Last week we were talking about the “Big Three” auto bailout. Since then, it appears that congress is balking at giving Chrysler and GM $15 billion as a “bridge loan” so they can avoid bankruptcy for a few weeks or months. The senate refused to pass the bill, then the Bush White House said they were going to furnish some sort of aid. So far, they have failed to do so. Could it be that they are coming around to “Country Boy Logic”?

Also this week, the story of an estimated $50 billion Ponzi scheme has come to light. I say “Come to light”, but evidence is emerging that financial regulatory agencies including the US Securities and Exchange Commission were warned for a decade that something was amiss with Bernard Madoff’s financial firms. A Ponzi scheme is one which usually doesn’t make any or much money. The early investors receive income from alleged profits that are really just money invested by later, usually more gullible participants. Since the organization is not really making money, it eventually implodes because it cannot attract enough new participants to provide “profits” to the original participants. Usually the perpetrators of the scheme try to grab most of the unencumbered funds just prior to the implosion, then either escape beyond the reach of prosecution or pretend that they were just running a legitimate business that went broke.

I think this points us toward an understanding that the seeds of the financial meltdown which we are seeing were sown by unscrupulous folks who were running corporations or institutions that really produced little or no profit. Unfettered greed has sparked several generations of bottom feeders disguised as legitimate companies and institutions that have skimmed so much money from the world economy that it has imploded. An example of this is AIG, which was allegedly an insurance company that the US Government just bailed out to the tune of $150 billion (so far). You might think this “insurance company” got into trouble because properties it insured suffered losses or that the bad economy caused a loss of revenue, but the main cause of AIG’s problems was a scheme in which they “insured” bundles of risky mortgages for the folks who owned the debt. If the mortgage bundle defaulted, the “insurer”, AIG, was to make sure the owner of the bundle did not lose any money by paying to the “insured” the alleged “value” of the bundle.

This cockamamy scheme is loosely known as a “credit default swap” and is so far from insurance as to be unrecognizable. I may be a country boy, but I know AIG was no “Insurance” company. This scheme has no winner except the middleman bottom feeder who just passed the loss for bad debts down the line and skimmed off the “profit”. Wikipedia agrees with me, pointing out that “CDS”es as they are called are NOT insurance: “A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments (premium leg) to the seller, and in return receives a payoff (protection or default leg) if an underlying financial instrument defaults. CDS contracts have been incorrectly compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if a specified event occurs. However, there are a number of differences between CDS and insurance; the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event. “ This is more close to financial speculation that insurance.
The really painful part of all this is that the $150 billion that we gave AIG is going into the pockets of these bottom feeders to pay them for the defaulted mortgage bundles. These folks have produced nothing and have added nothing to the value of the bundles, yet they are making money while the rest of us are contributing to their “bailout!”
In other news, the Federal Reserve Bank cut its funding rate to almost zero yesterday. This is the rate banks charge each other for loans. Why is the Government setting the interest rate between banks? Shouldn’t the banks set this rate since they will gain or lose depending on the success of the loan? And if the goal is to encourage banks to lend to each other, haven’t we taken away their incentive to lend? Why would they make a risky loan if they are making zero % interest? This doesn’t stand up to country boy logic either. I say no more loans or bailouts to companies or institutions that produce nothing and add no value to our economy.