Wednesday, June 28, 2017

The Global Finance Meltdown Visits Lower Harbor

The 2008 global financial crisis is an enduring fascination to me.

It took a chain of the less admirable elements of human nature working independently, but also in concert to pull it off. Clinton signed the repeal of Glass-Steagall. Coked up and commission-incentivized mortgage brokers sold exploding adjustable mortgages to individuals and families who had no idea what they were getting into. Upward pressure on real estate prices ensued. Mortgages were batched together by the thousands and used as collateral for investment bonds. Bond rating agencies carefully examine the bond issues from 47,000 feet and pronounce them A-OK.

Then it gets a little fucked up. Financial geniuses figure out how to buy and sell the risk of default, meaning a company gets paid for assuming the risk of bond failures and the opposing party in the deal gets a payout if there is a default, creating a reward for a bond issue tanking.

Then it gets very, very fucked up. Investors start entering into these transactions multiple times over for the same underlying real estate equity, which is something like taking out 6 insurance policies on the same house and hoping for a sextuple payout when it goes up in flames.

Then it gets very extremely fucked up. In one corner of the swamp, and by way of example, one large investment bank and a savvy deep pocketed short seller actually see that loading bond issues with the worst mortgages will generate the largest payout. A bond ratings agency say "A-OK, good buddies." Said festering stinkpile of bonds is marketed to a German bank which comes to regret it. If I sound like Elizabeth Warren, google Abacus, John Paulson and Goldman Sachs.

The bigger tsunami took down Bear Stearns, Lehman Brothers, launched the Great Recession, and came barreling into Matinicus Harbor one beautiful September day in 2008.

For a short while in 2008, our lobster dealer tied the Jacob Pike in lower harbor, bought our lobsters and dispensed fuel and salted herring. As John and I left the harbor that morning, aboard Natalie Irene, the boat price for lobster was $3.40 or so, not great, but enough to make it worthwhile. It would be half that by afternoon.

Sometime while we were out on the water, Glitnir, an Icelandic bank, failed. Icelandic bank failures were not on my mental list of concerns that morning. As we moved from string to string, I was probably stewing about having enough firewood, or some family strife, or trying to write a song in my head. Lobsters came up. Traps splashed back into the cold, rich water. Wrists got sore. Bait bags got refilled. I tried to keep up. The day went along as expected.

Some time further along, New Brunswick lobster processors, to which most of our catch was sold found that Glitnir, being out of business, could no longer issue them letters of credit for operating funds. Letters of credit issued to New Brunswick lobster processors were also not high on my anxiety inventory.

When we sidled up to the Jacob Pike, we were advised of two things. First, the boat price was now $1.70, if I'm remembering the figure correctly. Second, as a bonus to getting our pay cut in half, we were advised that the dealer would not be buying any more lobsters this week. There was no market for most of our lobsters.

That was just the beginning. Fortunately, even though the housing crash triggered an employment crash, homelessness and large swaths of suffering, we can take some comfort that the good folks at AIG, Goldman Sachs, JP Morgan Chase and others didn't take too much of a hit on the bonuses issued in recognition of their achievements.

No comments:

Post a Comment