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Hedge Funds and Banks: a S&M tryst and we're the voyeurs

by Upstate NY Thu Sep 25th, 2008 at 01:01:25 PM EST

I wanted to take a literary look at the "worldwide" financial mess, I'm crossposting this from DailyKos, where I expect nil reception.

The banks and the hedge funds got themselves in a symbiotic relationship as they passed around the credit default swaps. So, now, if the bailout doesn't happen, then the hedge funds don't get paid. If taxpayers are really generous to the banks, then the hedge funds get paid less because the derivatives come up to par. So, the hedge funds only win big if we pay the banks so very little for their mortgages, because then, a cheap mortgage makes for a more lucrative derivative.

When you look at this, you realize that the whole market is like a S&M relationship. When it hurts bad, that's when you get the most excited, and conversely, just as the dominatrix is in absolute complete control of the situation, that's when she loses interest. The hedge funds, pardon the analogy, have their hands on the bank's throat as orgasm is happening at the closest moment of asphyxiation, but if the worst were to occur, the hedge funds would lose their partner at the very height of the tantalizing act.

But what about us? How are we complicit in market sex? It's undeniable that Americans at least have bought a VERY expensive ticket to a show I'm not sure many of us are enjoying.

Last night I took out a dusty book from a shelf: I had to see if the Marxists could lend any insight on our economic crisis. Mr. Althusser did not disappoint. Reading Althusser, you realize that these crises and these bailouts are all too predictable.

First, those blaming either American political party are in the wrong.

Let's go back to 2000. Do not go back to 1999 when the modernization of financing was first imposed. In 2000, only 4 congressman voted against the Modernization Derivatives Act which took oversight away from the derivatives market. 2 Republicans, a Democrat, and Ron Paul. That's it. It was overwhelmingly approved by both parties.

Here's the link: http://www.govtrack.us/...

So, we can talk about no oversight on the lenders of mortgages in 1999, and I do blame Phil Gramm for that, or we can talk about penalties for avoiding redline districts approved in the CRA act of 1977 and maybe someone will blame Democrats for that, but let's be real now: both parties abdicated control over the real mess here: derivatives. Subprime and stated-income loans are minor losses comparatively.

Now, why are we the American people to blame? Because more or less, this is the way our capitalistic system works. You can regulate these highly abstract (I would argue metaphorical) investment/gambling vehicles all you want, but in the end, someone is going to do an end-round the system. You can't legislate a future you can't imagine. That, according to Althusser. What happened is all too predictable. Some would argue it is the very grain of the capitalistic system. Regulation of this beast only happens AFTER the fact. When our very own congresspeople are incapable of imagining the market destroying weapons, as Buffet has termed them, then that means the system itself rules over us. It's the nature of the beast.

So, my questions now which I already asked below:

Do you think the bailout will bring the derivatives up to par so that the bank's losses won't be so bad?

And, why doesn't Paulson just explain that the more we taxpayers buy, the less the banks will have to pay, exponentially less? In other words, for every dollar's worth we buy, the bank saves 10x that much in potential payouts.

Are we too stupid to understand it?

Or is it just embarrassing for the movers and shakers of Wall Street?

Maybe: BOTH.

Regardless, we have to do this.


Because we live in a capitalist system. Derivatives are what gave comfort to those who invested in America from overseas (and ironically, laughably, it was the derivatives that took a chunk out of their investment, the very vehicle intended to secure their loans instead wiped out their value, ha!)

Capitalism in Althusser's view: The rich take from us. We the proletariat take from them.

The next president will need to be creative in figuring out how to tax the rich and get our money back, the next president will need to adopt Marxist ideology to do this (the proletariat seizing from the rich what the rich seized earlier), maybe we'll tax all exotic investment vehicles at a much higher rate (99% on credit default swaps would be fine with me), because I know this: we will never be able to regulate the banks. That's just not the nature of capitalism, a system that by its very nature "reproduces the conditions of reproduction" (Althusser) before it produces anything at all. Think about that, think about abstract instruments such as derivatives, and then realize that our system relies on a mutually agreed upon ideology that has no anchor in the real world. An ideology of cash flow and means to ride that flow: value on liquidity, not on the cash itself, but the movement on cash. Abstract value. These derivatives and investment vehicles can endlessly proliferate, and they have. $455 trillion worth of derivatives contracts are out there right now. They have no real basis other than someone's neurotic constant hedging of bets.

The main question now is what to do: I'm inclined to do whatever it takes to bring the swaps up to par so that the hedge funds don't get paid at ALL. Let's see how disincentive for the manipulators may reduce the need for future bailouts, future crises which are ALWAYS going to be happen, bailouts therefore needed to keep our capitalist system afloat. If we want a capitalist system, that is.

There is nothing wrong with capitalism, it's the whole financial system of casino capitalism that's at fault, as rdf explained

This is not real wealth creation as we understand it in the real world. It posits an entire hyperspace of fantasy money, the pyramid balanced on its point where the only interction with our daily life is with the money we deposit; all other sums only exist in theory.

so increasingly the bandits trade in the fantasy money and award themselves credit in the giant casino of Second Life. Last year the city of london alone traded something like £300 trillion, which is an awful lot more than the net commodity worth of the entire planet. Yet somehow nobody asks if this makes any sense. Yet somehow they seek to persuade us that this is real money and they deserve to take our deoposits and reward themselves with them. and so long as the wheel keeps turning they can continue until suddenly there wasn't enough mney left in the real economy to justify what they were doing and bang, it all decouples and we realise the money was never there in the first place, it was all in their imagination.

We have woken up from the capitalist dream and have created a very real nightmare.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Sun Sep 28th, 2008 at 09:33:10 AM EST
And, why doesn't Paulson just explain that the more we taxpayers buy, the less the banks will have to pay, exponentially less? In other words, for every dollar's worth we buy, the bank saves 10x that much in potential payouts.

Why won't Paulson just explain...?  A clue: per Bruce McF's diary, Solvency Crisis, the real problem is insolvency due to massive declines in the real estate assets underlying the entire financial structure, exacerbated by derivative bets leveraged at up to 30 to 1.  But the Fed only speaks in terms of "liquidity."  Afraid they will spook the troops?  Read his diary.

Then there is the awkward sense that the only people in the world more despised by the average taxpayer at the moment than are investment bankers are hedge fund operators.  Suggesting that we should bail out investment bankers so that hedge fund operators don't blow up is a political non starter.  It is much more likely that Congress would pass a law putting derivative contracts in the same position as that occupied by the contract between a prostitute and a john in most bible belt states.

Uh, has anyone analyzed that option?  If Cox can ban shorts until October 2....talk about bondage and degradation! (And who could have come up with these terms and names!?)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 28th, 2008 at 04:18:12 PM EST
I have another theory: by not explaining the relationship between the Hedge Funds and the Bankers, the power structure tamps down voter rebellion.

Effectively, you have average Americans right now blaming irresponsible mortgage agents and the borrowers themselves, especially poor blacks who took out loans they couldn't pay.

The onus for failure is turned back onto the taxpayer.

by Upstate NY on Mon Sep 29th, 2008 at 02:22:58 AM EST
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