Over this past week @DylanRatigan of MSNBC Morning Meeting and I have been having a bit of debate over Wall St and Healthcare reform. Needless to say it is difficult for me to keep to 140 characters when responding to his statements, but in this forum I can write as long as I can before a kid comes and request my assistance on the location of a game or a Wii remote. (It’s raining here in Georgia and cold to boot.)
Let’s tackle Wall St first: All the ranting and raving it makes for good TV but it doesn’t really make for ground breaking journalism. Second, Wall St. should be required to disclose the risk in plain language that is understood by the investor. (Heck the guy selling it should be able to comprehend the security or fund that is being sold) When and if the losses accumulate to the point where a company goes south, the Federal Government should not come to its rescue, that’s why bankruptcy court was invented. Wall St is bit like the wild, its survival of the fittest; if a company can’t cut the mustard it gets eaten.
Next, the dreaded “d” word derivatives I’m not going to attempt to explain all of its uses. We are going to stick with the few that most effect the price of goods. Two of the most common valid uses are as a form of insurance in many business situations and to lock future pricing for a variety of products / commodities. A third less common use of derivatives is speculation. Specifically, this means betting that the price of the underlining securities will rise or fall. This is not fundamentally different than buying a stock, painting, or land with the primary purpose of making a monetary profit. The difference worth mentioning is that derivatives rarely have inherent value. For example if you buy a call on GM stock, you are betting that the price of GM stock will go up at least to the strike (buy) price of the call. If this does not occur, you lose the entire investment. This is in stark contrast to buying the stock itself. The stock has an inherent value which can be sold as long as the company continues to exist.
Al-right did you get that?
In order to provide some sort of protection: Companies should be required to disclose the speculation they participate in. Or the winning and losses should be heavily taxed in order to discourage this type of behavior. Last, the taxpayer should never play the role of the gallant knight. In the end it bites us in the#$.
With special thanks to Andy Maxwell