It's all just a number

The HeraldOctober 26, 2008 

It was during the Wednesday evening meeting of the St. Whisnent Prayer and Poker Society when Fr. O'Flaherty framed the question:

"Terrence, me boy, (I've told him time and again that's not my given name, but Fr. O'Flaherty is a mite forgetful), I read that Wachovia lost almost $24 billion last quarter. How, in the name of all that's holy, could that be?

"According to my feeble calculations," he continued, "that amounts to losing $182,000 a minute or more than $3,000 every second of every day for three months! How could anyone possibly have that much money, much less lose it?"

"Well, Father," I said, "you sound as if you think Wachovia had $24 billion to lose in the first place."

"But I read it in The Herald, so it has to be true!"

I pointed out that The Herald also had carried an article a few days earlier that could shed light on the issue. The headline asked the very same question: "All that money you've lost -- where did it go?"

The answer, provided by an economist at Yale, was that investors don't lose money in the stock market. According to the prof, "... the price of a stock has never been the same as money -- it's simply the 'best guess' of what the stock is worth."

There you have it: Those trillions of dollars in mutual funds, 401(k) accounts and college-savings plans weren't lost; they were just investment bankers' best guess as to what those subprime mortgages were worth.

Despite that home foreclosures are soaring and the Dow Jones Index is tanking, few stockbrokers, economists or bank CEOs are second-guessing themselves. Sure, they may have misplaced a decimal place or two somewhere, but -- hey -- it was their best guess at the time.

Call in the bills and money

What gets me is that none of this should come as a surprise to anyone schooled in global finance.

Six decades ago, in his seminal essay, "How to Understand International Finance," the late humorist Robert Benchley wrote the most insightful article on the world's money supply ever written.

"Now there is a certain principle which has to be followed in all financial discussions involving sums over one hundred dollars," Benchley wrote. "There is probably not more than one hundred dollars in actual cash in circulation today. That is, if you were to call in all the bills and silver and gold in the country today at noon tomorrow and pile them up on the table, you would find that you had just about one hundred dollars, with perhaps several Canadian pennies and a few peppermint life-savers."

Granted, inflation has poofed up Benchley's Depression-era estimate to several thousand dollars today, but his point stands: Most of the money "lost" in global financial markets never existed.

Sure, the Saudis have a large stash squirreled away, and Russia and Venezuela don't worry about who's picking up the tab for lunch, but as payday approaches, the rest of the world is checking under the sofa cushions for coffee money.

"How can they get away with it?" asked Fr. O'Flaherty.

Again, Benchley had the answer: "As long as you can pronounce any number above a thousand, you have that much money," he wrote.

The fly in the ointment is that whatever amount you claim to have, someone else can pronounce that you owe even more. Wachovia got in trouble because it picked up subprime slut Golden West at the bargain price of $25 billion, only to have scofflaws say that, in doing do, it inherited a gazillion dollars in bad mortgages.

Now comes Wells Fargo to the rescue, picking up Wachovia for the pittance of $14 billion. That the buyer doesn't have enough spare cash for groceries doesn't matter; it's just a number.

This works to the advantage of all concerned -- except for thousands of Wachovia employees who will lose their jobs.

As the sage Benchley put it: "You can't work this scheme with the shoe-store man or the restaurant owner, but it goes big on Wall St. or in international financial circles."

Let's hope the shoe stores and restaurants accept peppermints.

Plumb, retired Herald editor, can be reached at terry.plumb@gmail.com

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