The gangs of..Wall Street

I am not a top-notch financier but let me tell you this: the current development on the financial markets stinks of fraud. And it stinks really badly: Picture this: my neighbor has a boat, or better yet: this guy Joe that lives in the other side of my town has a boat. I do not personally know him. He goes fishing from time to time, and some say that he has pretty good skills. Now, what interests me is the following business: I want to purchase an insurance that covers Joe’s boat. This means that if Joe’s boat sinks, I will be reimbursed the boat’s value. Remember: I do not have any interest in Joe’s boat and I hardly know him. Do you think that there will be any insurer willing to sell me this insurance policy? I guess not. But that is because I am not living on the Wall Street. Should I be living there, many companies would be more than happy to sell me this type of insurance. This is similar to what they call credit-default swaps. Moreover, it is not only me who would have bought this policy, but also my neighbors, my friends and many others. Now, what do you think the chances are that Joe’s boat will sink by this time next year? When Lehman Brothers was allowed to sink, it had triggered a series of claims for the purchasers of CDS related to its bond. This immediately destabilized AIG, one of the main issuers of CDS. It was very convenient for AIG to sell CDS, since they were not even required to set aside the capital needed to cover a potential loss, given their AAA rating and in accordance with the regulation in place at the time. The fact that Mr. Paulson decided to “save” AIG with taxpayer money had only closed the vicious circle of this extremely convenient situation for some. Sinking Joe’s boat seems easier than sinking such a powerful player as Lehman. But that is until the gangs of Wall Street come together to work for a common interest.