It’s falling apart as you read this

The destruction going on in international financial markets these days are awesome and will be the source of study by historians for at least centuries. What happens when you deregulate financial markets, and count on the magic of the free market to make things right? What happens when thousands of brainiacs get access to billions in assets and trillions in loans to play with as they wish with practically zero visibility into their dealings? What happens when banks and pension funds start buying into this madness.

The Great Unraveling. Happening now in global markets, and coming to a job (or lack of one), house (or lack of one) or bank (or lack of one near you, it’s the Great Unraveling.

Here’s a key problem- people playing with OPM (other people’s money) generally have on HUGE carrot and one TINY stick at work as they invest and try to make money.

Get this- they generally get 20% of the upside profits, but pay zero on customer losses. In running a typical $300 million portion of a hedge fund, the guru in charge would rationally make this call with your money; heads or tails. Heads he makes $60 million, and the others make $240 million or tails, you lose every penny and he loses nothing. Worse, he often could borrow 10 times his actual cash, so he’d make $600 million on the heads/tails thing if he wins. Unfortunately, if he loses, it’s now a $3 billion (with a B) loss, and 90% of it is from the pensioners and customers of banks that were told this was all safe.

Under those circumstances, if you were the hedgie, what would you do? Why should rational people pay 2% on capital and 20% on profits when it creates what no one wants done with their money.

A coin toss.

Now it’s all coming apart. You heard it hear first (almost). Citibank will be the first victim of the Great Unraveling and seek government assistance or bankruptcy protection. The fun is just starting.