financial advice

a citizen's guide to profiting from the financial crisis

How many bailouts have we hit so far? There was the Bear Stearns Bailout, the Chase Morgan rescue, the Fannie Mae/Freddie Mac bear hug, the AIG ass-catch, and then the $700 billion gift to Wall Street. And that’s not counting the massive nationalization of financial institutions all over the world. Plus Britain finally fulfilled its dream of kicking Iceland’s ass.

I’ve lost track. I’m pretty sure that everyone but Paul Krugman has lost track. No one knows how much money is being decanted into the system, and in any case it doesn’t seem to be doing much to calm those arrested adolescents who are whipping the stock market around like they’re pumping the last drops from the keg. No one who set up camp on the the Dow Jones Industrial Average is getting any sleep these days.

Over the last decade, financial institutions have been able to leverage ridiculous amounts of capital through all kinds of financial instruments and half-baked assurances. It’s not even that the financial sector filled up a balloon with borrowed breath; it’s more the case that they persuaded the balloon to inflate itself with nothing but promises while they nipped around the corner for some hot air. The balloon acquiesced until it became clear that the bankers were never coming back. Panic-riddled and fatally mired in the very system that buggered them in the first place, governments around the world have upended their treasuries on the gold-plated mountebanks who perpetrated this scam on the world. Progressive-minded folk believe that money, that defiant fiction, should obey gravity for once and flow down to the people, not up to the banks.

I think the solution is simpler. Give us the power that the banks have enjoyed for so long. Let us do to money what they have been able to do.

After all, why can’t average citizens have the same kind of freedom to leverage our capital as the banks? Why can’t we create money out of acronymed nothingness and assault the walls of poverty with our fantastic weapons of wealth? Dadgum but I think it should be so, and here’s how.

First, let’s pick a potential wealth-generating object. I don’t have a car, house or any investments, so my net worth is pretty much nothing. My net worth is pretty much even less than nothing. But I do have a Playstation 3 and a couple of awesome games. That will be my money machine. A number of people in my neighbourhood would enjoy playing Grand Theft Auto IV, so I will sell them time on my machine. Sounds good, doesn’t it? But there are ways to leverage that dribble of income.

Instead of selling them time on my machine outright, I’ll loan them the money to buy the time. But I won't hold the loans; some I will sell to Alli who lives downstairs and some to Kelly who lives upstairs. They’ll assume some of the risk and I’ll get a small fee from the sale. Since the fee is small, I’ll have to get as many loans as possible to make enough money for things like capital reinvestment (new games are not cheap you know, and Bioshock is coming out next week). Eventually I’m going to run out of people with decent credit ratings, so in order to keep my profits flowing I'll have to start hitting up people who can never pay back the loans. But since I’m selling the loans off as quickly as I land them, what’s the risk to me? Next to nothing. So far, so genius.

The problem is that some risk remains – after all, I want to keep up my business relations with Kelly and Alli. So we’ll take these loans, bundle them into packages, and securitize them. And just like that, a debt (loans, which by definition occupy negative financial space) becomes an asset (because the law suddenly fucking says so, okay?). I’ll call these Palinode-Backed Securities. Now I can take these assets and start to slice them into pieces resembling marbled cuts of meat, which I call tranches. Some of these tranches are largely low-risk loans with a small return on investment. Some carry a higher risk, but the returns for investors are better. Now the risk is distributed even further and systemic failure is nigh impossible. And once these sold-off, bundled, securitized and sliced-up loans are sold again to, say, Zack from apartment #15 and the crazy old lady with the floral housedress from #23, I don’t need to worry about people defaulting, because it’s completely not my problem anymore. I just make money on everyone else’s money but I’m not taking any of the risks.

Given the universal need for entertainment, it’s pretty obvious that my Playstation will continue to go up in value forever and ever. But for those who may be skeptical, it’s helpful to go to a ratings agency that will guarantee the strength of the financial instruments I’ve created. Bernie from apartment 7 happens to run a ratings agency out of his living room, so I hire him to rate my securities. Since he values my continued business, it’s in his best interest to give high ratings to the bundled assets, based on the most solid parts of the tranche. And if Bernie takes a cut from all of us for awarding high ratings to our financial instruments, it’s because he works really hard and he deserves it, okay? Isn’t that what we all want? To be rewarded for working so damn hard? I thought so.

Of course, we have other ways of jacking up the ratings. We go to Chris who lives down the street and always wears that black trench coat to insure the tranches by buying Default Credit Swaps from him. The default credit swap is an insurance instrument - essentially a securitized insurance policy. It means that Chris will pay me out if a tranche defaults, but the credit swap alone is worth plenty money. So I sell some to Kelly, some to Zack, one to Bernie, and so on. The better the rating, the more the credit swap is worth, and since Bernie rates everything so highly, these things are a gold mine. I just keep on making more money! Where is this crap coming from? Pushed toward us in a never-ending stream on the solar winds, money from an unassailable source succors us. That's where this crap is coming from.

Even in this id-riddled wish-fulfilment fantasy of finance, I still worry about risk. Ultimately, the best insurance against risk is to generate so much wealth that I can never run out, even if everything collapses around me. In order to do this, I can create a Structured Investment Vehicle, which allows me to purcase subprime Palinode-backed securities from others – maybe even myself, why the hell not? To buy them, though, I will create short-term loans called Palinode-Backed Commercial Paper. Then I’ll sell the short-term loans to John, the building caretaker who seems to have jaundice, use the money from the sale to buy the subprime securities, and pay back Jaundice John. Or maybe I'll invest the money elsewhere, sell John some more paper based on those investments, and just keep the whole damn thing going. The point is to throw so much financial chaff in so many directions that no radar can possibly penetrate the obfuscating cloud. Meanwhile, everybody's charging commissions, everybody's selling debts masked as assets, and everyone’s making money, even if that money ends up as 400 imaginary dollars to every dollar of actual capital.

Will it fail? Of course it will. Playstations break down all the time. Plus no one has any real money to pay off the original loans, so the rotten pillar underneath it all will eventually crack. And when that happens, the government will be there with more money, real money, more again than I could ever anticipate, and we will all bathe in taxpayer gold. The little won't suffer, because we are all the little guy. The money that was never there for education, for welfare, for arts and culture and heritage, the money that was always lacking to build decent communities, the money that could not be found to give the worst of us a fighting chance – only then, when we have scammed our way into catastrophic collapse, will the real wealth be revealed. And it will, to everyone’s surprise, have always been ours.

And if the whole Playstation 3 thing doesn't work, I've got a really nice corduroy jacket I can loan you. Invest now in elbow patches for that professorial look.