Title: Boomerang
Rating: 5 Stars
Back around 2010 or 2011, I was a bit obsessed with the 2008 financial meltdown. Even now, when I think about it, it leaves me amazed.
It baffles my mind that the most highly educated people from elite institutions firmly ensconced in positions of power and influence and making gushing, cascading sums of money, could be so bad at their jobs. In fact, they could be so bad at their jobs that the world’s economy came dangerously close to collapsing. I’m not talking a ten percent stock market correction. I’m talking getting us back pretty close to bartering with goats in the town square.
I won’t go into a lot of detail. Just know that there were instruments called Collateralized Debt Obligations (CDO) that were (simplifying here) a collection of home mortgage loans. These were considered to be super safe because Americans have a good history of paying this type of loan off. The ratings agencies pretty much gave them an automatic AAA rating.
If you wanted to be even safer, you could buy insurance on them called Credit Default Swaps (CDS) that would compensate you in the unlikely event that the CDO failed.
All well and good. However, CDOs became so popular that there arose a huge demand for mortgage loans. The legitimate home owners already had their mortgages, so the mortgage brokers went out scouting potential customers that had no chance of ever paying off their loans. The brokers didn’t care because as soon as the loan was made, they just immediately resold it anyway. Not their problem.
These now very questionable loans were bulk loaded into CDOs and got the same AAA credit rating (after all, Americans always pay off their mortgages). CDSs were still in use but nearly all of them were being issued by one insurance company, AIG. If a system failure ever occurred, there was no way that AIG would ever be able to pay off them off.
All of this loan activity drove the housing prices higher and higher, resulting in even more loans that were never going to be repaid.
Ultimately, a slight wind came along and blew down the whole house of cards. Major financial institutions holding AAA rated funds now had no idea what value to assign to them. They had insurance policies from which they would never be able to collect. These Masters of the Universe that thought they had eliminated risk had only managed to obscure it from themselves,
The story doesn’t end there. These practices that were ‘perfected’ in America spread like a deadly virus to other countries. Boomerang is the story of some of these countries.
Lewis starts with Iceland. For a thousand years, its economy was based on fishing. Fishing in the waters off of Iceland required hard work, decisiveness, camaraderie, and fearlessness.
The Icelandic government fairly recently made university free for its citizens. Now, these highly educated people didn’t want to fish anymore. They decided to, um, get into high finance. Using the same attributes that were effective for fishing, they aggressively began to buy and sell real estate amongst themselves and then taking those profits to start almost randomly buying investments in Europe. As economic history dictates, this caused an extreme bubble in asset prices. All bubbles must burst and all of their banks were ruined. From the wreckage of this economic hangover, people finally started asking whether or not a nation of a couple of hundred thousand fishermen should really be leading international finance.
It then moves onto Greece. Greece needed to get to the stability of the Euro, so did all kinds of machinations (ie lies) to meet the Eurozone requirements. Entire governmental debts were simply ignored. Greece had taxes and tax collectors. It’s that Greeks don’t particularly like paying taxes, so they didn’t. Here, interestingly enough, the bankers aren’t the villains. They were trying to legitimately do the right thing but the entire system was corrupt. Once all of this came to life, it appeared that Greece would be the first Euro nation to default its debts. Severe austerity measures were placed on Greece to secure loan relief. The Greeks responded to their crisis of accountability by rioting.
Next up is Ireland. Now we’re back to bankers behaving badly. Bankers worked with property developers to develop housing and office spaces that completely exceeded the requirements of the entire population of Ireland (4.8 million). As usual, things were fine as money continued to roll in from all over the world and property values skyrocketed. That is, until the prices stopped skyrocketing. At that point, the three main Irish banks had some 100 billion Euros in bonds that they couldn’t pay. Instead of letting the banks fail and the bond holders lose their money (which after all, is the risk when you buy a bond), inexplicably the Irish government stepped in and guaranteed them. That is, 100 billion Euro in bonds primarily held by non Irish bondholders now have to be paid back by the 4.8 million Irish.
Finally there is Germany. Throughout all of this, Germany was looking down its nose at those profligate nations and their spendthrift ways. Why can’t they follow the Teutonic model? While it’s true that within Germany they actually did act with financial restraint, what they don’t mention is that it was German banks that was funding a good chunk of the crazy ideas of those other countries. While very sober within its borders, they spent money like a drunken sailor on leave in other countries. The knowingly losing investment bets that Goldman Sachs artificially created for its ‘special’ customers were sold to Germans. In the final days of the CDO action in America, they could only be sold to “Idiots in Dusseldorf”. They were so desperately seeking high returns that they didn’t do anywhere near the necessary due diligence for their investments.
It’s important for me to dip back and to occasionally read a history from that time. Whenever you see some smooth-talking self-confident condescending piece of shit banker like Jamie Dimon, just keep in mind that he and his ilk quite literally almost broke the world and yet hear they are, over ten years later, still thinking that they are infallible Masters of the Universe.
Fuck them.
dorkenstein 