Thursday, March 11, 2010

Cash Money Manufactured Into Toxic Assets


Yesterday I talked about the credit rating agencies (CRAs), and I said probably 99.999% of the population does not understand the significance of the role they play in the world of investment securities. Today, I want to talk about cash. Cash like in cash money, demand deposits, money in your checking or savings account or under your mattress or in a safety deposit box or a safe in your home. Yes, that kind of cash, Federal Reserve Notes. Some may have a stash of gold coins like James Bond, but for most of us those Federal Reserve Notes will do.

From time to time, Wall Street runs short of cash, and then we all feel it. What happens? Let us start with the idea that Wall Street makes nothing. This is not true, Wall Street can through a very simple manufacturing process turn cash into trash, or as I have referred to it in the past as a bag of shit. Yes, Wall Street can take money (cash) from mutual funds, pension funds, endowments, foundations, IRAs, 401-Ks and every other form of investment fund and turn it into what we now refer to as TOXIC ASSETS. What is a toxic asset? A toxic asset is an investment security that has no marketability. A bond market meltdown is when no bond trader will give you a bid for your bonds. When you have several bond traders not willing to give bids for a class of bonds, for example the billions of dollars in mortgage-backed bonds, we have a bond market meltdown.

Right now Toyota is having a problem with the accelerators and brakes on its new cars. This kind of problem is easy to understand and sometimes see. Run away cars make good news for TV and so anyone who has seen TV in the last few days knows that Toyota is having problems in manufacturing safe cars.

Wall Street manufactures unsafe vehicles too. But these vehicles are not easily seen or understood. One of the parts that the Wall Street underwriters out source in the manufacture of their investment vehicles is the credit rating. When the credit rating is slapped on these investment vehicles without being tested, they cause the investment vehicle to freeze up and become toxic. That is how Wall Street manufactures toxic assets, and 99.999% of the population does not understand that, and the Congress is too stupid to understand it either.

Toyota should get into the business of underwriting investment vehicles because when they freeze up and become toxic, there are no good videos to run on the evening news. Quite simply, what people can't see on TV, they don't understand, and so we are going to be in for more cash strapped Wall Street firms and toxic assets in the future.

Stay tuned.

1 comment:

Robert said...

Turning cash into trash is a great term. Another thought is that bond holders can turn into bag holders. Left holding the bag.