Tuesday, September 23, 2008

Financial Services Crisis Explained at My Poker Table

First off, if you want a good, solid explanation of what in the world is going on, go here and read this brilliant and relatively concise explanation. It has the statistics, the names of the legislators and the economic terms laid out in a readable article - unlike anything you would find in your newspaper or other the dead-tree media which, not coincidentally, are suffering through a different financial crisis.

But even that article is so mind-blowing that I need help in bringing it down to my own terms. I've never seen a trillion dollars, a billion dollars or even a million dollars. I don't really understand how, one day, the economy is trudging along with nothing more than the typical clouds on the horizon (Republican deficit, energy prices, stagnant Bush stock market) and then suddenly, with nothing changing in my world, we're talking about a trillion dollars for companies that don't even make anything. It's the metaphorical piano falling on a pedestrian. Where the heck did that come from, and why?

On the other hand, I do understand friendly nickel ante poker games, and, believe it or not, this whole thing can be put into those terms. Here goes:

It's a Friday evening, and I invite a few of my buddies over for nickel ante poker. It's the same old game as always - we all know and like each other, and at our stakes, we're looking at maybe winning or losing $10 or $20. Most importantly, though, this game is not taking place at a casino, with all their strict loss limits and regulations - my dining room table is like the financial services industry in a post-deregulation Republican administration.

Now, everything is going along great, but I start having a bad run. Next thing you know, I'm almost out of chips, and I start what looks like it will be my last hand with only a couple bucks left. Sure enough, I get dealt a great hand - a natural royal flush. Unbelievable! And there's no way I can stop betting on this hand with only a couple bucks in the pot. So, I look to my buddy Les, and say "float me". He knows me well enough to know I'm good for it, so he nods and I'm in for the rest of the hand. He doesn't need to actually put the chips in - the other players know he'll cover if I lose. I bet the limits, win the hand, and the game continues on.

What Les gave me was the equivalent of a credit default swap. They are like crack cocaine, crystal meth and Skittles rolled into one - an addictive jolt of energy that can destroy a poker game or an economy.

Now that the concept of "floating" has been introduced to the game, the game gets a little wilder. First off, why do we really need bet limits? In a normal game, we hold ourselves to quarter bets, with a limit of three raises, but that seems a little too tame now, so we agree that we can play no-limits.

Second, the "float" grows in popularity. I did it when I had a great hand, but Jim saw that it worked, and that doing the transaction actually enhanced my credibility. So, the next time he wants to bluff, he puts all his money in and asks me to float him another $10. I do it, the others fold, he wins, and his bluff never even gets discovered.

Here's where it starts getting crazy. Another guy gets a hand, smiles, and puts all his money in. Then he looks at me and asks me for a hundred dollar float. A hundred dollars is a lot of money to me, and my wife will kill me if I lose it, but I'm not going to leave my buddy hanging, so I nod. Then another guy raises him, and gets a float from Jim. Suddenly, there are hundreds of dollars being traded in floats around my little, unregulated, nickel ante poker table. The hundred become thousands quickly, since there's no real cap on money we're not really holding.

And we all know that we can't afford this nonsense. But we're all in over our heads at this point, and the first one to admit it will be ruining the game and exposing himself to be a fraud.

So we continue on. It's late. My wife comes in around midnight after a night with her friends and asks how I'm doing. "Umm, fine," I murmur, but I'm not really sure. It's tough to keep track of all the floats we've been using. Jim owes me $5,000, but I owe Les about the same. I honestly don't know who's backing Jim, but I'll be alright if Jim is able to pay, which I know depends on the ability to pay by the guy who is backing him . . .

Folks, in a nutshell, that is the crisis that is going on right now. The financial service industry has been giving each other floats, and it got crazy. Right now, those floats total to more than the GDP of the entire world! Nobody can pay up, and everybody knows that the game has to end sometime soon.

So now the American public is being asked to pony up. We weren't invited to the game. We sure as hell weren't going to be given a portion of the pot had the game continued. If the bill winds up being only a trillion dollars, that is $3,278 for your share. If you're married, your spouse is in for the same amount. If you have children, they're in for the same amount. Your old mother, trying to get by on a fixed income? Yeah, she is on the hook for the same amount, too.

Supposedly, this game is too big to simply break up, and let the players absorb their losses. Personally, I'm not convinced.

But, for Bush and Treasury Secretary Paulson, these are their friends playing the game. And that's no metaphor - the people who have done this are their actual friends - the people they yacht with and travel with and went to Yale with, and they've been asked by their friends to do a float. And they want to do it with your money.

Are you all in?

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8 Comments:

Blogger les said...

Nicely done, although thinking I know you're "good for it" may be a stretch. Add one thing--nobody can see all of their cards, and at the end of the night it's possible there's no winning hand in the deck.

9/23/2008 9:11 AM  
Blogger m.v. said...

If dailykos article even mentioned the word "democrat" maybe it could pretend to be brilliant and an explanation. But it doesn't (I searched the page) so it's just another one-sided attack piece. If you want to make a case against the bailout here is something that's concise and even-handed.

9/23/2008 9:20 AM  
Blogger Tony said...

Awesome find!!! I try to read Kos but sometimes it's hard to search for something of value amid the more partisan content.

9/23/2008 10:46 AM  
Anonymous Ex-Repub said...

MV - Republicans getting blamed for a republican scandal engineered by the republican economic advisor to the republican candidate.

Accountability's a bitch, isn't it?

9/23/2008 10:55 AM  
Blogger Bull E. Vard said...

Ex-repub,
How, exactly is this a Republican scandal? Isn't this a government scandal? Fannie and Freddie failing definitely had the government's hands all over it. LBJ, Carter, Cuomo, Alphonso Jackson and Bush all had policy gaffes involving Fannie and Freddie. This crisis can't be blamed on any one thing and efforts to do so can only be fruitless.

Let's take a step back from the blame game and figure out what the intertwined causes are and figure out what regulations need to be implemented and which ones need to be repealed.

Playing the blame game doesn't do a thing to solve the crisis and only makes you look like you're trying to make your favorite political club look good.

Be an American first and a partisan later (after you have some facts).

9/23/2008 4:15 PM  
Anonymous travel said...

Here's what I see. The taxpayer is being asked to bail out the big financial institutions and the people who worked for them who were making outlandish salaries and buying million dollar condos in Manhattan while ignoring the calamity they knew they were causing. Do I feel sorry for these guys I saw carrying their boxes out of Lehman? No I don't! The taxpayer is also being asked to bail out the homeowners who failed to pay their mortgages for a variety of reasons, many of which were simply to live an extravagant lifestyle they knew they couldn't afford. Do I feel sorry for them? No, I don't. And what about the unscrupulous lenders to these fools who I hope are all out looking for work, not finding it, and living under a bridge. Do I feel sorry for them? No I don't.

Thanks to all of the above, we have a mell of a hess on our hands and I, for one, am not willing to pony up to the bar this time. Let the chips fall where they may.

9/23/2008 4:45 PM  
Blogger m.v. said...

Ex-Repub- republicans are being blamed by democrats; I am sure you've heard that democrats are being blamed by republicans for exactly the same thing;either side doing that automatically loses credibility with me.for example the article linked by Dan should have said "all that happened while democrats were:a)playing dead, b)enjoying contributions from the industry,c)so busy, they couldn't even look up for the past 30 years,d)all of the above."that would have made the rest of the article more believable. and I agree about the "bitch".

9/23/2008 5:45 PM  
Blogger craig said...

If you take out the link to the Kooky KO's that was an awesome post Dan. Even with that stupid link, it was pretty damn good. I agree completely.

9/23/2008 11:15 PM  

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