Update: Stock Market Tanking? Don't Blame Regulators!

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The Untold Story of our Financial Mess -- Hedge Funds

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Stocks, bonds, derivatives, marginal trading, hedge funds.

Personally, I've just about had it!

It is a given that the stock market and investment banking, when mentioned and discussed, causes many people's eyes to glaze over, their faces acquiring a blank, clueless stare.

However, there is one thing everyone assumes about money. In the hands of experts and professionals, if one acts on their advice, miracles are often promised and expected.

The savings and loan scandal and resultant bailout of the 1980s cost American tax payers billions of dollars, with regulation, or lack there of, of the industry playing a role in its collapse.

During this time period, the actions of the so called Keating Five came under scrutiny, with their role in the S&L (Saving and Loan) scandal costing taxpayers over $2,000,000,000.00 (2 billion dollars).  

A chronology of events during the S&L crisis, offered by the Federal Deposit Insurance Corporation (FDIC), can be found here.

Let's take a look at the last market item mentioned in the first sentence of this article, hedge funds, by the way, whose investors were bailed out by the Federal Reserve in 1998.

Over two years ago, while watching one of those shows meant to educate its viewers on financial matters, I listened to one of the guests, offering his knowledge on hedge funds.

Beginning by providing a list of caveats, saying the rules governing the hedge fund vary from fund to fund, etc., with almost all requiring millions to get in on one of these funds, he gave a chilling example that if most components in his representation are true, it's no mystery why the economy is where it is, especially if there is/are similarly loose handling of finances practiced on all levels of the economy.

His example used as it's base a number of investors coming together to form the hedge fund, let's say four individuals.

For this example, each investor is required to ante up $4,000,000.00 (4 million dollars). With four investors investing $4,000,000.00 (4 million dollars) each, a total of $16,000,000.00 (16 million dollars) exists in the fund.

As each investor's portfolio is shopped around to be used as collateral for investment, each investor gets to claim the entire pot of investment cash, that is $16,000,000.00 (16 million dollars).

Now, wait a minute. There is only $16,000,000.00 in the fund but, each investor's portfolio is represented as being worth $16,000,000.00.

Let's see. Okay. With each investor's portion of the fund represented by the entire fund, that's 4 times $16,000,000.00 (16 million dollars), that's $64,000,000.00 (64 million dollars).

Now, minus the REAL money in the fund, $16,000,000.00, that means there is $48,000,000.00 (48 million dollars) in imaginary money that's floating out there on paper, without any true value other than on paper on some stock guy's ledger sheet, with that imaginary money being used as a form of collateral for use in buying and selling stocks and bonds, as well as foreign currencies, precious metals, commodities and derivatives and who knows what all else being traded on the market.

I don't need to hear any financier, investment banker gobbledygook attempt to schmooze me and show me how this is a legitimate practice.

From Financialpolicy.org:

There are an estimated 5,800 hedge funds worldwide, most of which are operated out of the U.S. even though they are often registered off-shore to avoid taxation, with $311 billion in capital.

There's something really wrong with this picture and it doesn't take any type of degree to understand this practice is fraudulent.

But wait, it's only fraud if the folks who make the rules say it's fraud, right?

Besides, the mortgage crisis? That's being blamed for this latest crisis? This is being touted by many as the fault of those American citizens seeking America's most common variable in the American Dream, purchasing their own home.

It was not bad decision making on the part of Americans seeking a home, if, after researching all they could, they approach a lender and that lender deceives the potential home owner into a shady deal.

At some point, as a consumer, one must rely on the individual or institution that is recognized to be the so called expert or, in this case, at least more knowledgeable than the prospective homeowner.

So, let's not look at the rules regulating the stock market or banking industry for any responsibility for this 'economic downturn'.

We need not look at the elements of the lending institution that were not transparent, fraudulently representing themselves to unsuspecting home seekers, causing millions to lose all the monies they had, having invested in their chunk of the American Dream.

By all means, blame the average citizen.

UPDATE: 

A link to a series of videos, airing September 21, 2008, with guests discussing with pundits a bailout guesstimated at being between $700,000,000,000.00 (700 billion dollars), going into the trillions. (That's a number followed by 12 zeros.)

Democrats and Republicans have voiced reservations and reluctance to sign off on the proposed plan, each party having distinct concerns with the plan.    

Those in President Bush's administration, responsible for recommending the bailout, are insisting there is no time, saying those details can be worked out later. However, it is reported they are working to come to terms on an agreement on particulars.

Both candidates of the Democratic and Republican parties, seeking the office of the President of the United States, are calling for an accounting of plans before handing over any bailout money.

Also at NowPublic:  

Text of Secretary of the Treasury's Bailout Plan

The Other Face of Foreclosure

The Paulson Bailout IS a Stick Up!