Wall Street is a Nude Beach

Several months ago, financial ninja Warren Buffet (not pictured above, but wouldn't that be funny?) told Fortune Magazine that investment houses have been "swimming naked." Their risky investments, he warned, would soon reveal that the emperor has no bikini. And all that cash stuffed inside her chacha won't be enough to save us either.

Okay fine...Warren never extended the analogy to include genitalia, but he did refer to Wall Street as a nudist beach. In fact, he has been a harsh critic of the very folks that made him the richest man in the world for some time now. In the wake of the recent bankruptcies/bailouts/buyouts of major players Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, and Merril Lynch - it seems that "The Oracle" was correct yet again. Honestly, I'm glad that there will be fewer of these arrogant little I-Bankers pontificating in class, but unfortunately these corporate collapses will effects much more than just my school.

One of Warren's biggest warnings surrounds the financial instrument called derivatives. WAIT WAIT WAIT! Before your eyes start glazing over and you scroll down to watch that karaoke video again, let me 'splain it to you!

If an investment is a gamble, then a derivative is a gamble on that gamble. So basically, its like betting on how an investment will perform, instead of on the investment itself. For example, let's say my brother bought a baby racehorse with the hope that it would grow up to win the Kentucky Derby and make him lots of money. I come along today and agree to purchase that horse in a year, before he's old enough to race. Although the price I have offered is less than my bro might make if he won big at the Derby, it's less risky because anything could happen to his horse as it grows up. If his horse is really fat in one year and can't run, then the price I'm offering today is more than he'd get if he tried to sell it on craigslist. But alternately, if his horse is the next Big Brown then I am rich as hell.

JUST BEAR WITH ME A LITTLE BIT LONGER

The contract between my brother and I is called a derivative . There are a number of different varities (options, puts, calls, etc) and they can get extremely complicated. What is so potentially dangerous about derivatives is that the profits and losses are recorded right away, even though no money has actually changed hands and typically won't for years. That gets tricky when all my brothers come home asking to cash in all the contracts I've made...My man Warren said derivatives are "financial weapons of mass destruction." See BBC article for more. Even the FDIC says that derivative activity in the US is more than $56 trillion! Yikes!

So why should us lefties care about the bankers booted off Wall Street, dripping wet and naked? Well, because we and our friends and family (that is, normal people) will be hurt far more than the heads of major financial institutions when the house of cards crumbles. The former Enron and WorldCom execs are doing just fine. But us, we're going to have be smart about our choices over the next couple years and that starts with understanding what these oligarchs are doing with our money (or lack thereof)...

On a personal tip, I'm shopping around for fire-proof safes to start stashing money Great Depression style. I'll TRY to stop racking up my credit on used high-tops from ebay. When the crash comes, I'm going to be prepared in full newsie attire. We all have to play our part, and I'm fairly certain that mine involves a vest.