It was October 19, 1987 and we had already had a 20% decline from the highs in the 2700 range and started the day at 2247. The Dow Jones Industrials had fallen almost 4% on the previous Wednesday, and over 4% the previous Friday. I had actually seen a decline coming and had purchase put options, a way to profit on declines, a few weeks before. I was so proud of my brilliance (I was a early thirties-year old idiot know-it-all) and sold my puts late that Friday, the 16th, having tripled my money. I believed in leaving some money for "the next guy". Besides, this had to be the bottom...right?
Wrong. I made $6,000 from that trade. had I sold them late on the 19th or early on the 20th, I would have made $150,000 from that $3,000 "investment." This is a good place to note that, while I didn't lose any major money during these times, neither did I make any. I gave my profits back in other dumb ways which are too embarrassing to mention here. What it DID teach me is that playing with the big elephants is a good way to get trampled and I also learned that our financial system is being played, by some, as a big lottery.
I digress.
I am so glad I am no longer in that business. It was interesting to see that the latest "game" had the same kind of effect as the last one. The previous game was called "program trading" or also "index arbitrage." If you want to know more about THAT game, clicky on the links.
This latest game was known as "mortgage backed securities." This one was started by Congress who live by the old adage from our friend Msr. De Toqueville
The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.
In this case, Congress was giving incentives, and later punishing those who didn't "participate", for banks to lend money to people who were bad credit risks. Now, this goes on all the time in our world today. How many times have we seen floods of credit card solicitations come in for our high school or college aged children. They have no visible means of support and yet banks are falling over themselves to lend them money...at 19%. At that rate, you can absorb a fairly healthy default rate. BTW, I would keep my eye on this rate as the next several months go by...this is our next area of weakness. Again, I digress...
So eventually, we hit a rough spot for many cities in the economy and these bad credit risks lived up to their reputation. Now, the piper must be paid, but the taxpayer is the one with the bill.
Who do we blame? First and foremost, it's CONGRESS. They passed the bills that made this kind of lending not only attractive and possible, but in some cases, almost mandatory. Getting little notice is that organizations like ACORN, the Obama campaign-linked organization getting press for the accusations in 13 states of voter fraud, has it's tracks in the sub-prime mess as well. ACORN would often tell large banking institutions that wanted to merge within the city limits of major US urban areas that they would have the deals held up in court unless they agreed to do more lending in red-lined urban areas; areas that had been avoided by banks because of the bad credit risks of the inhabitants of those areas.
Don't expect any of this to become widely public until after the election.
The sad thing about this whole mess is that the voters seem about to give more power to the people who caused this whole mess: the Barney Franks and Chris Dodds of Congress...and a former ACORN lawyer, former "community activist"...named Barack Obama.
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