University of Sydney

Hedge Funds, LBOs and Banksters, oh my!

The other day many of us were exposed to a BBC interview where a business reporter kept repeating the tired old mantra that hedge funds had no involvement with the global economic meltdown.

Oh really?

Then surely, given the opaque nature of these private investment concerns, there would be no surprises forthcoming if they were to be intensively audited by forensic accounting teams together with certified fraud examiners?

And while we're at it, might not the same auditing processes yield interesting results if also directed at those private equity leveraged buyout funds (LBOs) and the major credit derivatives dealers, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Citigroup and Bank of America (with Credit Suisse FB, UBS and Deutsche Bank in the mix as well)?

Awhile back, Dr. John L. Goldberg of the University of Sydney, was brought in by the Australian government as a consultant to research the financing behind a number of public-private partnerships concerning Australian toll roads and infrastructure projects.

Now public-private partnerships, where securitizations with the subsequent generation of credit derivatives occur, incorporate the same underlying fundamental financial model as hedge funds, private equity firm LBOs and credit derivatives dealing by major ("too big to fail") banks.

Dr. Goldberg's three principal points, taken from one of his executive summaries, were as follows:

"Paying equity dividends with virtually no cash flow available (CCT)"

A Brief History of Securitization

Or....

Shadow Bankers Gone Wild

 

 

Preamble

Recently the New York Times published yet another article expressing surprise at the previous existence of securitized financial instruments prior to the last several decades. Securitized financial instruments, or actually securitization, has been around for at least several centuries, and whenever it becomes widely used a Great Depression, or economic meltdown, ensues.

This is the foundation for that bandied about term, “shadow banking.” Without securitization, there would be no such capability. With securitization, the process for creating debt-financed billionaires and multi-millionaires reaches critical mass.

Unfortunately, so to does the dramatic increase in unemployment and poverty.

Those so-called “experts” or “pundits” who continue misleading the populace with extravagant claims as to the recent origins of the securitization process have done a major disservice to society. This brief blog will attempt to rectify this situation.