Wednesday, October 01, 2008

Wall Street Morphing: Required Syllabus

As the markets unravel we can all reverse-engineer and wade our way to discern what, in fact, happened. A few sources that have proven invaluable lately are below.

Note that this list is hardly exhaustive. For example, more thoughts about how the banks became speculators and traders vs. service providers (and the impact that this 'derivative' tangent had) are floating out there somewhere & not captured here...:

1) James Cramer . Never was a big reader of his but this article - already a few days 'old' and pre-Buffett investment in Goldman - remains quite spot-on.

2) Princeton economists. Not ivory tower! These guys have the data and the reality to help us not only diagnose what happened, but prescribe a better future. Just a FEW references on some key insights (and I'm only 18 minutes in! I tried to capture rough time-markers....):
- Minute 6:30: the i-banks leverage was just the opposite of household leverage; that is, as asset values increased, so did the banks' leverage. The opposite happens at an individual household level (as your home appreciates in value, your leverage DEcreases). As a result, when the underlying, long-term asset depreciates, the ensuing death spiral accelerates at unprecedented, exponential paces than historically experienced (and...don't press me to explain beyond that ;0).
- Minute 12: This is big: the "maturity mismatch" snafu that happened when long-term assets such as homes were chopped up into short-term investment vehicles/products (call them what you will). This led to high volatility as short-term debt no longer could be rolled over when long-term values began to fall.
- Minute 14: 40: recommendation to measure risk and exposure systemically (i.e. don't just look at how Lender A connects to Lender B to assess the amount of exposure Lender A has - the exposure must be evaluated in light of the whole web).

...and again, I'm not even 1/3 of the way through...I SWEAR those economists are the smartest. I have nothing but geek love for them.

3) Roubini. Again. Nouriel. My hero. He started predicting hedge fund fallout last week. Bets?