Professor’s Classroom

Subject:  Economics/Finance

NO!  I am not doing a review of some Hollywood mind dribble about guys that repossess organs that are in arrears…..NOPE!….I am talking about the theft occurring on Wall Street…..

A definition, a simple one, for therm economic term of REPO:

An agreement in which one party sells a security to another party and agrees to buy it back on a specified date for a specified PRICE. CENTRAL BANKS deal in short-term repos to provide LIQUIDITY to the FINANCIAL SYSTEM, buying SECURITIES from BANKS with cash on the condition that the banks will repurchase them a few weeks later.

There is the theft that was pulled on the American people that damn near brought the country down around our ears…..in other words, they used worthless non-existent paper as collateral for the money they were given and when it came to the day the sale was called in…there was nothing of value to use to raise the cash to pay back the money…..

But there was another……DERIVATIVES:

Financial ASSETS that “derive” their value from other assets. For example, an option to buy a SHARE is derived from the share. Some politicians and others responsible for financial REGULATION blame the growing use of derivatives for increasing VOLATILITY in asset PRICES, and for being a source of danger to their users. Economists mostly regard derivatives as a good thing, allowing more precise pricing of financial RISK and better RISK MANAGEMENT. However, they concede that when derivatives are misused the LEVERAGE that is often an integral part of them can have devastating consequences. So they come with an economists’ health warning: if you don’t understand it, don’t use it.

The world of derivatives is riddled with jargon. Here are translations of the most important bits.

• A forward contract commits the user to buying or selling an asset at a specific price on a specific date in the future.

• A future is a forward contract that is traded on an exchange.

A swap is a contract by which two parties exchange the cashflow linked to a liability or an asset. For example, two companies, one with a loan on a fixed INTEREST RATE over ten years and the other with a similar loan on a floating interest rate over the same period, may agree to take over each other’s obligations, so that the first pays the floating rate and the second the fixed rate.• An option is a contract that gives the buyer the right, but not the obligation, to sell or buy a particular asset at a particular price, on or before a specified date.

• An over-the-counter is a derivative that is not traded on an exchange but is purchased from, say, an investment BANK.

• Exotics are derivatives that are complex or are available in emerging economies.

• Plain-vanilla derivatives, in contrast to exotics, are typically exchange-traded, relate to developed economies and are comparatively uncomplicated.

Another fairly normal financial exercise….but once in the hands of greedy Wall Street traders it became a thing of ugliness…the second prong of the financial disintegration of the world’s financial markets…..in this case worthless sub prime mortgages were the culprit….when they were packaged and sold to raise money…..it was dishonest for the banks and institutions knew that they were worthless when they were sold….a SCAM is a polite word to describe the theft……

The two practices that I covered are nothing short of theft….but then their is a third prong to this…..the bailout.  After really bad practices and the economy crashing the country was sold on the idea that these institutions were too big to fail and were given billions to save their companies from ruin……then a year later still using taxpayers money……these companies gave employees massive bonuses….still using taxpayer money…..and there is the final prong…….yet another theft of cash but this time they are stealing taxpayer money….that means YOUR money…….anger resides on Main Street and to save these thieves from being fed to the wolves the Congress is working on a financial reform bill……..at best the bill, if passed as is, is a YAWN and a tap on the pee pee for the financial thieves that we trust our economy to……will we ever learn?

To Be Continued……..