Cars make more sense than ‘the Street’

By Warren Brown

NEW YORK — I never understood Wall Street. I could never figure out how people made money by changing it from one hand to another to make more money.

I am much more comfortable with the automobile industry. It is big, sprawling and sometimes clumsy, but I get it. I understand what car companies do and why they do it. Their end game is to put a buyer in a car or a truck, be it new or old, at a profit. I understand that. It’s easy.

A Chevrolet or a Honda makes much more sense to me than a “credit default swap” or an “asset-backed security.” I can drive a Chevrolet or Honda. I can park a Ford. I can wash, wax and polish all of them. But what can I do with a credit default swap?

Apparently, judging from the carnage on this city’s Wall Street, the answer is “not much.”

Credit default swaps and asset-back securities sound like fancy names for Ponzi schemes. Somebody makes a debt. Somebody holds that debt. The lender worries that the borrower might go belly-up. The amount owed has a securitized value. So the original lender sells some of the amount owed to a third party as a kind of insurance in case the original borrower stops paying.

If the original borrower experiences a “credit event” — loses a job, suffers a heart attack and loses a business, gets a financially ruinous divorce or just bottom-line defaults — the third party maybe gets a payout, the original lender maybe gets something, but all of the other people financially tethered to that funny money get drilled.

Before Wall Street ruptured a few weeks ago, it all seemed so distant, so foreign. I’m still more than a little bit in the dark on all of this, but I’m beginning to see the vague outlines of comprehension.

I start with what I think I know. General Motors, for example, makes the Chevrolet Malibu. The company spent hundreds of millions of dollars developing that car which, luckily for GM, consumers liked.

Where did GM get the money to develop the Malibu?

Presumably, some of it came from the company’s continuing operations. Some of it came from profits, although that’s difficult to understand, because GM hasn’t been profitable for a while. OK, so a lot of it came from Wall Street in the form of what essentially are loans.

Most of the consumers buying the Malibu borrowed money to do it, as did many of the Chevrolet dealers who borrowed money to buy allotments of Malibu cars to sell to consumers.

All of that borrowing created a nice business for people who make money by changing money into more money. Credit-default swaps, asset-backed securities, credit derivatives — if there was a way to make money by changing money into more money, the money changers had a name for it.

But something happened.

All about ‘stuff’

My theory is that the stuff makers — the people who actually make things, such as cars — fell on hard times. Stuff makers are financial seedlings. They generate the original money that the money changers spin into trillions of dollars attached to nothing except money changing hands. But the stuff makers were complicit in their own downfall. They suffered from the same malady that drove the money changers — greed.

American consumers wanted cheaper stuff and lots more of it. American workers who made that stuff were getting paid too much to make it at a price and, in the case of automobiles, in a way that pleased many American consumers. The American companies who paid those American workers wanted more profits. So those American companies shipped American jobs to places where workers asked for less and, thus, allowed American companies to earn and keep more money.

Meanwhile, back home, American workers who once had good-paying factory jobs moved down to lower-paying work. To make ends meet, they worked two or more jobs. They were Americans, so they dreamed big — bigger cars, bigger houses.

The money changers encouraged those dreams — easy credit, subprime loans, asset-backed securities, credit-default swaps.

But the stuff makers’ numbers were dwindling, as were the places in America where they could work. Their salaries were stagnant. Working two or more lower-paying jobs became difficult. They began missing car payments. Pretty soon, they started missing mortgage payments, too.

I’m beginning to understand Wall Street and the current mess, after all.