SUPERMAN AND BATMAN ON THE SUBPRIME CRISIS (it´s really long, I know, but also both funny and enlighting
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SUPERMAN:As a billionaire businessman you have your fingers right on the pulse of the financial markets.
BATMAN: Very much so yes.
SUPERMAN: And during the summer (2008) there has been a great deal of turbulence and volatility in the market. What has caused that?
BATMAN: Well you have to remember two things about the market. One is that they are made up of very sharp and sophisticated people, these are the greatest brains, and the second thing you have to remember is that the financial markets to use the common phrase are driven by sentiment.
SUPERMAN: What does that mean?
BATMAN: Well things let's say are just going along as normally in the market and then suddenly out of the blue one of these very sharp and sophisticated people says my God something awful is going to happen! We've lost everything oh my God what are we going to do? Shall I jump out of the window, let's all jump out of the window. And then a few days later this same sophisticated person tells you now things are going rather well and everybody says I agree with you I think we are rich. And that is what we call market sentiment.
SUPERMAN: Surely we are exaggerating just a bit.
BATMAN: Well I don't know. In the middle of August this year when the market absolutely plummeted in London a well-known city firm, State Street Global Markets, issued a statement in which it said and I quote ‘ market participants don't know whether to buy on the rumour and sell on the news, do the opposite, do both, or do neither depending on which way the wind is blowing’.
SUPERMAN: This is the kind of rigorous analysis companies will pay huge salaries for.
BATMAN: Yes exactly and a few days later when the markets had gone up a little bit the senior equities adviser on ABN Amro Morgan said and I quote ‘ we are back to happy days again’.
SUPERMAN: Well no price is too high for that kind of mature wisdom is it not.
BATMAN: These sorts of people are paid millions of dollars in bonuses.
SUPERMAN: Yes of course. During this summer there have been actual causes behind the volatility in the market I mean specifically and especially in America granting vast numbers of mortgages to people who can't afford them on properties which are diminishing in value.
BATMAN: It is the so-called subprime situation.
SUPERMAN: How does that work in fact?
BATMAN: Well imagine if you can an unemployed man sitting on a crumbling porch somewhere in Alabama in his string vest and a chap comes along and says would you like to buy this house before it falls down and why don't you let me lend you the money.
SUPERMAN: And is this chap who says this is he a banker?
BATMAN: Oh no he is a mortgage salesmen; his income depends entirely on the number of mortgages that he can arrange.
SUPERMAN: So his judgment to arrange mortgages is completely objective.
BATMAN:Completely objective yes absolutely.
SUPERMAN: And what happens next?
BATMAN: Well then this debt, this mortgage, is taken, bought by a bank and packaged together on Wall Street with a lot of other similar debt.
SUPERMAN: Without going into much detail about what is actually…
BATMAN: Without going into any detail, no it is far too boring. And so this is put into a package of debt and then it is moved on to Wall Street and it is extraordinary what happens then, then somehow this package of dodgy debt stops being a package of dodgy debt and starts being what we call a structured investment vehicle.
SUPERMAN: An SIV.
BATMAN: An SIV exactly.
SUPERMAN: Yes I see and then someone like you comes along and buys it.
BATMAN: I buy it yes and then I will ring up, I don’t know, somebody in Tokyo and say look I've got this package do you want to buy it and they say what is in it and I say I haven't got the faintest idea and they say how much do you want for it and I say $100-million and then they say fine and that’s it. And that's the market.
SUPERMAN: Presumably this packe, I mean that kind of thing can happen several times to the same package and every time it does of course then you or someone like you will get a fee and a mark-up and …
BATMAN: And a profit well you can't expect me to do it for nothing it is hard work.
SUPERMAN: In view of the fact that in these packages there is a lot of dodgy debt what is it about it that attracts the financial risk taker?
BATMAN: Well because these hedge funds as they are called which specialise in these debts they all have very good names.
SUPERMAN:You mean they are responsible companies.
BATMAN: No it's got nothing to do with their reputation they have actually very good names; the names they think up are very good. I'll give you an example; there is a very well-known American Wall Street firm called Bear Stearns who have two of these hedge funds which specialise in these mortgage debts and they lost so much money, well lost so much of its value, that Bear Stearns announced that they would have to put in $3.2-billion into one of the funds to try and keep it afloat.
SUPERMAN: $3.2-billion.
BATMAN: $3.2-billion yes and even then they said investors couldn't get any money out of it and they were going to let the other fund go but one of these funds was called the High-Grade Structured Credit Strategies Fund and the other was called the High-Grade Structured Credit Enhanced Leverage Fund.
SUPERMAN: Well that sounds very good, it sounds very trustworthy.
BATMAN: Well this is the magic of the market, what started off as lending a few thousand dollars to an unemployed man in a string vest has become a high-grade structured credit enhanced leverage fund.
SUPERMAN: I like the sound of it.
BATMAN: It sounds very trustworthy, I mean it's got good words in it; it's got words like high.
SUPERMAN: High is good.
BATMAN: Better than low anyway. And structured is another good word.
SUPERMAN: Very good.
BATMAN: Enhanced.
SUPERMAN: I love enhanced. I mean I would buy anything if it said enhanced.
BATMAN: Well absolutely. It might have been different if it said the unemployed man in a string vest fund.
SUPERMAN: Because then alarm bells might start to ring. Despite these very plausible names surely the reality is that the people that lend all this money have been incredibly stupid.
BATMAN: Oh no, no, no the reality is what was stupid was at some point somebody asked how much money these houses are actually worth. I mean if they hadn’t had bothered to ask that question then everything would have gone on as perfectly normal but they unfortunately did.
SUPERMAN: I see but now you see people who are saying the crisis is likely to turn into a financial meltdown. I mean can that be avoided?
BATMAN: It can be avoided provided that governments and central banks give us, the financial speculators, back the money that we have lost.
SUPERMAN: But isn't that rewarding greed and stupidity?
BATMAN: No it is rewarding what the Prime Minister Gordon Brown calls ‘the ingenuity of the markets’.
SUPERMAN: I see.
BATMAN: And we don't want this money to spend on ourselves we want this money just to go into the markets so that we can carry on borrowing and lending money as if nothing has happened without thinking too much about it.
SUPERMAN: If the worst came to the worst and you didn't get this money what then?
BATMAN: Well then there would be another market crash and then I would say to you what people like me always say that it is not us that will suffer it is your pension fund.
