Merle Hazard Explains the Financial Crisis

The WaPo is running a primer on financial derivatives today, hoping to educate the public on the complicated matters that lie at the heart of the civil suit against Goldman Sachs for securities fraud. An informed public needs a working knowledge of collateralized debt obligations, credit-default swaps, and such, in order to follow that news story.

But forget it! You'll learn less from that dry and boring - not to mention rudimentary - primer than you can learn from my favorite country singer, Merle Hazard. Merle is the only country singer to write songs about mortgage-backed securities, and his first big hit, H-E-D-G-E, will teach you about everything in that WaPo article plus more. Seriously.

Merle's website has lots more good music and financial infotainment. In particular, check his extras page for a link to an academic presentation that breaks down the lyrics of H-E-D-G-E and explains them in a less poetic but still succinct style.



Here's Merle's follow-up to H-E-D-G-E, which is about what happened to over-leveraged bond traders after their CDOs got marked down to market. And if you aren't sure what the terms 'over-leveraged' and 'CDO' and 'marked down to market' mean, then you are Merle's target audience.

"The working man gets hurt the worst if you don't save the rich ones first"

I've posted a couple of times before about Merle Hazard, the financial analyst turned country music singer, but it seems he just keeps getting more topical every day. The Holy City of Washington has never needed Merle's lyrical wisdom more urgently than it does right now, as the Treasury Department is on the verge of bailing out nearly every big investment firm that wasn't already bailed out by the Federal Reserve earlier this year.

The issue Merle sings about the most is what economists call "Moral Hazard," which is what happens when you assure financial gamblers that the government will save them from the consequences of their risky behavior. That is to say, they indulge themselves in even more risky behavior than they would have otherwise. They're relentlessly logical in that way.

Merle's lyrics never fail to be on the cutting edge of financial news. A major goal of Treasury Secretary Paulson right now is to overturn the 'mark-to-market' accounting rule for valuing mortgage-backed securities, something that would save the big firms from having to honestly report the diminishing market value of their assets. Well, Merle saw that one coming:

Now the CMOs [Collateralized Mortgage Obligations] ,
And the other mortgage-backed securities
Are gettin' marked down to market causing much unease
In the Hamptons

Much unease, indeed.