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June 18, 2014

We have seen in Parts I and II that we have enormous amounts of capital in the hands of unregulated or underregulated banks, hedge funds and various other forms of investment and trading vehicles. We have seen that some of such funds these unregulated and underregulated banks and funds use for their crapshoots are FDIC-insured funds. We have seen that most of the money invested by hedge funds, for instance, is leveraged (borrowed), and we have seen that at least one bank has loaned out such money to a hedge fund (which failed) at a ratio of 250 to 1!
With such a ratio, if applicable to a particular venture, it is clear that it is the loaning bank’s investment and that the hedge fund is a mere front for an investment the bank might not otherwise be able to make under the terms of its home charter or applicable rules and regulations. I am unfamiliar with Swiss rules and regulations applicable to what extent and under what terms their banks may invest in the ventures of hedge and other such funds, but if leveraging a hedge fund (as with the failed Long Term Capital) at a ratio of 250 to 1 is legal there, then their legal and regulatory regimes must indeed be weak to non-existent.
Leverage is addictive. Johnston notes that it can easily be the crack cocaine of hedge funds. He further notes that centuries of economic history show that those who try to leverage the world bring themselves to ruin – and drag others down with them. He’s right. Such grossly irrational ratios of leverage to investment, if a hedge issue is missed and the worst happens (as with Bush’s 2007-2008 experience), can result in a now-globalized economy’s crash into depression. It is worse than that for us Americans – you and I are publicly leveraging hedge funds’ ventures by allowing access to our own treasury to these crapshooters, and with FDIC-insured funds!
We desperately need reenactment of Glass-Steagall or better still the old Act as amended to meet the problems encountered since its original enactment in 1933. We need to end private access to our money. How did we get into this financing of crapshoots? Why should you and I remain vulnerable to the predation of private enterprise by helping to leverage their crapshoots? Why? Are we enjoying our continuing susceptibility to bailout and recession? Yes?
Given such prelude, let’s go back to the demise of Long Term Capital. We now know that there were 16 partners who put up 250 million apiece to start the venture. We now know that each partner leveraged his investment by borrowing 500 million more, thus making it appear that each partner was putting up 750 million. When added to the 250 to 1 ratio put up by the Swiss bank UBS, you had leverage (from the partners’ perspective) of some 300 to 1. Thus if the venture succeeds, each such partner could gain profit running into the billions from a mere personal investment of 250 million, depending upon the terms of the leveraging contracts with UBS. Great, you say?
What if, as in Long Term Capital’s case, the venture fails? Billions are lost by the leveraging banks, and in the case of American banks, billions would also be lost if the risks were not properly hedged, and some of it our money! Did anyone reading this sign a contract with a hedge fund agreeing to leveraging the funding of one or more of their crapshooting ventures with our (public) funds? I didn’t, so how is it that these crapshooters are not only using my money and yours, but with the repeal of Glass-Steagall, you and I could also be liable for their bailout if their crapshoots fail? This is an emergency! Where is the Congress? Where are the regulators? How can they be so irresponsible when the potential for an international depression looms before our very eyes? Are we so blind to our ongoing predicament that could erupt at any minute? HELP!
There is no social or economic value in allowing hedge funds to operate in secrecy and borrow other peoples’ money. Hedge funds have made some spectacularly rich, but they add nothing of value. Each trade made by a hedge fund that puts a dollar into the pocket of a billionaire hedge fund manager and his investors is a dollar someone else lost, so it is a zero-sum game. The risks taken by these hedge funds can bring wealth to the few but ruin to the many, and you and I number among the many.
Hedging away risks, of course, costs money. It may cost so much that paying for it destroys the potential for profit in a given investment. Not hedging away the risks, on the other hand, invites ruin (as with Long Term Capital and hundreds of investment groups during the Bush debacle of 2007-2008 – though we bailed out the insolvent Wall Street banks, their shareholders and insurers during that crisis). There is always the question, too, of whether by hedging away so much risk you create new and unknown risks, i.e., just how sophisticated are we at this point in identifying and adequately treating risks to investment, especially in wholly new ventures (e.g.,funding of trips to the moon, bio-medical research etc.)?
So where are we? Do we just sit here and bear the burden of permitting secret, offshore, unregulated investment pools operate with truckloads of money from lenders that mix retail banking with investment banking, a process that puts each and every one of us at risk for bailout and the world at risk for depression, or do we end the mix of retail and investment banking with reenactment of Glass-Steagall and protect the public till from their predation and subsidy and crapshoot backups in a grotesque system that favors the few beyond rational explanation, and whose zero-sum game has no economic or social value in any event? What public purpose and good are we furthering with our failure to protect our own treasury while inviting global depression – enrichment of the few as enabling (if indirect) lenders and backup stakeholders (with bailout checks at the ready)? There is none.
Since disaster could strike at any minute (as it did in 2007-2008 during Bush’s sleepy laissez faire tenure devoted largely to neocon military adventures), it may well be late in the game, but we have to start from where we are in the here and now and remedy this catastrophe-in-waiting. Today! We need not suffer this exposure to global economic ruin any longer than it takes us to put together the necessary legislation and implementing rules and regulations that, in the language of the hedge fund industry, would constitute “OUR HEDGE” against the ruin sure to come – at some point.
If private enterprise in search of profit wishes to roam the globe to make a buck, fine; but they can do it with their own money, not ours, and not with any guarantee on our part to bail them out if they fail to hedge risks or otherwise guess wrong in some other area of an investment or trading effort in order to make that buck. That’s real “private enterprise,” the kind the coddled investment class tells us they want (while their lobbyists go to Congress and beg for bigger and continuing subsidies and more and more preferential tax treatment). That’s private enterprise?
After all, it’s their investment, not ours. How did we get into this act? Why must we pay if someone else’s investment or trade goes sour? Check with your friendly congressperson, and while checking, ask him/her why we are subsidizing billionaires in such ventures and providing preferential tax treatment for their income derived from such efforts. Ask him/her when private enterprise is going to leave the welfare wagon and join the rest of us in engaging in the real world of private enterprise which involves repossession, foreclosure, bankruptcy and late night collection agents (and with no government bailouts to return our car or house). Ask him/her. . . Well, you get the idea.
We are being bullied by the rich and corporate class and are suffering lopsided treatment from our own government through the influence of that class. That is nothing new, but when you add our involuntary guaranty to the current outrages of wage inequality and tax and bankruptcy laws designed to reward the greedy, it is a bridge too far. Let’s end it. GERALD E


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