The Ant, the Grasshopper, and the Subprime Securities
by Bill Walker
by Bill Walker
An ant laboriously tunneled into MIT and carried around calculus books of 100 times her own body weight, earning an IT degree and an MBA. Then she secured a business loan and worked on her startup corporation 16 hours a day, 24/7, all summer long. Her company made software that cured cancer, wiped out computer viruses, and walked your dog, all for $39.95 with free updates.
A grasshopper was blown into Florida State by a hurricane, and majored in UV Absorption and Socializingology, drinking and singing with the other grasshoppers. Eventually he was dragged off the beach and forcibly graduated with a degree in Orthoptera Studies. He spent the summer at a cushy job in an air-conditioned office in a large bank and spent every evening singing in karaoke bars. Once a week he would take a pile of nonperforming mortgages, chop them up into tranches, and mark half of the tranches "AAA" while chirping cheerily. Then he would sell them to the other insects at high prices.
The ant was putting together the 401(k) options for her ant employees' retirement accounts when she noticed the grasshopper's subprime offerings hiding among real bonds in bond funds, banks, brokerages, and as prizes in cereal boxes. The ant carefully avoided buying any subprime debt, "AAA" or not. The ant and her employees put all their savings into bonds and stocks from companies that made good products that other insects really wanted.
When winter came, the subprime tranches that the grasshopper had sold all withered away and turned to dust, even the ones he had marked "AAA." The grasshopper's bank, the banks that had bought securities from them, and the Carlyle Group's hedge fund all had empty larders… actually more than empty, because they owed more than they had.
So the Federal Reserve printed up hundreds of billions of dollars and Treasury bonds and gave them to the grasshopper in exchange for the dried-up dust of the subprime securities, because the grasshopper's bank was "too big to fail." The grasshopper was also allowed to borrow from the Fed at a special cheap rate that no one else could get, "to give him liquidity." The grasshopper went on to his next scheme, which was to securitize tranches of nonperforming time-payment agreements for large-screen TVs (these were called "subprimetime securities"). The grasshopper became wealthier and wealthier, and his offshore corporate shells lived happily ever after in the Cayman Islands.
The ant and all her employees went bankrupt because their customers couldn't afford to buy software or CAM machines when gasoline cost ten dollars a gallon. The ant couldn't get a loan to start another company because of the credit crunch created by the grasshopper. The ant retirement accounts were so reduced in value from inflation that they could never retire, and the ants spent their last years working as the grasshopper's servants with no medical insurance.
The grasshopper looked down from his office tower at the scurrying ants carrying heavy burdens far below. Then the grasshopper knew:
"It is best to be the one who prints the money, not the one who works."
March 22, 2008
Bill Walker [send him mail] works in HIV and gene therapy research in Rochester, Minnesota.
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