Back in the crash of ’08, clueless underlings such as myself suddenly were made aware of a mysterious component of our financial system called “derivatives.”
What is a derivative? you may ask. Funny you should ask. I didn’t know either, and I still don’t. Although I have been trying to figure it out for seven years now, every time I think I know what a derivative is, I encounter acronymic terminology such as MBS, CDO, or SEC.
These slimmed-down nomenclatures should simplify things, but they do, in fact simplify nothing. Although everybody knows SEC stands for Southeastern Conference, which is the football conference where the best American football is played, and where my alma mater LSU exercises its right to excel in athletics, except when teams like Alabama or Florida are on the field.
But I digress. I was explaining to you what a derivative is and I mentioned some of the simplifying terminology.
For instance, as alluded to above: MBS.
Well some well-positioned bloggists of the worldwideweb identify an MBS as a Masters of Bullsh*t, which is attained through much blood sweat and tears and dedicated gamesmanship acquired at a venerable institution, such as Barnwell University or Cayman College. The MBS is attained through years and years of shoveling potentially useful data into HFT, which produces a yield from which its index is derived, and lucrative assets which are then deposited into accounts on behalf of the bullish denizens of WallStreet. These rich deposits build up the notional value of our economy as a hole, thus enriching all of us, not only those who are forever horsing around on Wall Street, but also you and me and all the folks on Main Street, Easy Street and Ventnor Avenue.
Somebody has to do it. I don’t mind doing my part, working with a shovel. Keeps me in shape.
Anyway, that’s not the MBS of which I spake. I’m talking about Mortgage Backed Securities. I think Uncle Freddie Mac and Aunt Fannie Mae gave these instruments as gifts back during the holidays of 2007, when life was oh simple then, before time had rewritten every line.
My understanding of a Mortgage Backed Security is that they’re something like an Arkansas RazorBack, which is probably why they didn’t work out so well for investors, although Arkansas is ranked third in the SEC west, behind Florida and–excuse my language–Ole Miss.
After that is my LSU Tigers, presently in fourth place of SEC west, but as always and forever will be, bound for greatness.
It’s quite complex to describe just how LSU could be in fourth place, because its position in the rankings is derived from the ratio of victories to losses, divided by the number of footballs passed beneath the legs of a center when he hikes the ball to the quarterback during any given play of the game.
Nevertheless, as I was saying before, a derivative is derived from the outcome, that is to say the, rear-end of a complex financial instrument.
Now I’m sure you’re wondering, as any serious investor is wondering, about the real question here, which is: how much is it worth?
One thing that my research has revealed, and one thing I can tell you with surety is this: The value of any particular derivative is derived from fluctuations in the value of the underlying asset.
Here’s an example: how much is my ticket to this season’s Sugar Bowl worth? Well, at this point it’s an open question, but let’s just say this: I’ll give you my ticket to the Sugar Bowl for your two tickets to the Orange Bowl.
Meanwhile, back at the ranch (Texas Aggies be forewarned), the guys who are shoveling out in the barn are asking what’s the real value of these derivatives. And as I explained before, you remember that the value of any particular derivative is derived from fluctuations in the value of the underlying ass-set. That should come out plain enough.
As for the collective value of all the derivatives, this figure is derived from its notional value, which is calculated based on the notion, as defined by the US Treasury, the Fed, the NYSE, and the AP sportswriters, that whatever goes around comes around, so therefore if the value of the aforesaid derivatives passes through enough piles of assets then when it comes out the other end nobody really knows what its worth, so that it can be revalued at the going rate.
This is unpredictable, of course, as the LTCM affair had indicated back in the Glass-Steagall days, but it is bound to be worth, somehow somewhere when you least expect it, more than it was in January of 2009. So that’s progress, although the Progressives may not agree with me. I don’t pay much attention to all those freaks on the fringe anyway.
And you understand, of course, that all this has taken place after Cronkite passed from the scene. Before that, it was pretty much everybody working together in America toward the same values and goals. But that was then and this is now. Derivatives happens.
I’m glad I could clear this up for you. As for the Sugar Bowl and the Orange Bowl, may the best team win, as it frequently does, but sometimes not.