Scandals, they are good for something.

Just as was the case with the bankruptcy of Enron, Worldcom and the like, the latest troubles underlying the capital markets will help to reveal some questionable behaviour that has otherwise gone unnoticed. Following the big scandals earlier this decade, newspaper headlines were jam-packed with executives on their way to jail and establishment of new laws and regulations like Sarbanes Oxley. With the spotlight now on acronyms like CDO, CDS and CMO, the next round of similar headlines is not far away.

I just read this article and it really drove-home how the big banks, in their take-no-prisoners approach to turning a buck, may have unwillingly taken those dollars straight out of the pockets of the people who could least afford to be separated from them. Jefferson County, Alabama, is the latest municipality at risk of bankruptcy and the cause are the swaps it purchased to avoid this very situation.

JPMorgan, Bank of America, Lehman Brothers and, yes, Bear Stearns, all sold interest rate swaps to Jefferson County to help them hedge their risk on loans purchased to finance the county's latest public projects. With interest rates going in just the opposite direction, it's left the County with the obligation to pay rates in the double-digits only weeks after paying as little as 3%. The county, now in dire straights, has hired its own independent analysts to review their swaps purchases and has been stunned to learn that the aforementioned banks collected as much as $100 million in excess fees by charging far and above the prevailing rates for the securities.

When our car is running well, we don't visit the mechanic. It's only when strange noises alert our attention to a possible problem, that we hire someone to figure-out what needs to be fixed. When you drive a domestic car, you can generally visit any mechanic and find the services you need at reasonable rates. When you drive an exotic, however, you need to visit specialists who will charge you far more for their expertise. The types of exotic securities being purchased these days require just such specialists and, unfortunately, these experts are taking advantage of their clients in much the same way an unscrupulous mechanic might. Fortunately, unlike mechanics, these financial institutions must answer to their regulators who will penalize them for these acts, but hopefully the buyers will learn from these experiences too. Being able to afford a Ferrari goes well beyond having the funds to pay its sticker price; don't be buy exotics, be it cars or financial instruments, unless you thoroughly understand how they work and have the funds to pay those unexpected bills.