The Blame Game For the Global Financial Collapse: Fingers are pointing to one woman --Blythe Masters

9 years ago

You won't find her on Fortune's list of the 50 Most Powerful Women in Business
but Blythe Masters may go down in history as the woman who is responsible for the 2008 collapse of global financial markets. You can't get more powerful than that.

When I started researching credit default swaps --the financial vehicle that Blythe Masters is credited/blamed for inventing and which Warren Buffet described in 2003 in his annual letter to shareholders as " financial weapons of mass destruction," my image of its originator was definitely not pink.

So sure was I that the culprits were testosterone-driven venture capital types, that before I had the facts, I had already begun my mental argument of why a woman would never have come up with a scheme that could bring global markets to their knees.

So much for fact-less based arguments. I have been working under the false belief that women have different values then men in corporate America. Not so, according to a 2003 article written by Arianna Huffington- Would Things Be Any Different If Women Ran Corporate America?

Clearly, the mere presence of more women in positions of power will not, by itself, be enough to guarantee a change in corporate behavior. Given the current business culture, the temptation for piggish behavior is far too great for both genders. And, in any case, we can't wait 20 years to find out if an infusion of estrogen would clean up the corporate muck. So we've got to get out the hoses today and wash down the entire corporate establishment without fear or favor. If something better -- more ethical, more honest, less narcissistic -- can rise in its place, then I, for one, wouldn’t care if it were dominated by men, women, or chimpanzees of either sex.

During the five years since Buffet's warning about credit default swaps and Huffington's assessment of business women behaving badly, things have gone from bad to worse.

This has been a good lesson for me about the danger of generalizations and the power of the butterfly effect--because if there is anything that can be said about the current global financial collapse it's that the butteflies have been flapping their wings.

The theory behind the butterfly effect is that the fluttering of butterfly wings can create tiny changes in the atmosphere that ultimately alter the path of a tornado.
April Hollingworth Photography

While its easy to say people should have been paying more attention, the truth is credit default swaps are not the easiest thing to understand. As I have spent the past couple of days trying to understand them -- this from someone who squeaked by econ101 with a C -- a memory continues to pop in my head.

It's of my son --at age 15-- sitting on the couch, hunched over a PlayStation joystick. He is totally engrossed in his game.

I sit down and ask if I can watch. I get the shoulder shrug,so I sit down.

During a break in the action I ask how he learned the rules. He says, "You figure it out as you go along."

Then, I ask the deciding question, "Do you think I could learn?"

This time, instead of the shoulder shrug, Noah looked me directly in the eye and broke out in a half grin,simultaneously shaking his head in the negative. It was as if he were patting his hand on my head.

Credit Default Swaps make as much sense to me as the intricacies of those video games that my son and daughter love to play. I need a guide called Credit Default Swaps for Dummies -- I found several that are helpful:

From HowStuffWorks :

Imagine that you could purchase your friend Jimmy's health insurance policy from the company that issued it. Everything's going smoothly; you're raking in the dough as Jimmy makes his monthly payments. But things take a sudden turn for the worse after Jimmy's legs are crushed in a car wreck. Jimmy can't afford the healthcare costs, but luckily he's insured -- by you.

You find nothing but cobwebs in your savings account and realize that you can't pay for Jimmy's health care. Jimmy's still insured (he's faithfully made his premium payments), so who pays the hospital bills? The insurance company sold the policy to you, and you owned it when Jimmy's accident happened. You were caught with the hot potato.


Jimmy's hospital realizes his insurer won't cover his costs and releases him, but he still requires care. So Jimmy sues you to pay up, but you just blew all of your money completing your collection of Pat Boone albums, which suddenly doesn't seem like such a good investment. Even worse, a trove of Boone's albums was discovered in the estates of some recently deceased collectors, and the market value of your collection plummets. You sell the collection for half of what you paid for it and put it toward Jimmy's health care costs, but it's a drop in the bucket. Ultimately, you're forced to declare bankruptcy.

The October 3, 2008 episode of This American Life also offers a easy to comprehend explanation. It's worth the listen.

When the global economy collapses it's not surprising that there's a lot of finger pointing going on. Many have pointed to Fannie or Freddie, but today McClatchy Washington Bureau says it was the private sector, not Freddie or Fannie that is the culprit or culpritress.

Of course the ultimate finger pointing is going in the direction of Blythe Masters, who at age 34, masterminded the credit default swap for JP Morgan.

In February 2007, Women Working featured Blythe Masters -- the woman behind Credit Default Swaps.

Blythe has gained a reputation for being opinionated and outspoken--and most of the time she is "right." This pattern started early on: "I remember that my father didn't want me to wear slacks to church. Despite my objections, I agreed to wear a skirt. But I wagered a small bet with him that other women would be wearing slacks on Sunday, and if that were the case I would get a dollar for each one I could spot. He took me on, and I not only won the bet, but some money too!"

As recently as September, Ms. Masters was defending the credit default swaps in an email exchange with The Guardian.

"I do believe CDSs [credit default swaps] have been miscast, much as poor workmen tend to blame their tools."

NC Painter has a short article written by Blythe Masters in 1997 where she describes how the credit default swaps will revolutionize banking. NC Painter added the bold italics.

By enhancing liquidity, credit derivatives achieve the financial equivalent of a free lunch, whereby both buyers and sellers of risk benefit from the associated efficiency gains."

Ms. Masters obviously isn't a devotee of TANSTAAL - "There Ain't No Such Thing As A Free Lunch,"-- an acronym made popular in the 1966 novel The Moon Is a Harsh Mistress, which, according to Wikipedia, discusses the problems caused by not considering the eventual outcome of an unbalanced economy.

Elana blogs about business culture at FunnyBusiness

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