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The government needs to do more than regulate hybrid derivative safeties and the establishments who underwrite them. They have to inject reason. Needing public registrations and a violent regulatory body are had to guarantee public security in future hybrid protection issuance's. Directors and officers of banks who bet with others' money ought to obtain heavy charges when their wagers fail. Both for the business's they represent and personally. They must lose all plethora they have actually built up and the built up plethora of their direct managers must be forfeited. Without repercussions these people will certainly trigger yet another globe economic meltdown. Because derivatives are complicated, I'm developing a metaphor to make them simpler to comprehend for the laid-back reader as topics such as financial derivatives can be very complicated.
What if General Motors were permitted to bet on the failure of a car part? Picture if they were allowed to get an insurance policy which paid them a million dollars every time a fuel injector failed on a Chevy Malibu and caught it on fire. Exactly what if GM persuaded an insurance company to payout when one of its own products failed and injured someone? And the repayment went to GM. Let's phone call these insurance contracts "GM injector default swaps" or "IDS's." Let's pretend that the insurance company has so much faith in the injectors that they over issue them due to the fact that of their research on past injector failings. The insurance companies enable GM to put 50 or 100 of these bets out on each injector placed in an auto. They let Joe Engineer get them in his 401k also though he is making the injectors. After all, injector failings have been very reasonable and this appears like a piece of cake business decision from the actuaries at the insurance company. In their own world, it represents a significant amount of free premium, with no danger, and someone else marketing the agreements so exactly what the f *ck. Now let's just say for disagreement's sake that there were companies in Detroit of reduced moral character, (undoubtedly right wing republicans) who determined to somehow convince GM to change the design of the Malibu injector. Let's presume that they persuaded GM engineers to make it to fail in order to benefit themselves on the IDS's. Merely a little failure, no one actually gets hurt, however enough of a failing that triggers IDS contracts. Let's even include in our metaphor that these business who persuaded GM to design their own injectors to fail loaded up on the injector failing insurance agreements. Also though they recognize that the huge, too big to fail insurance company will certainly be economically devastated, and that the company is of some significant significance to the United States economic situation; in fact the entire world economic climate since of its enormity and exactly how many individuals and additional morally practical firms depend on it for all kinds of insurance items.
They are persuaded that the government will certainly save the insurance company if trillions of dollars are owed to these IDS holders due to the fact that permitting the insurance companies to fail will certainly create a lynch pin financial occasion. So their bets are thought to be secure. Let's pretend that persuading GM engineers to revamp the injectors to fail and load up on IDS' was more profitable to the GM pro-forma than producing and selling sound automobiles. They understand that this short term plan will demolish the economic climate and harmed many individuals. They do not care because of the massive payday they will get. They validate that the government might step in and bail out the insurance business (s) because of its (their) significance to the economic situation. At the end of this game there are lots of dead bodies, but no one essential.
OK, let's put a brand-new twist on this. Let's say that the business plan to offer automobiles with f*cked up injectors is beginning to look so profitable that GM determines that giving these automobiles away to anyone who desired one might accelerate and considerably improve the general future IDS income accruals to GM and its cohorts. Let's additionally say that the engineers might really produce the injectors to fail after exactly two years of usage. The 2 years will certainly give GM time to construct and give away a huge quantity of injector failing produced Malibus to wager against. The 2 years will certainly give the insurance company, (who understand nothing of the injector failure design) an incredible amount of self-confidence in releasing the IDS's. The insurance company will in fact make billions of bucks on the insurance premiums over the 2 years. Their ignorance/naivete will certainly cost them trillions beginning at the 2 year mark as they have actually not been privy to the defective injector design charade. All is well in Detroit.
OK, fast forward. The 2 years have passed and the very first purchasers of inexpensive Malibu's with substandard injectors are starting to have injector failings. It's on the news, GM and their cohorts are laughing their asses off in closed door board space sessions. The investors in GM stocks and corporate bonds are not. The stock is getting pounded, the bonds are getting slugged. The GM managers decide to show S and P, Fitch and Moody's that they more than covered for defective injectors through their injector default swap purchases. The protections rebound and savvy experts at Ford and Chrysler recognize the event. They recommend their corporate directors to jump aboard and begin creating automobiles with faulty throttle bodies and faulty crank handles. On the other hand they acquire TBDS and CSDS coverage from the huge insurance business and GM follows suit. Soon all vehicles made in our beloved America are made with substandard parts covered by substandard part insurance payable to greedy immoral b*stards. Autos stalled and burnt up all over our freeways are not being paid for are being repossessed. Rich guys are cashing checks from the insurance business who underwrote the IDS's and concurrently placing large pressure on the government, the public and the fed to bail out the insurance business, or there would be economic catastrophe for all. They don't give a f*ck about folks who pass away in the burnt up automobiles or those who lose their vehicles ... Small price for the uber rich to pay (a little smoke on the highway they just require view from their Lear Jet windows - it's hard to see from up there).
This is just what took place in our mortgage loan business. This is just how fast meals workers bought half million dollar residences. The home loans were created to fail and given away to anyone breathing so that hedge funds and bankers (Scion cap, John Paulson, Goldman Sachs ... the listing is not that long but undoubtedly differentiated) might make billions and billions betting against them. The moral threat - It could well be the unwinding of our economic situation, the global economic situation and political military security around the globe.
My conclusion ... Just as long as we have business that are too big to fail and who are allowed to DEPEND on citizens to bail them out when they screw up, as evidenced by the recent JP Morgan Chase - Jamie Dimon fiasco, we folks have to make d*mn certain that how they do business is safe. They need to be controlled. Violently managed. Better yet, they ought to have been allowed to fail.
Jeff Greenberg www.LegalForensicAuditors.com
