NEEDHAM, Mass.  In this quiet suburban town west of Boston, fathers bring their kids to Great Plain Avenue on Saturday mornings to buy, sell and trade baseball cards at two competing dealers situated across the street from each other.  "It's great fun for my boys, and it brings back memories for me," says Jim Wolfson, a mutual fund accountant.

Needham Town Hall

Beneath the surface of those innocent transactions federal regulators see a serious threat to the American economy, however, one that could cause the bull market of the past few years to come to a crashing halt if the prices of basic commodities such as sports memorabilia were to fall.  "You have small, loosely-regulated card shops piling on debt in complex derivative transactions," says Timothy Schwermer, president of the Federal Reserve Bank of Baltimore.  "It wouldn't take much--a career-ending injury to Ken Griffey, Jr. or Barry Bonds going to jail--for the whole market to collapse."   

The use of leverage enables small, suburban card dealers to dramatically increase their gains from seemingly mundane transactions.  "I had a kid come in here last weekend who wanted to dump all his Nomar Garciaparra stuff," says Paul Ho, owner of Needham Sports  Cards, "everything from a rookie card to footie pajamas."  With the help of a Boston investment bank, Ho was able to borrow $125 on just $10 worth of collateral--a Dennis "Oil Can" Boyd bobble-head doll--to complete the purchase.

"Oil Can" Boyd:  "Why'd he call me a bobble-head?"

Omaha billionaire Warren Buffett explains that, if the value of either Garciaparra or Boyd as a long-term play drops, Ho will face a "margin call" in which he will be required either to sell the Garciaparra holdings, causing the value of his purchase to drop further as supply increases, or post additional collateral.  "I'm tempted to explain the concept by making a joke using Mr. Boyd's nickname," Buffett warned, "but this is a serious topic and I'm essentially a humorless man."

"Bud Selig gave this to me."

Mr. Wolfson, the accountant, says he is protecting his boys' investment through a complex series of hedging transactions that will offset any decrease in the value of their holdings by a forward purchase of Eurodollars, Texas light crude oil and Star Wars-themed Colgate toothpaste tubes.

"In any period when you have deflation of asset values," he notes, "there's always a flight to quality."

Copyright 2007, Con Chapman