crying is allowed…

Posted on Thursday 29 January 2009

Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.
[B. Obama 01/20/2009]

What was the problem that lead us to this economic cliff? Why were houses so overvalued? Why were loans so easy to come by? Why were we paying $4.00+/gallon for gasoline? I think a piece of this article in the New York Times contains the real answer to the question. It’s about J.P. Morgan’s timely decision to exit Madoff funds shortly after the Market fell, but before Madoff was exposed. They pulled out the Bank’s money, but didn’t alert their clients [who are kind of upset about it]:

The tale began several years ago when a unit of JPMorgan Chase in London issued a series of complex derivatives that gave investors a way to triple their bets on the Fairfield funds, whose solid consistency mirrored the track record that had quietly — and ruinously — drawn investors to Mr. Madoff for decades.

Leveraged notes issued by big banks like JPMorgan Chase and Nomura became conduits through which fresh money flowed from institutional investors into the Fairfield Sentry and the euro-based Fairfield Sigma funds, both run by the Fairfield Greenwich Group — and, in turn, into Mr. Madoff’s hands.

The arrangement worked like this: Investors put up cash to buy the notes from the bank. In return, the bank promised to pay them up to three times the future earnings of the Fairfield funds. When the notes matured in five years, assuming the funds did well, these investors would get more than if they had invested in the funds directly. The bank collected just under 2 percent in fees, investors said.

And because the bank had to hedge its entire risk, it put up to three times the face amount of the notes into the Fairfield funds. Thus, Fairfield Greenwich got more cash to manage than it otherwise would have, increasing its own fee income. To reward note-holders for making that possible, Fairfield paid them a so-called rebate of a fifth to a third of a percentage point a year, according to documentation of those transactions.

The first sign of trouble came in early October, when Fairfield Greenwich notified investors that it would no longer pay them rebates…
If you understand that "arrangement," you’re probably part of the problem. It’s unintelligible! I keep reading it over and over trying to make it make sense. Rather than try to dissect the details, let’s step an inch above the fray. It goes like this:
So people who want to invest their money in Companies give it to Institutional Investors, who buy various things from JPMorgan, which are given to Fairfield Greenwich, who buy into Madoff Investments, who is purportedly investing in Wall Street Securities [sort of], that have something to do with American Business Enterprises. This probably leaves out any number of other Financial Institutions who are involved in some way. At each level, there are promises of increased returns. At each level, fees are extracted. So between the people and the idea of public ownership of companies, there’s a thick layer of financial institutions extracting profit, promising to make profits for the investors – doing things like those described in the above article.

This story is tragic because we know in advance that it contains a con-man, Bernard Madoff. But what if we replace him with a "legitimate" Hedge Fund?

First, that adds another layer of Financial Institutions "playing with money." But is it really any different? No matter how you draw the figure, everyone is extracting money from a system that is supposed to be a contract between the "public" and "business." But the real business has become the Financial industry that handles the money – and it’s a very lucritive business indeed.

Even without Madoff, this cannot continue. The net conclusion of this story is very simple. The people and the businesses have been taken out of the center of things. Capitalism has been replaced by Financialism. And the economy is too weak from chronic Financial Piracy to allow it to continue. The buried Treasure is all gone.

Now, read it again [crying is allowed]:
The tale began several years ago when a unit of JPMorgan Chase in London issued a series of complex derivatives that gave investors a way to triple their bets on the Fairfield funds, whose solid consistency mirrored the track record that had quietly — and ruinously — drawn investors to Mr. Madoff for decades.

Leveraged notes issued by big banks like JPMorgan Chase and Nomura became conduits through which fresh money flowed from institutional investors into the Fairfield Sentry and the euro-based Fairfield Sigma funds, both run by the Fairfield Greenwich Group — and, in turn, into Mr. Madoff’s hands.

The arrangement worked like this: Investors put up cash to buy the notes from the bank. In return, the bank promised to pay them up to three times the future earnings of the Fairfield funds. When the notes matured in five years, assuming the funds did well, these investors would get more than if they had invested in the funds directly. The bank collected just under 2 percent in fees, investors said.

And because the bank had to hedge its entire risk, it put up to three times the face amount of the notes into the Fairfield funds. Thus, Fairfield Greenwich got more cash to manage than it otherwise would have, increasing its own fee income. To reward note-holders for making that possible, Fairfield paid them a so-called rebate of a fifth to a third of a percentage point a year, according to documentation of those transactions.

The first sign of trouble came in early October, when Fairfield Greenwich notified investors that it would no longer pay them rebates…

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