Cousin Charlie and Uncle Bob

In finance, as in politics, love and most other aspects of human life, there are things we talk about, but don't do and there are things we do, but don't talk about. It is in finance, however, that we do things which we talk about in such an obfuscatory and banal way that - by design - no one from the public at large can possibly understand what is going on. (If you have any doubts, attempt- for example - to understand an IPO prospectus.

Usually there is little, if any, harm done. A bunch of professionals charge an arm and a leg to other professionals to come up with documents in a language only professionals can understand, all to assuage and comply with government regulations. Net-net it's a bit like my pet hamster running around in his little carousel - though it does keep pricey restaurants and luxury resorts in business.

But, there are times when such obfuscatory banality is absolutely, positively designed to confuse and deceive, despite its compliance to the letter of the law. How about this, for example: The Federal Reserve has decided to not apply Section 23 for XYZ big bank's transactions with its subsidiaries. "Blah, blah, blah" think Joe and Jane Average Citizen, presuming that if this was really important their government would speak in plain language - right?

Well, it so happens that the entire financial industry bailout process engineered by the Fed and Treasury is couched in exactly such anodyne terms. They completely obscure the unprecedented and breathtaking scope of liabilities, present and potential, all undertaken in the name of Mr. and Mrs. Average. Trillions, anyone?

Here is the truth, as an example that can be easily understood:

My rich cousin Charlie got the idea that he could get filthy rich by betting on the ponies. He set up a bunch of accounts with a whole lot of bookies and started placing his bets. At first he hit a winning streak - he styles himself a horseflesh expert - and let his winnings ride. After a while, he ramped up to such an extent that the bookies simply accepted his markers instead of cash. He was a winner, a champ, a fella - and, of course, an excellent customer who paid a whole lot of vig.

Hey, very nice! thought Charlie and started spending his filthy lucre; Lamborghinis, beach house in Southampton, mega yacht, chalet in Aspen. He even tried to get legit by making a sizeable donation to The Met, but the hoity-toity crowd took his money and still snubbed him, of course.

Needless to say, the roof caved in on cousin Charlie when the ponies started to fail to win, place or show as he predicted. Losses mounted and the bookies got nervous. Soon thereafter they stopped accepting his markers and demanded cash, instead. With liquidity flowing out much faster than it was coming in, Charlie was in deep trouble. Faced with the very real prospect of broken bones or worse, he turned to his Uncle Bob.

Now, Uncle Bob is not rich, as such. But he does have the ability to raise a ton of cash in short order because he works for the Treasury. He can also change crucial regulations as he sees fit, without having to consult with his ultimate boss, i.e. the people. Uncle Bob is not always easy to deal with and he does from time to time make an example of his wayward nephews and nieces by hanging them out to dry.

Charlie, however, was quite smart. He realized that if he failed to pay his losses he would set in motion a domino effect that would touch lots and lots of bookies. After all, he was dealing with most of them and they in turn had laid off their positions with yet more bookies. So Charlie got on the phone and quickly convinced them to appeal to Uncle Bob together; if you don't bail us out, they said, the whole bet-bookie-pony system will collapse.

The rest of the story, everyone knows...