sub prime

Indeed, nearly 300 years later, we have not learned that much

Interesting comparison with this company from 1700’s with today’s banking crisis. The South Sea Company traded on conversion of debt, into marketable securities. Sound familiar? Its the perfect definition of a derivative.

Hogarthian image of the South Sea Bubble, by Edward Matthew Ward, Tate Gallery
Hogarthian image of the South Sea Bubble, by Edward Matthew Ward, Tate Gallery

The South Sea Company – Wikipedia, the free encyclopedia

However, its main function was always managing government debt,

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rather than trading with the Spanish colonies. The South Sea Company continued its management of the part of the National Debt until it was abolished in the 1850s.

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In a recent study Martin Barnes of BCA Research, a Canadian economic-research firm, traces the rise of the American financial-services industry’s share of total corporate profits, from 10% in the early 1980s to 40% at its peak last year (see chart 1). Its share of stockmarket value grew from 6% to 19%. These proportions look all the more striking—even unsustainable—when you note that financial services account for only 15% of corporate America’s gross value added and a mere 5% of private-sector jobs.

40% of corporate profits produced by 5% of jobs. Can you spell bubble. The comparisons are remarkable:

The purpose of this conversion was similar to the old one: it would allow a conversion of high interest, but difficult to trade debt, into low interest, readily marketable debt/shares of the South Sea Company. All parties could gain.

OR THIS

it would allow a conversion of high interest, but difficult to trade debt, into low interest, readily marketable debt/shares of the South Sea Company. All parties could gain.

Indeed, nearly 300 years later, we have not learned that much.

2 thoughts on “Indeed, nearly 300 years later, we have not learned that much”

  1. Interesting post. What gets me is that the central banks are bailing out the commercial banks to protect the system that got us into this mess in the first place.

  2. @Daniel … one good thing about how the Americans are handling it, is that the fire sale approach to Bear Stearns means the investors in Bear get nothing out of it. That will include Executive employees stock option programmes that will be essentially eliminated.

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