every $100m insured quoted here, there was never any possibility of them building up the financial reserves needed for a potential rainy day. Three, the monoline insurers piled into insuring residential mortgage related debt like mentals and as a result placed too many of their eggs in one basket.

So they come across as having been fucking shite portfolio managers who didn't understand the market they were insuring; housing, when it goes down the tubes - judging by the periodic UK experience - tends to go down en masse prompting widespread, systemic repayment issues as opposed to selective ones (and that’s no even taking into account the whole sub-prime shite of lending to untested borrowers for which there was no data on which to base an assessment of the default risk)

I reckon the first bit of this needs brought out a bit more though; these insurance companies sold insurance policies that in practice they could never honour if ever called upon to do so. This was nothing to do with the small print or crap like that, rather they never had the cash to pay out without wiping themselves out or at least grossly fucking themselves up. Monoline insurers sold rainy day insurance that only worked in the sunshine; they were fucking shysters.

Even better, I mind reading late last year about one of them that’d had been taken into bankruptcy protection where the people who’d bought the insurance were legally obliged to keep paying the premiums despite the fact there was no way they’d be able to claim on the actual policies. Now that is fucked up.

Its pretty obvious why these monoline shysters did it - they hit their quarterly sales targets and pocketed bonuses before shit done got fucked up. However, the people buying it also got the gravy; they bought some mortgage debt frelated thing for say $X, then got it insured and hey presto because thanks to some accounting rules, its paper value increased to $X+Y so they got their bonuses as well. And when there’s gravy like that to be made so easily no one is going to ask too many questions.

You could dismiss things at this point in a moral huff give and point out how it exemplifies the whole privatisation of profit socialisation of losses thang. You could even refer to bad regulation, greedy shortsightedness, the need to change accounting rules and what no. Except the original rationale for monoline wrapped bonds highlights the wider problems they created for the rest of us. Monoline insurance made it easier to get credit on an incredible scale (this article mentions $125 trillion of monoline wrapped credit derivative exposure i.e. derived from as opposed to the actual underlying debt fer chrissakes). Hence, the above shyster business helped make the bubble we’re still contending with (think say Greek sovereign debt crisis) even bigger than it would otherwise have been.

So given this "product"'s contribution to our current economic woes, I reckon the gits involved should be done for misleading customers or at the very least barred from ever working in any financial services company ever again on the grounds that if they didn’t not act in good faith, then they’re too incompetent to trust (aye right, like either of those things are ever going to happen).