Fabulous Fab Finance

It's hard work putting the "fabulous" into fabulous finance...

The YOUNG FRENCHMAN went to all the right schools in Paris, writes Bill Bonner in his Daily Reckoning.

He must have been good at math, because he got into Stanford. And then, it was onward and upward. He landed a job at Goldman. He was making millions. His girlfriend wrote to say how she'd like to curl up in his arms.

And then, at the tender age of 31, powee! Right in the kisser. His beautiful derivatives lost 85% of its value in just 5 months, his clients get sore and now he's got a whole posse of senators on his tail.

The senate torturers didn't have any idea what Fabulous Fab was up to. They wouldn't know a derivative contract from a household fusebox. But they knew something had gone wrong. They knew the public was out for blood. And they knew the lights were on and cameras were rolling.

This was the time to impress the rubes back home. Get some Wall Street hotshot in the dock and grill him hard. And a Frenchman to boot! What luck.

I-N-D-I-G-N-A-T-I-O-N...!

The senators were positively shocked...shocked!...to discover that Fab...and Goldman...were out to make money.

Maybe they thought the Goldman was a public utility – like Amtrak or the Post Office. Government services don't work very well, they may have told themselves, but at least they don't make any money!

Yes, senators can feign indignation when it is called for. But what are they so indignant about? Well, that's another matter. Who knows and who cares! The point is, the voters want to see them nail this little Frenchman...and they're going to make a good show of it.

The media reports suggest that everyone played along last week. The senators were indignant. The Goldman fellow denied any wrongdoing...but regretted that had sent the emails out. While the senators pretended indignation, the Frenchman's regret was certainly sincere. So was his denial. For, in fact, it's hard to know what he did wrong.

Yes, he played his clients for suckers, but so what? That's what Fab Finance is all about – make money...and then dump the risk onto someone too dumb to know what he's doing. And then, when he blows up...and the whole system blows up...in come the senators to bail everyone out.

From Fab's perspective – and ours – if you can find bankers and hedge funds dim enough to take your derivative contracts...without wondering what is in them...you are performing a public service by separating them from their money. Better for the cash to be in the hands of someone who knows what to do with it. Like Fabulous Fab himself...

But let us imagine that Fabulous Fab gets his hands on some real dough. And let's imagine that he is not in the mood to gamble on his own jackass derivatives...or to find some chump to sell them to.

What would he do with the money?

Ah...here, he would have to close his newspaper and turn off his television and think deeply about what is actually going on in the world. Forget the circus surrounding Goldman. Forget the news flow. Forget even the 'information' coming from the markets.

Now, it's time to think. This is real money we're talking about...not just casino chips.

Fab is no dope. He'd probably look at what is happening with Greek debt...and he'd be suspicious of all government bonds. After all, Greece's finances are not so different from a half-dozen other countries – including the US of A. True, Greece's debt problems have investors running to the relative safety of the US...which lowers borrowing costs for the US and makes it easier for the feds to finance their debt.

But the problem of too much public debt cannot be solved by low interest rates and more debt. Eventually, the US runs into the same problem the Greeks face now. Only the US problem is even bigger...and there is no bigger, richer nation to bail it out.

Fab figures all of that out. He figures US lending rates may go down in the short run, but in the long run, the feds face the same predicament – they need to borrow more and more money just to keep the show on the road. And eventually, lenders will want higher interest rates. And it won't be too long before Moody's and Standard and Poor's take a hard look at America's balance sheet too.

Last week's news was that the rating agencies may downgrade Spain, Portugal, and Ireland even further. And Reuters reported that the Greek debt alone would cost bondholders $265 million if Greece has to reschedule (that is, if Greece defaults on its loans).

Greece now. Then Spain. Then Ireland. Then Britain. Then America.

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