The fraud involves Collateralized Debt obligations, or CDOs.
This stuff is a bit complicated, but the good news is that there is a brilliant little video that explains it all very well. See below.
Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.
In the first bottle, you are buying bulls.
In the second bottle, you are buying bullshit.
If you are "new to the farm" you might not know the difference.
Of course, most people are new to the farm.
I used to have young reporters who had never experienced an economic downturn tell me that the stockmarket always went up, and that we were crazy, as a nation, not to privatize Social Security by putting everything into the stock market.
I said I would roll over on my position and support privatization of Social Security, provided the reporter could first answer three simple questions about basic finance and financial history.
Did he or she want to play that game?
Every reporter said they did. Here were my questions:
- What is a no-load fund?
- What is a zero coupon bond?
- Who is Robert Citron?
When every single reporter crashed and burned on those three questions (this was before Wikipedia), I would point out that this was normal.
"Across America, people who don't know the rules are pretty sure they can win the game. Las Vegas casinos get rich fanning that conceit"
Of course, not everyone is a fool.
Look at India.
As Robert Kuttner notes, Dr. Yaga Reddy, the former Governor of the Bank of India, knew what he did not know and what the average consumer in India did not understand.
And so, over the objections of Western bankers, the International Monetary Fund, and greedy local bankers he refused to let the Indian banking system engage in Wall Street-style speculation.
As Dr. Reddy notes, somewhat tongue in cheek:
"We are a poor developing nation. We don't really understand these securities, so we don't permit our banks to use them. We leave them to the advanced nations like you."
Of course, after the crash, (a crash India avoided thanks to Dr. Reddy's common sense) Alan Greenspan and pretty much everyone else admitted they did not understand security transactions either.
But greed won out, didn't it?
And doesn't it always?
And there, ladies and Gentlemen, is why we will always need a little government regulation and oversight.
The story, as I have often noted, is as old as Genesis 41.
And where did Joseph say the grain should be stored?
And what did Jesus do to the money changers?
Thus concludes today's short lesson in macro- and micro-economics, with a side order of Moses and Jesus as well.
Let us prey ...