05/28/2009 05:12 am ET Updated May 25, 2011

Field of Dreams: Fantasy Finance Meets Fantasy Baseball

Baseball is in full swing which means fantasy baseball aficionados are glued to their computers watching their make-believe teams drive them crazy. The craziest part is they are playing with financial derivatives, without knowing it. Our fantasy baseball betting leagues, in fact, have quite a bit in common with the fantasy finance played on Wall Street. But unlike fantasy sports, where all we risk are a few dollars and bragging rights, the collapse of Wall Street's fantasy finance world has triggered a global economic catastrophe.

Fantasy sports leagues derive their value from real professional sports teams. In our American Dream League, each of our teams is ranked according to the statistics of real baseball players. For the past 28 years, we gather in early April in a seedy basement of a midtown Manhattan bar to draft real American League baseball players for our make-believe teams. Of course we don't "own" these players, we just pretend to. But the bets are real: The winner is the team that accumulates the best statistics in the course of the year, (like the most home runs, the most runs batted in, and the most stolen bases). After six grueling months, you win a little bit of real money and a lot of ego gratification. For you, a winning fantasy team is a valuable financial derivative.

Tens of thousands of fantasy sports leagues play a similar game using the statistics of real baseball, football and basketball players. Shelves of books and an array of internet stat services cater to our leagues. Websites and computer programs help us evaluate the talent. We have our own little economy based on pure fiction. But although the value of our make-believe teams depends on the real players we have drafted, none of us own the real assets, except for our player lists and our pride.

High rollers on Wall Street play their own fantasy finance game with synthetic collateralized debt obligations (CDOs). Synthetic CDOs derive value from something real -- namely, giant pools of debt (subprime mortgages, credit cards, corporate bonds, student loans, auto loans, etc.). If you invest in a synthetic CDO it is as if you owned the real thing. But at no point do you actually own the underlying mortgages, credit card debt or corporate bonds. You just own a derivative which has value that moves up or down with the referenced pool of debt, just like I own my dream team of baseball players.

Derivatives were enormously profitable for Wall Street because they greatly expanded the number of financial securities that could be created and sold for handsome fees. Instead of one pool of debt that was chopped up into sellable securities, you could securitize the same pool again and again, just like in fantasy sports. Thousands of synthetic CDOs have been sold that reference the same set of underlying real assets again and again, just like there are thousands of fantasy baseball teams that reference the same Major Leagues. It sounds crazy, but hundreds of billions of dollars worth of synthetic CDOs are floating around the world, and their entire value is based on certain credit assets that are owned by others. (More precisely, there are credit default swap "insurance" policies on those assets.)

The proliferation of derivative securities that don't own any real underlying assets has helped to wreck our economy. Consider what happens to our fantasy baseball teams when the real Major Leagues went on strike in 1994. Our derivative teams were suddenly worthless. The stat services closed up shop. Our books accumulated dust. The entire fantasy baseball enterprise went kaput.

Now imagine what happens when subprime debt loses real value in the real economy because housing prices have crashed. Of course millions of homeowners and their neighbors suffer. And it's also a loss for the institutions that hold those mortgages as well as for homebuilders and suppliers and housing speculators. But the problem is enormously amplified because synthetic CDOs have spread the problem to thousands of institutions that own fantasy finance derivatives based on those mortgages. There would be no economic meltdown were it not for synthetic derivatives that also crashed along with housing prices.

Now that synthetic CDOs have plummeted in value, financial institutions all over the world are stuck with worthless securities that Wall Street calls "toxic waste." The balance sheets of banks and other financial intermediaries are a mess and they teeter on the brink on insolvency. They stopped loaning money, and the credit system froze. (Then they blew the door off the US Treasury vault and walked off with over a trillion dollars in loans and are set to get billions more as the government buys up their toxic waste. But that's another story.)

Bernie Madoff, -- the Babe Ruth of fantasy finance -- is in a league of his own. His Ponzi scheme simply did away with all the fuss and bother of investments. If he were running your fantasy baseball league, he would make sure your team was in first place, week after week. What a thrill! Others would admire you for your baseball acumen. Just don't try to collect your winnings from Bernie at the end of the season.

As for me, I'm sticking to fantasy baseball. The ego rewards are more satisfying. Our treasurer doesn't steal. And when you lose, even though it feels calamitous, you don't wreck the world economy.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity -- and What We Can Do about It, (Chelsea Green Publishing, June 2009)