Why is the world economy in such a financial crisis? It all started in the US; Canada is just a victim of big US companies because we have a better banking system, right? And isn’t it all getting better now?
Not exactly;
Anyone who’s read anything has probably already heard the answers; after all, the entire world has been in the middle of the worst depression since the dirty 30’s for about 4 years now, but here are my two bits…
1st – How did the economy get this way? There are a lot of different opinions on this, but a series of complex derivatives created to confuse and mislead the people who are apparently really smart in this department became way too complex for even the smartest of financial analysts to understand so much so that companies were taking out insurance policies on bad debt which was combined into pools of more bad debt and renamed good debt – This newly named “good debt” was then put into a pool of more grouped bad debt named good debt and then insured for when it defaulted. Then the insurance policies on all this debt was grouped together and re-insured to the point where companies were actually buying insurance that allowed them to gain from their own companies defaulting. And a lot of this was done with common peoples mortgages.
So if you or someone you know got a mortgage you couldn’t really afford, this was considered risky debt to the bank. But they were more than willing to give this mortgage to you because all they had to do was pool it with a bunch of other mortgages, sell the pool to a third party who took out an insurance policy against the pool of debt. Then the insurance company pooled this insurance policy with a bunch of other polices full of bad debt and sold that to another insurance company who insured this; therefore the first insurance company and the bank are both covered if anything goes wrong.
Then this insurance company pooled those policies with some more and insured them to, and so on and so on and so on until nobody really knew what they had insured anymore or what they were actually on the hook for. And the name for all these crazy complicated devil pools – Derivatives
This happened in the states; this happened in Canada, this happened everywhere. And who were the big players in this fancy pyramid scheme that happened kind of like a big old Amway party? It was Goldman Sachs, Leman Brothers, AIG -- all those guys that made headline news over the past couple years with their big US bail-outs and bonus scandals.
So what? This is old news… yes, but I just read about a new demon to our financial system that really isn’t making a whole lot of news yet -- DARK POOLS. Just the name sounds scary, and who is the mastermind for Canada– Goldman Sachs.
Now, Goldman Sachs is a big, big company so just because they were heavily involved in the whole derivative scandal doesn’t mean everything they do is all bad but they just recently announced (August 18th, 2011) the launch of Sigma X – Canada’s Dark Pool trading system.
So what is a Dark Pool?
“An informal stock trading system which electronically and anonymously matches buyers and sellers”
Sounds harmless enough… what could go wrong?
1) These pools are private – quotes are not displayed publically and orders are placed anonymously; not even the regulators get to see them.
2) Mainstream market prices then become skewed
3) Financial risk is not managed and risky stocks are suddenly spread like wildfire.
4) The pools then defeat the very purpose of a fair and transparent market
So what does that mean to a normal person? It means your mutual funds and RRSP’s which are based on pooling stock to minimize risk will get riskier. It means the companies you work for who sell stock on the open market to fund their investments and keep your jobs safe are selling them to riskier investors and/or purchasing riskier stock’s which makes them less stable.
It means if you buy stock on the open market, they may not be valued fairly and the risk level assigned to them won’t be accurate. It means the recession isn’t almost over we are continuously digging a deeper hole. And it means we in Canada are opening the door to this, so we can’t blame other countries when it all goes bad.
Karen Nowicki
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