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21 September 2008

NOT A ONE ACT PLAY

ACT 1 Scene 1
In the post ICE 2000 meltdown United States of Alan Greenspan, the interest rates were loosened and money flooded the market. Average Joe Smith had a well paying job in the highest tax bracket so the thought of tax breaks available via mortgage on purchase of a flat(condo) was induced in his mind by the friendly neighbourhood banker, who incidentally happenned to have lots of loose cash lying about.So the first leverage of the system was born. 

ACT1 Scene 2
The next came in when Mr Bright Spark Investment Banker at L Bro collected lots of Joe Smiths together into a CDO(Collaterised Debt Obligation), asked his friend Ms Unscruplous at a rating agency to mark it as the next best thing to a US Treasury Bond and then sold it(on leverage of course) to Mr KnowNothing a deep pocketed investor. Mr Bright Spark earns the commission on the sale and management fee for the life time of the CDO ie till the time cash flows from Joe's pocket to the lender bank as an instalment. 

ACT1 Scene 3
The last level of leverage came in when Mr KnowNothing bought the CDO with money he didnt have, paid for by the bank at a handsome rate of interest.

ACT 2 Scene 1
Oh there is so much happiness in the world! Everyone is a born financial wizard. All you have to do is buy an 'asset' wait for a few blinks and you have a multiple on the 'asset'

ACT 2 Scene 2
Everyone in this three act play was happy till Joe paid up on time or till the price of Joe's flat/condo kept going up and Joe II bought it from Joe, restarting the process. But now the music has stopped. Joe IX is struck holding the parcel. He also does not have the bright job that Joe has and so ...........Sub Prime! Default!!No cash flows!!!Losses and bankruptcies.

Hey but what about Mr KnowNothing? Well that act of the drama is yet to unfold. Watch this space for more on ACT 3.

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