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Damned derivatives


Harry Russell

Damned derivatives

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THAT WAS THE GENESIS of the problem; the alpha without an omega (yet).
It all started with toxic mortgages. Some greedy people began giving what were called NINJA mortgages to people who obviously did not qualify, what we call in Barbados “walk-away mortgages” like those being offered now.
These came from mortgage shops that sprang up all over America. They united with Fanny Mae and Freddie Mac mortgages. Then when their funds were near exhaustion they approached the banks and investment houses to buy these mortgage portfolios and succeeded.
The investment houses in particular had men and women with sticky fingers so they divided the mortgages into parts called derivatives. Thus a mortgage consisted of a first tranche, second tranche and third tranche. The interest paid to people and institutions that bought the first tranche was the finest interest because in the event of sale of the underlying property some money would be retrieved, but those who bought the third tranche were promised the highest interest. Having the highest interest also meant the highest risk (just like CLICO). When foreclosure came to these NINJA mortgages, most times those who bought the third tranche lost money since the underlying sale was insufficient to pay them.
Investment companies and banks did not sell all of the derivative mortgages and therefore were in trouble when the pack of cards came tumbling down.
That was not the end of the story. American International Group (AIG) and Merrill Lynch, two companies given triple-X status by the famous rating agencies, failed and the house of cards came tumbling down as credit from banks shrank, leaving an ocean-wide credit vacuum. Practitioners who took all the profit at the front end of projects instead of waiting until the projects run their course were mainly responsible for the credit vacuum.
The goings-on were not limited to the United States. In London, Paris, Tokyo and all over Europe, dealers were into derivatives and got rich. It was a passport to profitable business. When the bubble burst, the effects were felt all over the world, particularly in the Unitd States, Europe
and some parts of the Far East. Unfortunate Third World countries that sit at the divvies table also suffered.
In Greece, for example, where American Investments were heavy, the fallout was fatal and Greece was one of the first to fail. Central Banks and Governments were called upon to help banks and major companies that were facing bankruptcy. The countries themselves were in trouble and wanted help. People accustomed to retiring at 55 and the unemployed revolted, millionaires became paupers or billionaires and markets were and are on fire.
Interest rates for countries soared and as interest rates rose, social programmes declined and people lost jobs.
Citizens of Third World countries need to be wary of policies espoused by First World countries. The human-rights campaign being waged mostly by First World countries may involve actions that may conflict with the customs of Third World countries. An obvious example is the volume of tears shed for murders by certain countries that still practice executions. Yet these countries may be the first to condemn Caribbean countries, claiming that their laws are inconsistent with modern thinking.
 Harry Russell is a banker. Email: [email protected]

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