Wednesday, April 21, 2010

Your Future has Derived

Job Opportunity

Title:                 Financial Genius
Experience:    Not much
Desire:             To make obscene amounts of money
Where:             Your home office or our place
Duties:             Invent next Wall St. gobbledygook derivative
When:             The sooner the better
Ethics:             Seriously?

If you have a great idea on how to transfer massive amounts of money from poor (at least they soon will be) individual investors into an account of your choosing and need a firm to cover your actions please contact us at…

The above memo did not actually go out, yet.  But that's only because the current financial environment for fraud is sadly toxic and under review.  However' current' has a way of becoming 'quaint' when seen from the future and in our 24 hour news cycle the future could be as soon as next week.

The memo is reminiscent of bumper sticker on the backs of some trucks on the road today.  The drivers who appear not to care about other vehicles on the highway display the following message with pride - “If you don’t like the way I drive please call 1-800-EAT SHIT.”

The wonderful people in the banking and investment industry seem to be licking their wounds but are actually raking in the profits.  And just like the boys from Enron who were nicknamed, "the smartest guys in the room" these bankers are incredibly shrewd.  Goldman Sachs is under investigation for, uh for, um, well we have no idea exactly what they were doing except we believe it was a fraud of some kind.  We’ll get back to you on that.

The alleged fraud (I use that term thanks to years of watching, ‘Law and Order’) centers around the practice of trading in ‘derivatives’ in order to basically gamble with other people’s money while not risking a penny of your own.

So just what is a derivative?
It shouldn’t be that hard to figure out, right?
The word has only ten letters and is derived (sorry about that) from the word derive so I deduce I could arrive at an easy to understand definition.
I deduce wrongly!

According to Webster’s a derivative is something that is derived from something else.  Don’t you just love dictionaries?  Aside from having to know how to spell something before you can look it up to see how to spell it many of the definitions therein derive their explanations from a different form of the original word in question!

But I digress.

In fact I remember something I learned last century in high school math that may make it easier to figure out derivatives.
One of the subjects I enjoyed in a nerd sort of way back then was trigonometry.  During that class I learned about sine and cosine and tangents.  These were the so called Trig derivatives and although they were not the simplest of ratios to understand a small amount of studying made their meanings clear.

In all fairness and to the best of my knowledge I have never used trig derivatives in my life since getting out of that class but there is still time, I hope.

And as amusing as it may be to realize that trigonometry is a study of the use of angles big financial gurus did not use it to game the system and scam billions of our dollars so we must keep looking.

Investing 101 tells us that the easiest derivative to understand is also one of the oldest on the books, options trading.  Simply put buying an option on a stock gives you the right to either buy or sell that stock at a set price some time in the future.  The value of the option is derived from the difference between that future price, known as the strike price and the current price of the stock.

For example, suppose the price of Company “A” is $100 per share and you feel the price is going to go up.  Now suppose you don’t wish to spend $100 to buy shares of “A.”  You could instead buy a ‘call’ option for as little as $1.  The price of the ‘call’ is derived from the price of the stock but is obviously much less costly.

If the stock goes from $100 to $110 within a month you would make far more money, percentage-wise than if you had bought the stock itself.  The downside is the stock does not go up and you lose your entire investment.  Then all you have is a capital loss and a tax 'write-off' to show for your efforts.
(As always past performance is not an indicator of future value and you should consult your broker or financial advisor professional for more details. Invest with your head, not over it.)

But just about everyone who invests in or follows Wall St. knows about the options market.  This means the riff-raff gets to play in the game with the big boys.  The big boys don’t like that so they created a derivative on the derivative.  And as soon as the public figured that one out the biggies went one step further.

And they kept going until they were so far off base they had no way of getting home.  Even some of these geniuses don't understand what the hell they are doing anymore and forget to cover their tracks.  And that's when they get in trouble.

If you think something is going to happen but you're not sure what then you hedge your bet.  On Wall St. ‘Hedge Funds’ are derived from that uncertainty.  Managers of those derivatives constantly move money around to build a fortune for themselves and their investors based solely on smoke and mirrors and the fears of the little guy.

Our desire to get ahead without actually earning it or producing a value to society is rampant in America and it has been fueled by the success of the nouveau riche billionaires on Wall Street.  Mention the term ‘Hedge Fund’ to most Americans and you may have to duck and cover.

A hedge fund can earn billions betting that you and your neighbors will lose your homes because you cannot cover your mortgages.  Sadly in some perverse way the manager may have caused the environment that created the downturn in the economy that made the bank call in your loan but hey, all’s fair in love, war and finance.

The fact is big time investors derive pleasure and fortune gambling in the public sector while keeping their machinations private.  And unless and until our Politicians stop protecting them and bailing them out and start regulating the industry this practice will flourish.

But until then:

Opportunity is knocking!
Will you be the one to answer the call? 
Do you have what it takes to make someone else’s dream yours? 
Do you think hedges have nothing to do with bushes but can still deliver the green; 
Can you dazzle with your footwork
AND Baffle with your bullshit
WITHOUT Batting an eyelash
OR Breaking a sweat?

Then you too can be a billionaire before breakfast. 
Just come up with the next legal-like scam. 
Learn the latest loophole. 
Let us show you how to fly under the radar in your underwear and you’ll never get caught with your pants down again.
(Not a member of FDIC or SIPC)

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