Birth of a Financial Engineer: Who Creates Weapons of Financial Destruction?

[Joanne98]

While we are shaking in our boots over yet to happen attacks from foreigners, the current incarnation of weapons of financial destruction is doing real damage right now. Factories are downsizing or shutting down. Chain stores are seeking bankruptcy protection or going the way of the dinosaur. State governments are furloughing employees, going to four-day workweeks and many mainline banks and brokerages no longer exist. Pension plans, 401(k) plans, foundations and not-for-profit charities have lost billions.

Many assistance agencies are overloaded; some no longer exist because the financial crash wiped out the endowments, which funded them.

Everyone is scratching their heads, trying to find out what happened. Some blame “people who bought more house than they could afford.” Others say “sub-prime” con artists milked the system. And, still others blame “crooked real estate agents and unscrupulous mortgage brokers.”

While many experts say these exotic investment “instruments” are at the center of many of our economic woes, to many of us, they may well be speaking a foreign language. Some of these financial products are so complicated that even master investor, Warren Buffet, calls them weapons of financial destruction, based on both, their complex abstract nature and their potential to wreak havoc in the investment sector.

The hedge fund nightmare, fueled by arcane and exotic financial instruments, is unregulated and hosted mostly by foreign, “off shore” financial entities that are beyond the regulatory reach of what little regulation exists. A 2006 article in LeMonde notes that

There are now at least 10,000 hedge funds, of which 8,000 are registered in the Cayman Islands. However, the 400 funds with $1bn or more under management do 80% of the business. They cannot be regulated. They have over $1.5 trillion in assets and the daily global derivatives turnover is almost $6 trillion (equal to half US gross domestic product). With the economic climate euphoric over the past five years, most funds have won, although some have lost. In the year ending this August, nearly 1,900 were created and 575 were liquidated. Standard & Poor would like to rank their credit-worthiness, but has yet to do so: bigger funds claim to use computer models to make trades, and three of the 10 biggest claim they make purely quantitative decisions. Click here.

With some of these exotic derivatives, computer models generate the only valuation that exists. No “real world” value exists, because, these products are valued on the fly, and some haven’t been valued, even though they are part of “credit default swaps” which have been bundled and sold worldwide.

http://www.opednews.com/articles/The-Birth-of-a-Financial-E-by-M-Davis-090211-944.html

:scared:

[Double T]

1. Nothing has changed. The same wall street and corporate criminals that have destroyed our economy

and financial system are still in charge with corrupt business practices, hedge funds and leveraging as usual. No one in Congress or the WH is REALLY willing to go after these criminals. Economic Recovery???? YOU have got to be kidding!!!!

[bemildred]

2. Bullshit artists are nothing new, P. T. Barnum said it long ago.

"There as sucker born every minute." I remember a quote from a Lehman Brothers (remember them?) bond operation person back in the 80s, speaking about "investors": "They come up like the grass, and we mow them."