92 THE BiG DROP
I was talking to an investor recently about shifting some in-
vestments, and he said: “Well, you know, my broker took care
of me I got some cash, money market funds, I got some stocks,
and I got this bond fund.”
And I said: “Do you know what’s in your bond fund?”
He answered: “No, the broker recommended it.” And I
answered: “Well, let’s get out the documents.”
We dug inside. It was a municipal bond fund. We found
bonds from Puerto Rico, we found the bonds from city of Detroit
— absolute garbage. This is the kind of danger you’re in.
Some of these fracking companies are going to go bank-
rupt. That means you may have equity losses on some of the
companies if they didn’t hedge.
Then, many frackers issued debt which is going to default.
It doesn’t necessarily mean the company goes into bankrupt-
cy, although it might; they might have to restructure. That
debt, however, whether it’s bank debt or junk bond debt, is
going to default.
Some other companies are going to be fine because they
bought the derivatives. But then, where did those derivatives go?
Think back to the housing bust. We now know that a lot of
the derivatives ended up at AIG.
AIG was a 100-year-old traditional insurance company
who knew that they were betting that house prices would not
go down. Goldman Sachs and a lot of other institutions were
taking that bets too.
When house prices did go down, everyone turned to AIG
and said: “Hey, pay me.”
It’s just like if you win at roulette in the casino, you expect
the house to pay you. But AIG of course couldn’t pay and had
to be bailed out by the United States government to the tune
of over $100 billion. That’s the kind of thing we’re looking at
now. These bets are all over the place, because nobody thought
oil was going to go to $60.