President Obama's First Year, Pt. 2: The Economy and Recession (and MBA Follies #)

Right out front, this blogger believes one or more large banking/investment companies short-sold America into a recession. Maybe the same dynamics accounted for the Great Depression of the 30's, maybe not. However, this time around the culprits are for the most part self-admitted short sellers, but they claim, so far, they didn't do anything wrong (which claim might be supported on one of those in-crowd, yes-there-is-a-fox-in-the-henhouse-but-it's-here-to-keep-the-peace kind of rationales).

"Short-selling"? Essentially, the money sector principals (e.g., Goldman Sachs, JP Morgan-Chase) while agressively selling the sub-prime derivatives of shaky motgages, were betting those same derivatives would fail. The big trick, though, was different departments in the same companies were engaging in these cross-interest activities, which was supposed to protect these oompanies from conflict of interest which is a mild way of saying they hoped to stay out of jail for inside trading.

So the key point of this preface is the question: did G-S, and/or JPMC banking departments "cross the hall" and discuss their sub-primes with their brother departments, the special investment groups, who were structuring and touting their own investment issues whose eventually stupendous financial success depended on the eventual tanking of the sub-primes. (Take a breath.)

One assumes any congressional "look-see" commission will begin with finding if cross-talk happened. But one never knows does one?

And just why did the sub-prime market tank? Well, mainly because of the MBA Folly of assuming real estate prices would climb forever. (As if the "dot-com" tanking had happened in another universe.) But then there was another factor that played a big-big factor in blinding good-minded MBA types - the Magic Formula. Just about every business fairy tale in the last 20 years has a magic formula tucked somewhere down in the bedding. And, MBA types do love their formulas...makes thing so tidy and easy to remember. This magic formula was not understood, or it was misunderstood or it was just quoted by name just to look savvy, by nearly everyone. Plus, plus, the formula wasn't even developed by a business type, just a small-world-view mathematician...and you know how dweeby they can be.

But let's not blame the honorable mathematician, his formula checked out...within the parameters of strict mathematics validation. The problem was, it is claimed, no one plugged into this sturdy formula the simple matrix option where the grand upward market price trend would somehow, heaven forbid, turn sour, i.e. reverse and downtrend. Maybe, (?) this is forgiveable in the then enthusiasm of all the MBAs making so much commission, but more likely it is not forgiveable. Instead, it is likely someone did the dastardly thing, plugged in a downturn, which occurs in the nasty real-world, and got scared out of their mind since what they saw would cause angels to trade in their wings.

More to come....