Mongo Says - "Stop Game, Take Ball, Go Home."

One of the most vile fabrications of end-stage Capitalism are the “Funds.” In particular, both Hedge Funds and Equity Funds are deserving not only of our ire but should be loathed as a matter of natural law. Equity Funds are, theoretically, “investors” in the stock market but that is an almost meaningless statement today. In fact, most Equity Fund managers (along with their Hedge Fund brethren) are actually stock manipulators. Consider Mitt Romney’s Bain Capital. In the Reagan era Bain operated like a more traditional source of funding for startups or companies in need of being bailed out. An early success story was Staples, a place where many of us bought office supplies. In the 90s though Bain started to turn sour. Instead of putting money at risk in order to help startups succeed Bain started to aggressively buy companies that needed to be “turned around.” To some extent the strategy yielded outcomes that were beneficial to many average folks. Those days are now ancient history. Today Bain, like other Equity Funds, makes its money the old fashioned way - by doing whatever it must to generate profits. While the notion of “Saving” a company sounds good to most folks the reality is that the only savings of interest to most Equity Fund managers is in the form of increased revenue directly into their coffers. Whether that requires liquidation of a company, placing it into a Chapter 11 and “reorganizing” it (Sears Holdings?) or massive layoffs what matters is the bottom line - period.

Hedge funds are significantly worse both in terms of operation AND goals. Unlike the Equity Funds of old, Hedge funds are about one thing - minimizing or eliminating risk (or the appearance thereof). I like to think of Hedge funds as the “debt-buyers” of the capital markets. In point of fact some Hedge fund managers do actually buy debt. Others are focused on betting AGAINST a company by shorting its publicly traded stock (“brick and mortar is SO 20th Century). There are also hedge funds that focus on derivatives, a theoretically arcane investment that, in the end, is no more arcane than the concept of “fiat” money. The basic idea behind derivatives is, arguably, best found in the world of credit cards. When a bank extends credit to you in the form of a credit card, it is betting that your future income (and ostensibly the psychotic musings of Bill Fair and Earl Isaac) will ensure that you pay back whatever you use WITH INTEREST. As time has gone on however your bank isn’t really willing to gamble that you’ll actually pay back what you borrow (with interest) so it does something you may not ever know about - they SELL your credit usage (both existing AND future). Your bank will likely continue to “service” your credit card but you won’t ever actually owe them any money in the future because they sold the debt to someone else, often yet another fund. One might ask, if a hedge fund buys credit card receivables, isn’t it “gambling” that you won’t pay? Oh yes my friend, it most certainly is gambling - except when it’s not.

Credit card rates in the 2020s are almost always at least double digits. You might receive a promotional rate for a bit but rates up to 30% are not uncommon. When a pool of credit card receivables is put up for sale there are many players who fabricate an expected value for the pool. Let’s pull a number out of thin air and say the expected return on a 2020 pool is 18%. As a “risk manager” I’m going to take the position that the 18% return is some wild-eyed fantasy and I won’t pay a penny over a premium of 7%. That means if I have 100 million in credit card receivables, the most I’ll pay to the card issuers is 107 million. You might think that I’m risking a lot of money but, you’d be wrong. You’d be wrong though for only the most Bezos/Bloomberg/Musk of reasons - the fact the “buyer” is going to ask YOU to be the source of the “investment” funds. Once the ratings companies have artificially valued the pool at 118% of the face value (actual amounts owed plus expected interest and fee returns) and the buyer has paid less than the 18% return expected (presuming they’ve fronted a single dime at all) the buyer can now tell you about the magical ratings company and ask you to pay, not 118% but a mere 114% thus “ensuring” you a return of 4% at a time most savings accounts are paying under 1%. Talk about your “win-win.”

Assuming our pool performs well, as is often the case at first, you might look at your portfolio and think - wow, I sure picked a winner. The question is, did you? It’s not hard to imagine the volatility of what is, often literally, completely unsecured consumer debt. Despite that, the pooling of credit card receivables lead to the pooling of all manner of receivables. Automobile loan payments and, more recently, mortgage loan PAYMENTS (notice how I capitalized that last word). Once upon a time companies used to issue Bonds to sell interests in mortgage LOANS but, alas, that was far too easy. Instead the securities industry decided that, just as it had done with credit card receivables, it could separate the mortgage loan from the mortgages by selling future, unreceived payments since, after all, the borrowers had pledged their homes as collateral. Life was good for the servants of greed, right up until loans started closing to borrowers with income equal to roughly 20% of the amount they were supposed to pay on their mortgages. Indeed, Countrywide’s army of loan representatives was busy convincing first time homeowners that, they too, could be real estate moguls by leveraging their “home equity” and buying several additional residential properties. All one needed was a “FICO” score of 700 or more and - income be damned! As one might expect, the literal inability of a borrower to pay $20,000.00 in monthly mortgage payments on a monthly income of $2,000.00 became a problem and the Huge Capitalist Boil of Mortgage Mania erupted and oozed all over the planet in 2008. Enter the bottom feeders - folks like OneWest or JP Morgan. These companies paid literally PENNIES on the dollar for the assets of failed thrifts IndyMac and Washington Mutual (and, just FYI, YOU insured them against losses on their “investment”). Yet instead of being reviled the people running these outfits were sought out and, in fact, one served as 45’s Treasury Secretary!

In 2021, for the first time in my memory, the smoke has cleared and average folk are finally seeing the “markets” for what they are - the ultimate casinos. Upon realizing this a group of apparently savvy Redditors decided they wanted to play too. If the 1% and their household staff (sorry, “Asset Managers”) want to artificially create value, the Redditors wanted to do it too! Let’s consider the GameStop Gambit. GameStop is a “Mallestor” (a retail outlet often based in Malls). Once upon a time actual human begins would visit a GameStop store and “try out” the latest and coolest video games. Think Blockbuster but for much more expensive video games. GameStop would not just let you buy a new video game, they’d let you RENT it. A high school or college gamer might not have enough to buy a new game, but the few bucks to rent - sure thing. Unfortunately for GameStop its brick and mortar approach to sales is guaranteed to fail. Rather than invest in the company to help them move to a primarily digital platform our Fund friends had a better idea - SHORT the stock. The Redditors took umbrage at this scheme and decided to prop the stock up and, potentially, save the company. All fair game in my book except for one thing - the Fund Managers who had shorted the stock literally started losing their “investments” to the tune of billions, all because of those damn kids. I like to think of what’s happened to them as proof that “gambling” doesn’t ever really pay off. Unfortunately our friends in the federal government and on Wall Street don’t believe what they do is “gambling” because, from their view, they not only invented the game and wrote all the rules, they put the fix in. I think it’s time for ALL of us to start BREAKING the rules, and making sure our own bets are “sure things” too.