Gearheads Can Get Wall Street: Just Follow the Money
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NEW YORK
I never understood Wall Street. I could never figure out how people made money by changing it from one hand to another to make more money.
I am much more comfortable with the automobile industry. It is big, sprawling and sometimes clumsy, but I get it. I understand what car companies do and why they do it. Their end game is to put a buyer in a car or a truck, be it new or old, at a profit. I understand that. It's easy.
A Chevrolet or a Honda makes much more sense to me than a "credit default swap" or an "asset-backed security." I can drive a Chevrolet or Honda. I can park a Ford. I can wash, wax and polish all of them. But what can I do with a credit default swap?
Apparently, judging from the carnage on this city's Wall Street, the answer is "not much."
Credit default swaps and asset-back securities sound like fancy names for Ponzi schemes. Somebody makes a debt. Somebody holds that debt. The lender worries that the borrower might go belly-up. The amount owed has a securitized value. So the original lender sells some of the amount owed to a third party as a kind of insurance in case the original borrower stops paying.
If the original borrower experiences a "credit event" -- loses a job, suffers a heart attack and loses a business, gets a financially ruinous divorce or just bottom-line defaults -- the third party maybe gets a payout, the original lender maybe gets something, but all of the other people financially tethered to that funny money get drilled.
Before Wall Street ruptured a few weeks ago, it all seemed so distant, so foreign. I'm still more than a little bit in the dark on all of this, but I'm beginning to see the vague outlines of comprehension.
I start with what I think I know. General Motors, for example, makes the Chevrolet Malibu. The company spent hundreds of millions of dollars developing that car which, luckily for GM, consumers liked.
Where did GM get the money to develop the Malibu?
Presumably, some of it came from the company's continuing operations. Some of it came from profits, although that's difficult to understand, because GM hasn't been profitable for a while. Okay, so a lot of it came from Wall Street in the form of, well, what essentially are loans.
