The year in review

Money. It's so last year. But cheer up. Consider the following. So we were wrong about, well, everything: real estate, leverage, deregulation, derivatives, risk management. I mean, really, who's perfect?

-- See the full slideshow: Year in Review: 2008 --

You've got to squint to see anything we got right, this side of, hopefully, Barack Obama. But the great thing about being wrong about everything is, well, odds are the situation is bound to turn at some point. Let's face it, with stocks slumping like a California mudslide, with forest fires and Barney Frank closing in, pessimism is the new optimism. Greenland is melting, but credit is frozen. Iceland's not doing so hot either. Lehman has become Barclays, Bear Stearns has become J.P. Morgan Chase & Co., Merrill Lynch & Co. has become Bank of America and the U.S. Treasury, Henry Paulson (temporary) proprietor, owns Freddie, Fannie and the junketeers at AIG, and there's a Citi ATM in the Old Executive Office Building. Greenwich-based hedge fund Poopsnoop, Flackerie & Grinde LLC, founded 2004, finally flamed out after overdosing on credit default swaps. The metaphysical Oz of "Wall Street" has, well, dissolved into a Dickensian warren of mean streets full of dead Pontiacs. NPR is fixated on "Brother, Can You Spare a Dime?" Bartleby the Scrivener has returned as the Street's house god.

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So let us try, children, to explain what went awry in this fairyland called Wall Street. I will speak very slowly. First, there was this thing called leverage. Once upon a time (after the last disaster), leverage was scarce. Money was plentiful in bank vaults, but it didn't travel very far or very fast. (You can't just take a lot of real money into the streets for fear of losing it; that's risk.) This was a problem, my friends, because the world wanted money and was willing to pay for it. So tools were developed to allow money to break out of vaults and make like Peter Pan: here, there, everywhere. Once money could fly around tossing pixie dust, liquidity, a kind of metamoney with aphrodisiacal properties, began to flow from the ground somewhere near Scottsdale, Ariz., filling the big bathtub. It was either a fountain of youth, a generic form of Viagra or the beer tap at Busch (er, InBev) Gardens. Enter risk management, which was invented to allow us to handle more and more liquidity without blowing ourselves up into a thousand pieces. And then, something truly magical occurred. Now that we knew how much we could hold, we could consume more and more. And the more we imbibed, the more experience we racked up, the more we could consume. Look at us! Fat! Happy! Triple-A! It was a great system, until one day, doggone it, we took a sip and exploded into a million pieces. We went from value-at-risk to moral hazard as quick as a Sarah Palin logic shift. Triple-D-.

Putting those pieces together again has proven difficult. One reason is that the pieces are not numbered. Another is that the financial system is not a shattered Pottery Barn ashtray, like Iraq. Break an ashtray and you can Super Glue it together again. But finance consists of "real" assets like real estate (ponder that use of "real," and you're on your way to a finance degree) that provide the foundation for vast, swaying towers of abstraction. And unlike the ashtray (on sale: $5), every floor of those towers, every component of every floor, from lobbies to escalators, fluctuates in value depending on everybody's bipolarity. Now what makes this so 2008 is not the collapse of real estate -- hell, real estate's been collapsing since they invented Florida -- rather, it's the abstractions. What exactly is "abstract?" Well, there is real (dirt), less real (mortgages), less real yet (mortgage-backed securities) and really, really less real (CDOs, etc., etc.), known as less-real-squared or -cubed. The higher you go, the less-real things get and, weirdly, the more they hurt when they self-destruct. This scales quicker than a computer virus. Real is a house sitting on dirt. Touch it. Burn it down for insurance. Less real is a mathematical model. The ultimate less real is a big fat zero, which we should avoid if possible.

Where were we? Ah, the big bath of money. Actually, we were considering the matter of abstraction. For all the talk of venality, criminality, imbecility, etc., etc., the year marks the demise or, more accurately, the severe maiming, of Abstract Man, often known as Hedge Man or M.B.A. Man. Exhibit A: our lame-duck president. Exhibit B through whatever: There's Alan Greenspan confessing his flaws. There's Christopher Cox chasing rumors with a butterfly net. There's Paulson revising his revisions. There's indexes -- VIX, ABX, TED spreads -- so spooky they jiggle without human intervention. There's alphas (not many), betas and crazy eights lying on their sides, which is never a good sign. There are paper fortunes, trophy wives and the SimCity banking system scattered like newspaper companies. Alas, as Abstract Man plummets, pulling down those turrets and towers behind him, he's heading straight toward a poor soul -- a real person in a real America -- staring up from his two-bedroom starter with the Home Depot grill. What's that in the sky, Mildred? Coming toward us like a meteor. My gosh, can you hear, Mildred, he's singing. Listen. What's that? "Brother, can you spare a ... ?"

And so Abstract Man crashes, right into a big empty birdbath. This, my friends, is how abstraction returns to earth: head first into the bird crap.

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