8:09 p.m., July 28
- Community Blog
- Encanto Gas Holder
Complexity as Necessary to Advance All Financial Fraud
Do you remember when the only things one could invest in were stocks and bonds? That, and maybe some ponies in claiming races if business at the track wasn't too rich and risky for one's constitution.
I was hoping that increasing transparency in the creation of financial instruments would lead to a reduction in irrational risk, the kind of risky risk that caused to Crash of 2008 while Wall Street was awash in derivatives of derivatives and under-capitalized credit default swaps. At the same time, with the full knowledge that there are more suckers born every minute than the stock market can possibly absorb without developing a severe case of froth on froth, word comes from Forbes that as part of the endemic sickness of the West (where truth is a taboo subject), the San Francisco firm EquityRock will do IPOs on individual underwater homes.
I kid you not. The real estate article "How to IPO Your House" is a front-page feature in this month's March 15 issue. OK, so I just did a plug for Steve Forbes...
Even in relatively plain text, it took Stephanie Fitch nearly two whole pages to explain the various nuances of attracting and keeping outside investors invested in one's home now worth less than its mortgage value. Fitch recommends hitting up one's rich uncle first as a potential investor. Correct me if I'm wrong about this, but don't all classic Ponzi schemes start by luring in one's own relatives first?
As for me, the whole idea of turning one's house into an actively traded ticker symbol is not the simplest thing to do. If this were to catch on, I imagine that Wall Street banks would have to double their annual bonuses to prevent their top talent from jumping ship and promoting their own en masse residential public offerings. After all, if this is a trend, then somebody is going to start advertising herself or himself as the grand wizard of residential IPO commissions.
Occam's Razor ought to apply to all financial transactions. If nobody can explain how it works in three sentences or less, then my bet is that the risk likely outweighs the reward. Like the SEC says, "Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb. " Failure to apply the Razor promptly is most likely why Sempra Energy and Royal Bank of Scotland are stuck having a fire sale on RBS Sempra Commodities assets after last year's emergency Abu Dhabi bailout of Dubai World, a symptom of an overly-complex series of partnership deals, multi-national underwriting transactions, and the questionable conflict origin of a whole lot o' gold finding its way onto the Dubai bullion exchange.
As for house IPOs, you can pretty much figure out what'll happen in a few years or so if Citi or AIG get involved... but that's just my opinion.
More like this:
- On Keeping 3+ CFL Bulbs Burning Free For Life — March 15, 2010
- Sempra Energy Credit Warning by Rating Agency Reported — Feb. 4, 2010
- Despite Crash of 2008, RBS Sempra Share More Than Doubles in Value — Jan. 10, 2010
- Local Tie to Dubai Debt Problems? — Nov. 30, 2009
- What is Occam's Razor? — Jan. 20, 2000