Rock & Roll: source of all wisdom

My big revelation in the job search process was this:

"Negotiations" = asking for something.

Thing is, the banks already asked! The gvt gave, and wisely.

But now they want to "re-ask"?

I don't think so.

Hold the line, Timothy!

Surely this must be a *lagging* indicator....

I was so eager to check out NY's Museum of American Finance, "the nation’s only public museum of finance, (whose) mission is to promote financial literacy, and to empower people to better understand risk and reward in order to make more effective financial decisions."

But what are we to make of the "Current Exhibit" page?


404: Resource Not Found

Creative accounting on steroids

Because the king of steroids is in charge!

But IOUs? Reallly....?

I guess it's a self-fulfilling prophecy: if you don't invest in infrastructure, the populace becomes dumb enough to accept just about anything. All roads lead to Idiocracy!

Is it possible to short a U.S. state? If not now, I'm sure the Wall Street guys will figure it out....

Overdrive

If the symphony of forces colluding to create our current economic meltdown isn't enough to get you down, throw in some gubnatorial malfeasance, medical misrepresentation and overt fiduciary egregiousness and (if you're anything close to human), you'll soon be in the same place of despair as me.

But the best antidote to despair: The Motor City! Where all things real become surreal.

"It's the Cadillac of mini-vans."
-- Chili Palmer

Economic rap-sody

• Wall St./Main St.
• Innovation/Regulation.
• Short-Term gain/ Long-Term pain.
• S&P. SEC. Freddie Mac. Fannie Mae. Fed-e-ral Reserve.
• Overreaching homeowners. Mercenary mortgage brokers. Delusionary derivative creators. Rogue real estate developers. Parochial pension fund managers. Icelandic gubernators. United Autoworkers.

"God made humans upright, but they have gone in search of many schemes."

- Solomon

Today we bling, for tomorrow we die.

Admiration for all things prophetic -cntd-

Do you know his aol account?

I've admitted to geek adulation a few times here; the latest on the radar (though hardly new) is Michael Lewis:

Lewis: [Five years from now] ...a job at Goldman Sachs is about as glamorous as a job at the Chase Manhattan Bank was in 1985 -- it's just not what the brightest sparks want to do. The neatest jobs in finance are venture capital and private equity, but they are smaller, niche jobs. Generally, the financial services sector shrinks quite a bit. There are many fewer people making, taking financial risks.

Greer: And so Michael, I know after Liar's Poker, you had said that you hoped that "some bright kid, say at Ohio State University, who really wanted to be an oceanographer, would read my book, spurn the offer from Morgan Stanley and set out to sea." So are we going to see more oceanographers?

Lewis: I think they are not even going to want to read my book. I think this era on Wall Street will have finally come to an end, and people will look at Liar's Poker as a document from the distant past.

I wish we could sell CraigsList postings on eBay....:

BROKER TRAINEES WANTED FOR WALL STREET FIRM!!! (Financial District)
2008-12-03, 10:22AM EST
E1 Asset Management is a rapidly growing Wall Street firm with 175+ employees, excellent support staff and top of the line technology. US regulated (SEC, FINRA). We provide a safe home and a clean disclosure record to build and maintain your future business. We want to develop top producers for the long term. Ex-Mortgage, Insurance or Real Estate Sales professionals welcome. Excellent opportunity for recent college graduates! Must be authorized to work in the United States! Paid training & excellent "on the job" training. Send resumes to Rachel Ryu at rryu@e1am.com or call her today at 212.425.2670. Learn what it takes to survive and flourish on Wall Street. For more information about our company please visit our website at www.e1am.com

Maverick

oops wrong soundbyte. I meant to say:

"Bailout."

But....really?

U.S. Representative Jeb Hensarling (who hails from the one other state besides Michigan that causes an inordinate amount of grief to our nation*), latched onto the "bailout" bandwagon when he told (more grief) Fox News: “You wonder where bailout-mania will end.”

Mr. Hensarling said American automakers should bear responsibility for their failed operations. “They are producing high-cost products that consumers don’t want to buy. And so now we have Washington on the verge of giving them a bailout simply because we have all heard of them and they have high-priced lobbyists.”

Ok sorry: this is where I must now intervene...and for reasons beyond a feral need to defend my beleaguered hometown. Because, not only is the above statement simply untrue (consumers DO want to buy gas guzzlers when gas is cheap), but there are several things that differentiate the Big 3 (an admittedly nostalgic descriptor these days) automakers from the financial services firms. Namely, the automakers have**:

• high fixed costs for manufacturing
• a heavily unionized workforce that adds a prohibitive cost element and restricts competitiveness globally
  
• an extensive supply chain that impacts various elements of the economy (steel, textiles, electronics, manufacturing)
• environmental implications which have only recently been uncovered and require regulation...nearly one century after the industry structured itself without these considerations
  
• an aging labor demographic that, if abandoned by the existing pension commitments, stands to significantly...significantly drain the federal government's social services
  

None of the above conditions apply to the Wall Street firms. And, none of the above conditions are remotely likely to be re-created in another industry any time soon. And as such, the moral hazard moniker being used to avoid aiding the Big 3 simply doesn't stick here.

Oh, and isn't the proposal on the table for the automakers just for about $25B of the (as of today) $700B+ in assistance funds? So if moral hazard is irrelevant and just 1/28 of the $ set aside thus far is all we're talking about, what is the real story behind the lack of political will?

As much as I really wanted to get the hell out of Dodge (viva la double entendre) when I left the Great Lakes State, I sure don't want it to be a total black star.

*and provides yet even more grief in his role as chair of the paradoxically-named Republican Study Committee.

** credit for this list goes in part to Salon poster Elephantman who provided much insight into the unique history & economics of the auto industry

Finance is the new sexy

Theoretical? Abstract? Removed?

It's been over 9 months since I emailed some friends a snarky-yet-frighteningly-incisive piece laying out the intricacies of the current sub-prime-and-the-kitchen-sink crisis. Fast-forward to today, where the NYT tells the exact same story, detailing the tragic implications that this human propensity for denial has had on school districts, municipal authorities and local governments (and of course, all of their attendant constituencies = us) around the globe.

A sad taste of the destructive ripple:

...the transportation authority has already announced it will raise subway and train fares next year because of various fiscal problems, and may be forced to shrink the work force and reduce some bus routes. Some analysts say fares will probably rise again in 2010.

People have always wanted to be the exception. To not, as someone recently said, "be average" but to be "above average." This means timing the markets. Escaping risks that, while explained to you, don't really apply to you. This is not new. But, what has changed is the scope and the degree of interdependence that results from this behavior.

Time for financial literacy to get sexy!

Un-be-frickin'-lievable (or: the Post of Rhetorical Questioning)

Welcome to this highly evolved and erudite term - you saw it here first! - which I was forced to create because I've exhausted all other descriptors -- outrage (twice, even), shock, disbelief, audacity, indignation and flabbergasted(ness) .... even getting to the point of becoming "Blogless".

So, while Blogger really has saved on the therapy bills, we know that therapy only elucidates but does not transform. Hence the un-be-frickin'-lievability pounds on. In this case, the culprit: Credit Default Swaps were unregulated....???????? I mean, I could see how these new securities constituted uncharted territory (=they were "new") and, as such, the exposure they created for their holders wasn't fully realized* until it all unwound.

But....COMPLETELY unregulated????????

Free-market purists are so pure they fail to grasp human nature, which is not, of course, purely rational.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said. Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Our former flavor-of-the-Administration went on to subtly defend himself....:

“I have been going for 40 years or more with very considerable evidence that [this economic worldview] was working exceptionally well.”

But doesn't every Series 7 person know that 'past performance is not an indication of future results'? Reference my grasping to define character as being willing to course- correct....sometimes of course than can appear as waffling ;-)

I know hindsight is always 20/20 and it's easier to criticize retroactively than to formulate policy proactively. However, I'm being hard because, in this case being "wrong" has led to trillions....as in, "tr"....of damage worldwide.

Somehow that adage of "asking for forgiveness is easier than asking for permission" just doesn't seem to cut it here.

*see #2, "Minute 14:40" reference in this post

Validation of my brilliance

In that lame, self-promoting spirit of "I Said It First" (recall I've never held back from shameless pandering): Liz Ann Sonders, SVP & Chief Investment Strategist at my beloved employer (and nearly as brilliant and beautiful as me), writes today:

Gov’t to pull a Buffett?
I also think the Fed may have to consider direct investments via preferred shares in banks; kind of like a mega-Warren Buffett, and/or allow financial institutions outside the normal banking system, like commercial lenders, to borrow directly from the Fed via the discount window, with appropriate collateral and with an oversight that those borrowings do indeed get lent out.

Of course, I noted this nearly 1 week ago which feels like eons in light of the unprecedented pace of change bemoaning the financial services industry. But who am I to shamelessly self-promote? I always give credit where it's due.

Property of transference

High school geometry:

Wall Street asks for $700B
California asks for $7B

Therefore:
California/Wall Street = 10%
Diane/California = 10% (I'm having Sarah Palin run some models for me)

Ergo >>>> Diane asks the feds for $700M

I'm thinking that can buy a LOT more in Manhattan than it did last year and I'm willing to provide warrants to the feds for the equity increase over time.

See? Math is phun!!

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?

Can we please read the fine print and learn?

A friend recently shared how her dad says that whenever things head south, there's always a way to make money. Enter poster child Warren Buffett.

Just days after buying $5 billion of Goldman Sachs ("perpetual preferred" stock...ah....), Buffett shows he has a soft spot for those kinds of shares and buys $3B more of GE's.

The perpetual preferred stock carries a dividend of 10 percent, and can be repurchased after three years, at a 10 percent premium. Berkshire Hathaway will also receive warrants to buy $3 billion of common stock at $22.25 within the next five years.

So when Americans becry a "bailout" I wish they could do some Buffett primering. Specifically, there are bailouts...and then there are deals. Congress needs to strike the latter. Unfortunately, these involve a bit more complexity than the average person has an appetite for (dangling preposition and all).

We remain our own worst enemies

When the market nearly free-falls as it did today, the last thing we should be is glib or take any delight in being "right." So hopefully it is with sorrow rather than smugness that, in light of Congress' decision today, I can't help but recall my earlier posts on how to approach key moral dilemmas, and the psychology of risk/reward:

Members of both parties, doing a quick political post-mortem, said those who voted no had encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.

Are our members of Congress exercising, to use Richard Foster's terms, "creative" or "destructive" power? Is that a rhetorical question? :-p

I love press releases

“We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs,” Mr. Blankfein said.... Mr. Buffett, also in the statement, called Goldman Sachs an exceptional institution.

The thing that makes Buffett so admirable is that he adheres to that timeless market adage:

• Buy low.



• Sell high.

Ergo, I don't doubt Buffett's statement for a second; in a market transaction just about anything can be exceptional depending on the price. I can also see why Blankfein used a word like "pleased" vs. an effusive word such as "exceptional."

Kant, Hobbes and Wall Street

Some excellent Q&A in the NYT on the latest epic morphing of Wall Street elucidates the ongoing relevance of timeless questions such as "the individual vs. society"..."is inaction better than negative action"....etc. Excerpts below, with certain emphases added, and one more pitch to go to http://www.yourmorals.org - go there.

However, in lieu of solving such intractable problems, I'm focusing my small brain on tackling things like: given the fact that everyone will now be working for a bank*, will we all now be VPs and work "bankers' hours"? Take me now.....

Q. So is it fair to say that Americans who are neither rich nor reckless are being asked to rescue people who are? ...

A. Yes, you could argue that people who cannot tell soybean futures from puts, calls and options are being asked to clean up the costly mess left by Wall Street. To make the bailout palatable to the public, it is being described as far better than inaction, which administration officials and members of Congress say could imperil the retirement savings and other investments of Americans who are anything but rich.

But it is a good bet that the negotiations between the administration and Capitol Hill will include ideas about ways to help middle-class homeowners avoid foreclosure and perhaps some limits on pay for executives....

Q. How is it that the administration and Congress...can now be ready to come up with $700 billion to rescue the financial system? And is it realistic to think that the parties can reach agreement and get legislation passed in a hurry?

A. ...As for rescuing the financial system, elected officials in both parties became convinced that, while a couple of venerable investment banks could fade into oblivion or be absorbed by mergers, the entire financial system could not be allowed to collapse.

*What will these new banks be called? My mind gravitates to Steve Martin's "Fred's Bank" embedded in one of his best works

I thought that word had a negative connotation

Sure this is yet another of a myriad of moral hazard tales of late. But the differentiator to this specific story is how yet again, my hometown continues to engender a special kind of pride.

Alan R. Mulally, the chief executive of Ford, was even more upbeat. “It was a great day,” he said. When a reporter asked what Mr. Mulally might say to people who viewed the loan guarantees as a bailout, he replied in a chipper voice, “I would characterize it as an enabler.*”

* DB: emphasis added

A lagging indicator, but the best we got (barring Roubini)

In Monday's post I lamented regulation as an inadequate step to curtail the excesses of human nature. Since then, we can add WaMu to the mix of flailing financial institutions and point to regulators' scramble to stem the hemorrhaging. Of course, hindsight IS always 20/20 but I also recognize that regulation - like any law - is effected in hindsight and can certainly help stem the degree of vice it's intending to address. My tired brain's analogy: while a guardrail may not obstruct the most reckless vehicle, it can hopefully curtail the ensuing damage.

Then again, if only we'd listened to Nostradamus....er....Roubini (I'm in my honeymoon phase - leave me alone for now)

Nouriel to the rescue

I timed out yesterday because I knew I was missing something...banks have quarterly earnings and short-term rewards but aren't crumbling in the same way other financial services institutions are...Roubini cuts to the chase as to why so much of our financial services sector is crumbling...and what the implications are...:

The problem, he says, is that broker/dealers use the same model as banks --
borrow short and lend long -- only they borrow on even shorter timeframes, use
more leverage, and don't have the kind of government backstop banks enjoy.In the
wake of Bear Stearns' demise, which showed how brokers are vulnerable to a "run on the bank" if they can't get overnight funding, the Fed temporarily
opened its discount window to brokerage firms. But making that option
permanent means submitting to the same kind of regulation and capital requirements as banks; that, in turn, means a very different business model -- and much lower profitability -- for Wall Street firms, whose current business model
is "not viable," he says.With U.S. financial giants like JPMorgan, Citigroup, and Bank of America dealing with internal issues, the most likely buyers are international financial firms or sovereign wealth funds, Roubini says. But unlike in 2007,
foreigners are not going to settle for preferred shares, and non-voting
rights next time around.That raises the questions: Is America ready for (true)
foreign ownership of major financial institutions? And do we have a
choice?

While Rome burned

Today the Dow dropped 544 points on the heels of the Lehman bankruptcy, Merrill's sale to BofA and AIG's scramble for cash ....if that weren't enough to signal a crisis, the co-founder of the Blackstone Group/former head of Lehman/secretary of commerce in the Nixon administration resorted to using to out-of-caricature language such as ''My goodness." This must be extraordinary.

So naturally, I did what any Series 7 licensed financial services professional would do: I escaped to the gym to furiously spin to - I can't believe I'm admitting this - The Scorpions, among other songs of note.... (note to everyone: you must see my new favorite movie, "Burn After Reading," to appreciate the intellectual stimulation of the gym environment, among a plethora of other things pertinent to life as we know it).

As I've long attested, there is nothing like a little '80s rock to get the neurons firing (lest you accuse me of rationalizing my shallow need for endorphins...you win). Nevertheless, it was on the bike that I:

• Reaffirmed my sense that our financial system as fueled by publicly-traded institutions is positioned for vulnerability to behaviors incented by short-term rewards structures (read: speculative, opportunistic balance-sheet manipulations are rewarded in the quarterly business cycles).
• Underscored the tension of "moral hazard" that exists when institutions yield such a powerful influence across a wide range of society, leading to impunity for reckless behavior in the name of salvaging the assets of a broader swath of the population.
  

Is further regulation the answer to these 2 issues? As my new hero*, economist Nouriel Roubini put it, "“You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”" That said, I'm never one to advocate regulation as a panacea for human shortfalls (and economic activity is merely the product of human behavior). All regulation does is transfer accountability from one entity - the private sector - to another human entity - the public sector. With enough time, the players always find a way to circumvent the intended structures put into place.

Of the two steps already being considered - (1) the Fed lending against more assets, including stocks, thus providing an additional cushion for a troubled firm; and (2) the banks setting up a facility to buy assets from troubled firms in the future; - the first doesn't address the moral hazard issue; and the second will only be as good as the banks will eventually allow it to be used.

Hearken back to nearly 100 years ago, when, per the NYT, J.P. Morgan purportedly called the heads of all the trust companies to a meeting in his library and "demanded that they agree to put up money to stop the bank run at another trust company. The bankers did not want to do so, in part because they would need that money if the panic spread. Morgan locked the door, and kept the presidents in the library until morning, when they finally gave in. No such coercion exists this year." (aside: looks like my quest for character ...as it entails making noble choices when under pressure.. is timeless...).

In light of these bleak realities, can we at least hope for the prevailing of the Nash equilibrium (yes, that Nash that most Americans associate with Russell Crowe), which purports that "The incentive to defect is overcome by the threat of punishment, leading to the possibility of a cooperative outcome"??

Dunno - I just timed out. Time to blogroll Bourini!

[*who is, btw, my hero not only because he is an economist - the smartest human beings alive who can also never be wrong ...see, smart!... but also coined a phrase that captured my heart: “delusional complacency” - yes!!!]