FT243

Financial collapses rarely occur on the scale of the banking crisis of 2008, but there is nothing new or unique in the economic features that led to this collapse. While the public struggles to understand exactly what went wrong, it is certain that two contributing factors are, sadly, familiar tales –  greed and delusion.

The first of these was the eagerness of banks to cash in on the property booms in the UK and US during the early/mid-2000s. Faced with an expanding and overheated market, the bankers did what bankers do best and sought to maximise their immediate returns. This led to banking practices that could only really make sense on the basis of ever-increasing house prices. [1]  An economic model secured on a perpetual one-way bet on the price of any commodity is one based on hope over reality.

The second factor was the increasing reliance of banks on trading in ludicrously complex and obscure financial instruments. Indeed, some of the derivative-based instruments traded between banks were so complex that even those buying and selling did not understand them. [2]  All that mattered was that someone else might be prepared to pay more in the future; the link between market price and intrinsic value was blurred. A recipe for disaster.

History always contains the right less-ons if you know where to look. Perhaps the bankers should have spent less time inventing new ways of making paper or electronic money and more time contemplating Beanie Babies.

As far as I am concerned, staking my child’s future education fees or my pension pot on an investment in small cuddly toys with names like Weenie, Spunky, Dotty and Gigi seems like madness. However, that is exactly what many Americans did during the late 1990s. With the full benefit of hindsight, it was, indeed, madness.

The original Beanies cost .99, but the Beanie craze saw second-hand prices for rare or scarce Beanies increase to anything approaching ,000. But it was not enough for the market to cater for rare and scarce Beanie Babies; inflated prices were obtained for all Beanie Babies, even when the market was flooded with the dumpy little things. As Beanie Babies began to change hands for ever-increasing amounts, they came to be considered an investment. In the rush to be part of this opportunity, desperate investors began to pay ever more desperate prices. Beanie Babies were bought and sold on the basis of expectation of profit rather than the value for sale to a final loving owner. It’s an almost identical mindset to that involved in the Tulip Mania which struck Holland in 1637. [3]

As people became desperate to get in on the action, civil unrest was reported at stores selling Beanie Babies. [4]  There were even rumours of Beanie Baby-inspired crime. [5]  When McDonalds included a Beanie Baby as a gift with their Happy Meals, young entrepreneurs quickly learnt how to make a fast buck. Knowing that a Happy Meal could only be purchased by an adult with a child, some children even hired themselves out to childless Beanie investors to sit in their car at the drive-in and sanction the purchase of the Happy Meal. [6]

Whether by design or accident, the distribution policies and marketing of Beanie Babies could not have been more suited to creating a façade of exclusivity and the hope of potential future value. Despite the fact that Ty Inc, the company that designed and manufactured the classic Beanie Babies, was producing millions of Beanies per year, they were only sold in smaller, mainly independent, toy shops in unpredictable batches, thus hiding the true state of the market. To add to this uncertainty, lines of production were often halted with no advance warning. [7]

In response to this, buyers created networks to share information on deliveries and ensure their place in the queue. The fever was so high that no sooner did a batch arrive than it was sold out, the resulting empty shelves serving to increase the desire not to miss out on the next batch.

In late 1999, Ty announced that on 31 December 1999 it was to cease product-ion of Beanie Babies. Faced with the end of production of their beloved commodity, collectors and investors questioned their actions. The market collapsed. Although Ty did return to producing more Beanie Babies, it was too late. The bubble had burst.

Rare and unusual Beanie Babies still have some market potential, and as long as there are people who choose to collect on the basis of what the Beanie means to them, this market will survive. However, the second-hand market for the more common and standard Beanies is virtually non-existent. Beanie sellers on eBay have to accept selling prices of less than .

So, what happened? Firstly, the market in Beanie Babies only worked on the premise that their market price would always increase. Secondly, the link between market price and intrinsic value was blurred. Sound familiar?

Of course, modern bankers would no doubt laugh at the idea that their banking practices could be considered analogous to the Beanie Baby craze. But, I would propose that, once you get past the jargon and bullshit of the financial world, many of the roots of our world banking crisis involve nothing more than multi-billion dollar Beanie Baby-style investments. Taking the similarities even further, it seems quite appropriate that a second-hand Beanie Baby is, in reality, just a load of old balls.

NOTES
1 For an amusing and easy to understand explanation of the banking practice of mortgage securitisation and how this ultimately undermined the banks see: http://tinyurl.com/2kvosz. Highly recommended, as long as you don’t mind some strong language.

2 When Lehman Bros collapsed, Frank Partnoy, a law professor at San Diego University, was quoted in the New York Times: “The really interesting question that no one knows the answer to is, if you were to go into liquidation and sell off all the derivatives contracts, what is the value… We are just learning that no one, not even the senior people within these banks, knows how much these contracts are worth.” http://tinyurl.com/5jy43h.

3 Investors were prepared to pay ridiculous prices for future contracts for the purchase of tulip bulbs. The price of the contracts bought and sold bore no relation to the eventual purchase price of a tulip bulb. The market eventually and inevitably collapsed. See Mike Dash: Tulipomania, Weidenfeld & Nicolson, 1999; http://en.wikipedia.org/wiki/Tulip_mania.

4 “Beanie Babies on Parade”, LA Times, 10 Sept 1998; http://tinyurl.com/4zraqg.

5 “Woman Hurt, Robbed of Beanie Babies, Cash”, LA Times, 10 April 1998; http://tinyurl.com/434dmn.

6 “Writer baffled by Beanie Babies craze”, The Lantern, 23 April 1997; http://tinyurl.com/4e2gan.

7 “Bubble Bursts on Beanie Babies”, Seattle Times, 31 Aug 2004; http://tinyurl.com/3t5lxb.