Turning Point by John Francis Kinsella

  Part of the problem went back to 2004, when a decision was taken to change the rules fixed by central banks relating to obligatory banking reserves, designed to help them weather cash crises, and debt limitations. When debt ceilings and capital reserve restrictions were lifted, banks were allowed to fix their own risk limitations based on their own calculations. This freed huge sums of money which were used to invest in complex mortgage-backed securities and derivatives. These included CDOs, financial instruments invented by Michael Milken’s Drexel Burnham Lambert in the late eighties, a system of bundling asset backed securities into tranches.

  As time passed these securities evolved, becoming more and more complex and were attributed a triple A rating by rating agencies such as Moody’s or Standard and Poor’s. They were bought by institutional and other investors, including Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, AIG, General Motors, high street banks and mortgage companies in the UK, not forgetting municipalities and of course pension funds.

  Financial specialists placed the blame on the models developed by ‘quants’; highly qualified mathematicians employed by investment banks. These seriously flawed models, invented on Wall Street, were based on abstract notions of market concepts transformed into complex mathematical algorithms, led millions of small investors, savers and homebuyers, who knew nothing of banking’s complex but worthless calculations, to disaster.

  Never had Albert Einstein words, technological progress is like an axe in the hands of a pathological criminal, been so true.

  The staggering extent of the threat finally became public when Barclays Bank announced it assets and liabilities had each reached the mind numbing sum of two trillion pounds, an unimaginable quantity of money. By what miracle could one single British bank have accumulated such an astounding wealth of assets? It was impossible to believe that the assets of Barclays Bank were worth more than the total value of all the goods and services produced by entire British economy in one year.

  Barclays was not alone however, there were other questionable giants, amongst them the French BNP Paribas and the Spanish Banco Santander. All of a sudden everybody was counting in trillions. But behind the glowing talk of incredible wealth, economists were beginning to question the real worth of certain securities.

  The world’s financial institutions were electronically locked together in a globalized system of trade and exchange. What happened in Tokyo instantly affected New York and what happened in Sydney was instantly felt in London. So it was when the news Swiss banks, USB and Credit Swiss, announced losses of eleven billion dollars and five billion dollars respectively hit the markets. Never in the history of international banking had so much money been lost on such as scale by so many banks in so many different countries and so quickly.

  Hedge Funds