The announcement this week that two small, regional banks have gone under due to the credit crunch, and were promptly snapped up by Mutual of Omaha leads many to believe that the entire ABCP crisis was engineered, or at least encouraged. While I like a good conspiracy theory as much as anyone, I think that there is a far more easily digestible siuation going on than a hands on market manipulation: It’s called human nature.
Firstly, what would someone gain from allowing a situation such as the US credit crisis to get out of control. The answer is property. Let’s say you have won the lottery, and are looking to take a $40 million stake and double it. If your immediate reaction to that idea is “Why would I? Isn’t $40 Mill enough?”, then you aren’t thinking like a company. So let’s throw another obstacle in your way. How about if you had to look after a gigantic extended family? Twenty people are relying on you to look after them – a small shareholder pool, but you can suspend your disbelief for a while. After all, this is Superhero movie season, so you may be used to doing this on a weekly basis.
You have your $40 Million, and you notice that there are five properties on your street up for sale, and another five that you know the owners are out of work. You talk to your local real estate agent, and he says that the interest rates are about to go up, so you snap up the 5 empty properties, and go and have a chat with the five unemployed owners. You offer to lend them money, if they need it, because you want to give some away, and they take it. You also tell them to stay in their houses because interest rates are going down. When rates rise, you call back your loan to these five familieis, and when they can’t make the payment, you start legal proceedings knowing that the only way they can give you anything is by selling their houses. You snap them up at a low price and you have manipulated this market to now own 11 properties on your street (including yours), and your extended family is happy. What was the distasteful part of that? Lying to home-owners that you know cannot afford much? Starting legal proceedings against them knowing it would lead to their being homeless? Looking after your shareholders? The choice is yours, but what you actually did was correctly predict what people would do in a certain situation. You now own 10 run down properties, but you own them at a point where their value is only going to go up, so sooner or later your shareholders will be selling them at a huge profit for you.
Back in the real world (or what passes for a real cyberworld in international debt-financing circles), this could certainly be achieved ignoring a couple of warning signs. If you can see that someone is going to buy debt from homeowners automatically because their debt earns your portfolio money, you are going to encourage them. Obviously, the only logical end to this is massive amounts of foreclosures, but when you are earning money, who cares about logic? There are more and more obscure, debt-laden investment vehicles around that are being traded at the speed of light by computers (and their operators) globally. Soon, these trades will purely be between computers, and they do not see the human cost at the end of the rainbow. President Bush is home shopping in Dallas, apparently, and that city’s foreclosure rate is about 25% of all residential properties, so he should have quite the choice.
If a large bank sees what the logical end will be, and has the money in the bank to buy several smaller banks, would it stop this lightning-fast financial impending auto crash, or would it say to it’s shareholders something like this:
“We can see this global ABCP trading process will not only make us money in the short term in trades, it would open up a situation where many properties are owned by small banks that would not survive a run. If we bet big now, knowing what the end product would be, we could see their demise as a positive for us. We buy them out, and we have inherited a couple of million residential homes, that we can afford to sell at a lower price now, and they will rise in value over the next 20 years”.
So, where is the wrongdoing here? Because major banks are using their knowledge to make money now, and later, or the fact that they are cutting down the amount of consumer choice in the future? Perhaps it is that they are simply fulfilling their shareholder’s expectations twice or three time over.
Mutual of Omaha did not do this. The shareholders that are making money did. It is us who are the dark shape in the background manipulating markets as a single voice. Our company stocks made this happen. The major stock holdings held by individuals in the World are those over 50 years of age. When they are retiring on their stock earnings, what will everyone else be living on? If you are looking for a bad guy, it’s probably you.
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