I had a huge light bulb moment after reading this fantastic Newsweek article
. You should do yourselves a favor and read the whole thing, but the gist is this:
Once upon a time in 1994, a group of JPMorgan bankers during an off-site weekend in Florida ("think yacht parties, bikini models, $1,000 bottles of Cristal") came up with "credit default swaps" as a bold way to protect themselves from loan defaults and free up capital on their balance sheets.
Newsweek reporter Matthew Philips writes:
"Within a few years, the credit default swap (CDS)
became the hot financial instrument, the safest way to parse
out risk while maintaining a steady return.
'I've known people who
worked on the Manhattan Project,' says Mark Brickell, who at the time
was a 40-year-old managing director at JPMorgan. 'And for those of us
on that trip, there was the same kind of feeling of being present at
the creation of something incredibly important.'
Don't ask me how a guy who was 40 in 1994 "knew" people on the Manhattan Project, because I have no idea. The point is, everyone in the
finance world in the mid-90s saw the proliferation of credit default swaps as a major, game-changing thing.
Now, check out this chart of the Dow Jones Index from 1958 until 2008:
Oh, hello there 1995! And hello there, subsequent explosive growth that was hardly harnessed by the tech bust or 9/11!
Of course, many banks have now learned the hard way that no matter how much they dice it up and sell it off, risk is still risk. And loan defaults are very bad things that are *very* difficult to fully escape.
So: If that Cristal-fueled weekend in Florida never happened, where would the DJI be today? Based on the trajectory up to then, and using my highly sophisticated "finger tracing" method, I'm going to say around 7000 points. Is that the "bottom" we're all looking for?
I'm actually asking, because I really have no idea. But it makes sense to me.
*Yep, the title is a reference to Billboard's #1 single in 1994, by Ace of Base. Hey, if we're going back to the mid-90s anyway, I say let's go all the way. Flannel shirts, 90210, and "Clueless," anyone?
Ha, well, let me know.