Thursday, October 16, 2008

WALL STREET OR WAALSTRAAT?

We have heard a lot lately about securities made up of bundled mortgages (or parts thereof). This financial instrument has been characterized as a new way of distributing risk, and giving people more opportunties for profit. Of course, when it turned out that the mortgages in some of these securities turned out to be worse than average (i.e. higher default), lots of people lost lots of money.

This morning I was reading A Splendid Exchange: How Trade Shaped the World, by William J. Bernstein. It is a pretty interesting book, and does track some of the major trends in world trade from the earliest days. On pages 235 and 236 there is a discussion about the Dutch East Indies Company's effort to fill its personnel needs.

This grisly recruitment effort was run by a specialized corps, composed mostly of women, the zielverkoopers (literally, “soul sellers”). Their marks were the young foreign men, mainly from Germany, who swarmed into Dutch cities seeking their fortune. In return for a cut of their signing advance and future pay from the Company, the women advertised room, board, and the kind of entertainments usually sought by unattached young men, during the weeks and months until they sailed for Asia.

The reality fell far short of the promise. One contemporary report described three hundred men in a single attic:

where they must stay day and night, where they perform their natural functions, and where they have no proper place to sleep, but must lie higgledy-piggledy on top of each other . . . the death rate is so alarming that the owners, not daring to report the correct number of deaths, sometimes bury two bodies in one coffin.

Holland being Holland, this Faustian transaction yielded a financial instrument, in this case the transportbrief—a marketable security entitling the zielverkooper to a cut of the recruit’s wages, paid by the Company as they were earned. Other investors then bought these securities at a discount that reflected the high death rate of VOC personnel and assembled them into profitable, diverse pools of human capital. These magnates were called, naturally enough zielkoopers—buyers of souls. When, in the eighteenth century, the mortality among VOC’s soldiers and sailors soared because of lax Company procedures, many zielkoopers went bankrupt.
Wait, wait, wait. The Dutch in the seventeenth and eighteenth centuries had already created a financial instrument that bundled payments with a portion of risk and subdivided the risk among many investors. And in that same era, when the contracts making up the financial instrument were worse than average (i.e. more people than normal died) lots of people lost lots of money?

First, those asshats on Wall Street have never invented anything that the Dutch didn't do 300 years ago, have they? Second, does this mean that the outcome of the current crisis could be that we would become more Dutch? And you thought Starbucks was beneficial to the "coffeeshop culture." You ain't seen nothing yet.

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