Monday, March 17, 2008

Wayland's Chits

During our Sunday brunch yesterday, D.C. told our group a story about his poker playing days in college. This is dorm room poker mind you, and it was close to a half century ago. So when they would play, they would play pennies and nickels and the occassional quarter. A five dollar pot was a huge pot.

Rules in the poker game were pretty lax. If you ran out of money you would simply write a little IOU and throw it into the pot. Generally "the chit" would be repaid the next day. If not, the holder of the chit would use it in the next night's game.

It was a pretty friendly game of poker that went on for months.

Then one day, Wayland joined in the game. Either these guys were really good poker players, or Wayland wasn't. Either way, it wasn't very long before Wayland found himself writing IOUs to the poker game.

After a while, Wayland wasn't able to pay off his chits, and the poker game became more and more dominated by Wayland's credit. The pots grew larger, but they were only backed up by Wayland's ability to pay.

When it became clear that Wayland couldn't pay, the game ended. And they never really played poker again.

DC also sent me an email that in part said this:

"The US financial collapse has but one simple cause, the rest of the world no longer wants to finance our spending binge and this makes the dollar less acceptable in the world market place.

We were spending way more than we made and making up the difference with borrowed money, now no one is relaxed about lending us more money because there is a serious question that we cannot pay it back. (and if we do, it will be with devalued dollars)
It is no different than a store giving credit to its customers so that the customers would spend more in the store. The storekeeper was able to borrow against these customer accounts to buy more goods to sell on more credit and on and on, until one day someone realized that the customers had already charged twice as much as they could be expected to make in their entire lifetime.

Then it was all over."

DC goes on to say:

"Fighting a trillion dollar problem with billions isn't working . The Fed is like a fireman with a garden hose fighting a forest fire in a 100 mile an hour wind. There are 2 trillion dollars worth of subprime mortgages in trouble. The Wall StreetJournal reports the total securities portfolio of the Fed at 800 billion. Also it would appear that the Fed maxed out its capability
this weekend and now even the fireman is at some risk.

An hour ago my friend who trades the Globex premarket called to warn that all indications point toward a calamity in the market tomorrow."

So what is happening in the market?

Stocks are down world wide, but calamity is not in sight. (At least not today)

Over the weekend, JP Morgan bought Bear Stearns for about 250 million dollars. That's about 1 cent on the dollar. And that includes their new high rise in Manhattan.

The problem is not just on Wall Street though, it is global.

"The collapse of a Wall Street institution over the weekend shows the global financial crisis is broader than policy-makers realized and it is growing worse, the head of the International Monetary Fund said Monday.

"The financial crisis which started in the United States is more serious and more global than it was a few weeks ago," IMF chief Dominique Strauss-Kahn said in Paris.

"The risks and dangers are very high. The economic environment is still worsening."

The current crises will require a "global answer," Strauss-Kahn said.

Now it's easy and appropriate to complain that these large banks are getting bailed out with our money. But, we have been privatizing profits and socializing losses in the capitalist world for a long time.

And I suspect, based on what DC told me, that there is a lot more involved here than the so called mortgage issue. And that is the 43 trillion dollar credit swap market.

You can read about swaps here.

Sounds like Wayland on steroids to me.

And his chits are no longer any good.

And this poker game may be over.



Anonymous Anonymous said...

The brilliant architects of credit swap markets seems to have forgotten John Forbes Nash Jr.'s (movie: A Beautiful Mind,) nobel prize for economic game theory. If I understood game theory, parties make choices based on their risks. When the risk is effectively re-moved (by credit swap,) a player no longer has a stake and its choices change.


1:28 PM  

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