Marilyn M. Barnewall
October 9, 2009
…And the toys in their sandboxes
Synthetic Financial Toys
a story about a man who plunged from an escalator at The Pier Shops at
Caesars in Atlantic City that raised my curiosity. He was the second man
to die on that same escalator.
As I read about his background, two words caught my eye: “Synthetic securitization.” Only a banker seeks out words like “synthetic securitization.” It is a process that provides an extremely complex structure so derivatives can be produced.
readers who have written and asked me what "derivatives" are,
synthetic securities – derivatives – are created by combining
one group of securities so they mimic the properties of other securities.
Sound confusing? That's why no one likes to explain what they are…
Derivatives are synthetic. "Synthetic" means artificial. It means unreal, non-genuine. "Synthetic" means a thing made in imitation of something that is natural. Breast implants are a good example of “synthetic.”
In addition to being an imitation rather than an original, derivative investments also allow product developers to create securities that do not actually exist. What did I just say? You read it correctly. Derivatives are imitations of a real investment… they mimic real securities but do not have to be real, and the security being mimicked doesn't have to exist. If that doesn't confuse you, nothing will.
What can be turned into derivatives? Life insurance, credit card debt -- any kind of debt can be turned into a derivative… home mortgages were used in the last go around.
Carbon credit derivatives could combine energy from windmills with that of electric cars to mimic the properties of – what? Clean air? Orange juice? Anything can be created to mimic anything so let your imagination run wild! Obviously, Wall Street does. And, the windmills in which you are investing don't even need to be built to be mimicked, packaged, and sold as derivatives. Such a deal! That’s why they are sometimes called “weapons of mass destruction.”
A sane person might ask why anyone would want to invest money in a financial product that is not real or genuine… something artificial, an investment that imitates something else. It's a very good question. It's the best question you could ask, in fact. The answer should be quite clear: No one.
Equally clear, however, is that a lot of people who consider themselves sane do invest in derivatives – or, synthetic securitized products. Why? In a synthetic world, synthetic products look and feel real. But the real world has a way of forcing truth upon us. We are living through an economic crisis brought on by reality – and synthetic derivatives.
America was founded as a Republic with a capitalist system of economics. Capitalism requires risk management. Someone is removing risk – creating a phony derivative that imitates capitalism. People who are afraid of or unable to manage risk want socialism. It eliminates the need for risk management at the cost of personal freedom. What we have in America today is synthetic – a derivative form of capitalism. It’s true. Synthetic capitalism is dying. Real capitalism, once re-discovered, will still build strong nations.
In thinking over the past couple of years since the crisis started, I asked myself why so many successful hedge fund managers and wealthy financiers are dying prematurely – so young. We must mourn their passing and pray for their eternal souls. But some very significant questions arise when we realize sandbox toys the big boys play with offer no more solutions to life's problems than your sandbox toys or mine. At some point, we must all come to grips with reality. We must put away our toys.
Think about how the term “synthetic securitization” can be applied to life in America, today… the synthetic security we have allowed – even encouraged – our society to accept.
Synthetic Political Toys
The Patriot Act encourages us to exchange our freedoms for the promise of personal safety. It is a synthetic promise. Homeland Security tells us we are protected yet leaves our borders open to any illegal who wants entry into our great nation. The people who accept promises of security under such circumstances are living in a synthetic world. It is an unreal world. Logic tells me my freedom is priceless and cannot be exchanged for safety – or anything else. It tells me foreigners who wish to enter America illegally are dangerous and that Homeland Security isn’t doing its job if it doesn’t know that.
All three branches of government, Legislative, Executive, Judiciary, are synthetic. Justice Ginsburg speaks of making legal decisions more in line with international law than Constitutional law. She lives in a synthetic world of make believe, thinking herself and her personal opinions above the very Constitution she has sworn to uphold – a Constitution that gives her no such powers. Her Constitution is synthetic… imaginary. Others on the bench have joined her to bring an undesired result: There is no Rule of Law regulating how our banks are run, how investment firms can do business, or how taxpayer money can be used to bailout ailing businesses that should be allowed to fail so successful ones can replace them.
Congress thinks it can continue spending synthetic money that appears from a make believe world… just turn on the printing presses. There are no consequences. Because they like an idea, they think they can create money from thin air and there will be no shake out, no negatives, no inflation… and no bankruptcy. “I wouldn’t intend for that to happen. I’m a good American who loves my country!” A legislator who lives in a synthetic world actually believes that intent, not reality, determines the outcome of actions taken.
An American intelligence agent’s oath is designed to protect Our America from foreign interests. Agents swear to “…learn to subvert, sabotage, and destroy our enemies by more sophisticated and more effective methods than those used against us.”
Last year “waterboarding” was sophisticated and effective. Today, it is not. Those who did what was okay last year may be punished for it this year. That is likely to generate a lot of employment applications at the CIA - not! When something is synthetic, it can be morphed into anything chosen by those who hold power. What kind of career intelligence officers will that attract?
We fight synthetic wars. The truth is, we have not fought a real "war" since Congress declared World War II in 1941. Congress has not declared a Constitutional war since that “day of infamy” so easily forgotten by so many. Yet we have spilled American blood in Korea, Vietnam, and in various places in the Middle East. Does that negate the cause for which American lives were lost? No. Nothing negates a life or an injury given in sacrifice.
Synthetic Social Toys
Life for many, it seems, may be very like a derivative. Having bucket loads of money doesn't solve problems if your life is synthetic – an imitation of the real thing. Finding and dealing with truth from which reality is born is the most basic of life's many processes.
Of what value is the establishment of a standard of behavior anyplace in the world if it is based on the unreal? If it is fictional or pseudo – made of synthetic securitization – what good is it? If a standard can be changed like a light bulb, it is not a standard. It is a device to get from point A to Point B.
Our public school system has fallen victim to synthetic securitization. We play like we are educating our children when we know they are being indoctrinated. It is pseudo education. False. Phony. Imitation. Yes, synthetic.
We have synthetic faith. New "religions" emerge based on the principle that man is God. Perhaps the ultimate example of pseudo synthetic behavior is man creating God rather than the other way around.
We allow legislators to talk about giving seniors counseling on how to end their lives as part of nationalized health care. We kill the unborn. We allow our government to steal from the Social Security system and ignore the dangerous results as if they were not real. Our society has created synthetic principles of what is good and what is evil.
Most people agree that the world has turned upside down and they don't know how to right it.
The truth is we cannot right the world for others. Each of us must start with our own world and make it right. When we do, we stand like a candle on a hill for others to see and follow. We do it as individuals and as our individual numbers multiply we do it as a nation. We do it by finding truth. To do otherwise is to accept a synthetic society as a way of life. Too many Americans do.
There is no substitute for truth. There never has been. There never will be. Yet, we have a synthetic business community… the bigger the business, the greater the Let's Pretend atmosphere of outward symbols of success. One old saying tells us that "Success is not a destination. It is a journey.” What the saying doesn’t say is that it is a journey of truth based on reality.
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Do you see where synthetic securitization leads? It leads to a world where bankers believe they can leverage mortgages contained in a derivative 40 times without causing a world economic crisis. It results in a three month prison sentence for raping a child. The undisciplined world of the unreal leads to greed which results in lies which bring deadly results.
Maybe that's why there are so many lies today. In the end, life doesn't imitate anything… and it cannot be imitated by anything. Synthetic people are about to learn that lesson.
� 2009 Marilyn M. Barnewall - All Rights Reserved
Marilyn Barnewall received her graduate degree in Banking from the University of Colorado Graduate School of Business in 1978. She has authored seven non-fiction books about banking, two are listed at Oxford and Cambridge University libraries in Great Britain. Her current book, When the Swan’s Neck Breaks, details the banking problems she foresaw in 2006. Of the 24 predictions made in the book, 22 have happened. It is fiction but readers refer to it as docu-fiction.
Barnewall was named one of America's top 100 businesswomen in the book, What It Takes (Dolphin/Doubleday; Gardenswartz and Roe) and was one of the founders of the Committee of 200, the official organization of America's top 200 businesswomen. She can be found in Who's:Who in America (2005-08), Who's Who of American Women (2006-08), Who's Who in Finance and Business (2006-08), and Who's Who in the World (2008).