How to Tell When Finance is Doing a Very Bad Thing

When the Wall Street Journal Describes Finance With Cartoons, it Means that Someone will Get Boned, and it ain't the "Bankers, Lawyers, and Other Advisers."

When the Wall Street Journal talks about a new financial wonder weapon, like the resecuritization of real-estate mortgage investment conduits (re-remics), and they feel the need to use a cartoon to explain how it works.

Does that cartoon look complex to you? There are a couple of reasons for this:

1. The bankers, lawyers, and other advisers are picking your pocket.
2. In a perverse way, needless complexity is good for business, because it makes people feel like they are paying for meaningful services.
3. It justifies the enormous fees collected by Wall Street, not just for brokerages, but also for the now discredited ratings agencies..

But the bottom line is this:

The net result is financial firms' books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.

(emphasis mine)

This business will get out of control. It will get out of control and we'll be lucky to live through it.

It's time to cue Freddie Dalton Thompson from The Hunt for Red October.

So, you have the same amount of risk, but by slicing and dicing securities into new "pools" (a year ago the word was "tranches", but well, we know how that went.

This is not about managing risk, or understanding risk. This is about concealing risk from the unsophisticated investor and unsophisticated regulators.

This is a perfect example of why investments should be treated like drugs: Forbidden until proven safe and effective.

Financial innovation, my ass.