Thursday, April 29, 2010

Nothing Sells Like Nothing

...a product of pure intellectual masturbation, the type of thing which you invent telling yourself: Well, what if we have created a thing which has no purpose, which is absolutely conceptual and highly theoretical and which no one knows how to price?”--Fabrice Tourre of Goldman Sachs on the ABACUS synthetic collateralized debt obligation offering that he structured for the firm, as quoted in the NY Times
Before capitalism came along economics was mainly conquest. You ravaged and savaged other people, enslaved the survivors, stole their stuff, and lived off the proceeds. As Casper Gutman, seeker of the Maltese Falcon, pointed out, "the Holy Wars were largely a matter of loot."
The notion that you could create wealth by hanging up the pike and making useful items for sale began to catch on in the middle ages. Soon people were creating even more wealth by hiring others to make even more stuff to sell.
There were certain expenses involved that we nowadays call capital--hence the term capitalism. You had to pay for the raw materials, the tools, wages for the workers, etc. Obviously, you could become richer by keeping these expenses as low possible while selling your goods for as much as possible.
The ideal would be a product that cost nothing to make and whose main purpose was to profit its sellers. An impossible dream, you say. For eons human society had been based on tangibles (i.e, a pepperoni pizza) and services (i.e., a delivery boy). How could business escape that straight jacket of substance? How could it achieve maximum productivity and profitability by making nothing out of nothing? That was the ultimate challenge.
It took a son of Gaul who chose America to meet that challenge--something we can all be proud of.
So what is that perfectly nebulous product?
It’s the Synthetic Collateralized Debt Obligation or SCDO. It allows underlying credit exposure to be taken on using a credit default swap rather than by having a vehicle buy assets such as bonds.
Who wouldn’t want to own one of those--especially the kids? Hey, Mother’s Day is coming? I know moms are finicky. What if you gave her one and she said she wanted a flower pot instead? No problemo. You could short her ABACUS SCDO. You know, that’s when you sell stuff you don’t own.
A couple of decades back when it became apparent that we were switching from an economy that made tangible items to one based on services, pundits warned that Americans would end up washing each others' cars for a living. Wall Street has since advised us that that was wishful thinking.