Monday, October 13, 2008

Sequels and the current financial crisis.

We seem to be living in a world that does not know when to call it quits. For instance, if a good movie is created it has to have its sequels. Exorcist was quickly followed by Exorcist II and so on till the whole world knew about the entire family tree of exorcists. Chicken soup for the (generic) soul got succeeded by a spasm of chicken soups for every species of soul extant in the universe. So you had one for the Pet Lover's soul, father and son soul, adopted soul,mother's soul, preteen soul,ocean lover's soul etc.- Irreverently speaking, there is one for every a$$hole (no offence meant.. just could not resist this diabolical urge to use the pun) And what if a pre teen mother loves visiting acquariums and keeps a rabbit? She has to read like four books now!

This "keep a good thing going" spirit has infiltrated almost every walk of life. That was how most of these sagas were born be it in the comics (Mickey Mouse etc.), children's books (Harry Potter etc.) or even good old Jeeves of Mr. P G Wodehouse. What makes this complex is the fact that each saga branched out into a million other "child" sagas. Look for instance at every good tv sitcom. There are follow up sitcoms by the various people who acted in the original sitcom. Cheers and Fraser for instance.

The sequels originate because of many reasons in my opinion:

  • The original author deems that the last word has not been said on a particular topic.

  • The author thinks that he should get specialized to attend to the needs of a particular sub topic in more detail. Ex: The Chicken soup series.

  • Plagiarizers want to ride the wave of the original topic's popularity

  • Others just want to milk the cow dry!



Anyways, what has all this to do with the current financial crisis? In my opinion, this trend of spawning sequels got extended recklessly into the financial domain,thereby proliferating a slew of products. Consider the situation for yourself. The US was having the biggest boom in the housing industry due to favorable interest rates coupled with escalating house costs due to the disparity between supply and demand. The direct beneficiaries of this unprecedented demand, besides the housing industry itself, were the mortgage banks.

But there mushroomed multiple markets that got set up to milk this "housing cow dry". The good ole housing loan got repackaged with exotic, tongue twisting gobbeldygook such as "High Grade Structured Credit Enhanced Leverage Fund", CDOs (Collateral Debt Obligations), Structured Investment Vehicles etc. which were sold to people all over the world. Not only that, these products were insured by other products such as Credit Default Swaps. Are you impressed by all this knowledge from me?? Dont be.. Just read this rather enlightening article.

At some point in time, the products were so far removed from the housing industry that people did not even realize that a part of their portfolio was dependent on the home prices in America. For instance, if you bought AIG shares, would you have thought that your fate depended on the prices of American homes? So, when the housing bubble finally burst, people felt like the carpet was dragged from under their feet!

To me, this incident smacks of excess greed. But the laugh is on me since I have also inadvertently allowed myself to get embroiled in this quagmire. Let us hope that the spaghetti would wind itself back to the spindle!

PS: You should check this rather hilarious video that talks about exactly what i talked about.

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