Tuesday, March 31, 2009

"Just a Dog"

For Diggory, Edgar, Wrigley (was really a "dog.")


Saw "Puppy" and Keisha in Manila. Will keep Kate this weekend, starting tomorrow.

Blow -- Forced Resignations


More Quotes From "Liar's Poker"

The training program [at Saloman Brothers] was without a doubt the finest start to a career on Wall Street. Upon completion a trainee could take his experience and cash it in for twice the salary on any other Wall Street trading floor. He had
achieved, by the standards of Wall Street. technical mastery of his subject. It was an education in itself to see how quickly one became an "expert" on Wall Street. Many other banks had no training program. Drexel Burnham, and what I admit is an extreme example, even told one applicant to befriend someone at Salomon just to get hold of the Salomon training program handouts.

Why did investment banking pay
so many people with so little experience so much money? Answer: when attached to a telephone, they could produce even more money. How could they produce money without experience? Answer: producing in an investment bank was less a matter of skill and more a matter of intangibles – flair, persistence, and luck.

The head of bond research at Salomon, Henry Kaufman, was, when I arrived, our most acute case of cognitive dissonance. He was the guru of the bond market and also the conscience of our firm. He told investors whether their fast-moving bonds were going up or down. He was so often right at the markets made him famous if not throughout the English-speaking world at least among the sort of people who read the Wall Street Journal. Yet Kaufman was known as Dr. Gloom. The party had been thrown in his honor, but he seemed to want it to end. As he wrote in the Institutional Investor of July 1987:

"One of the most remarkable things that happened in the 1980’s was the sharp explosion in
debt, way beyond any historical benchmark. It was way beyond anything you would have expected relative to GNP, relative to monetary expansion that was taking place. That came about, I think, as a result of freeing the financial system, putting into being financial entrepreneurship and not putting into being adequate disciplines and safe-guards. So that's where we are."

Finally, a Concrete Idea

Oops, it's not quite April Fool's Day:

Brooks -- Car Dealer in Chief


But this one says Obama and the Auto Task Force did the right thing.


Monday, March 30, 2009

Now This is an Article!

Listen up. Something vast has happened between the government and GM:


CNBC -- Ratigan Gone

Comments are pretty good:


Market Turmoil Brings Do-it-Yourself Investors

This is me:


Baseline Scenerio -- Structured Finance For Beginners

The Baseline Scenario
Structured Finance for Beginners
Posted: 29 Mar 2009 04:00 PM PDT
For a complete list of Beginners posts, see Financial Crisis for Beginners.
This is more of an advanced beginners topic - I already covered CDOs (collateralized debt obligations) in my first Beginners article - but I imagine that most of our readers are already familiar with structured products. At least, many people know that first a bunch of securities are pooled together, and then they are “sliced and diced,” in the common media parlance I find incredibly annoying. But Joshua Coval, Jakub Jurek, and Erik Stafford have a new paper, “The Economics of Structured Finance,” which does a brilliantly clear job of describing what these securities are and why they were so widely misunderstood, with the results we all know.
The paper is 27 pages long, not counting references, tables, and figures, and if you are comfortable with probabilities and follow it carefully you can understand everything in it. I will provide a summary to whet your appetite. I am not going to use numerical examples because the examples they use throughout their paper are so good.
The key to CDOs is that they could be used to manufacture AAA-rated securities out of underlying securities (like mortgages) that were not even close to AAA. (”AAA” is a bond rating, meaning that the security in question had about a 0.02% chance of defaulting in a given year.) This is well known. But although these new, synthetic securities had expected default rates comparable to traditional AAA-rated securities, they had other properties that were unlike their traditional brethren, having to do with (a) correlations between the underlying assets and (b) sensitivity to underlying default rates. (a) is the probability that, if one mortgage inside a pool defaults, the other mortgages will also default; (b) is the degree to which small changes in those default rates can affect the expected value of the manufactured AAA securities. This meant that these CDOs were much more sensitive both to errors in estimating their characteristics, and to macroeconomic changes, than most people realized.
If you didn’t follow that I’ll go over it again more slowly.
In a simple, “pass-through” securitization, each investor in the pool of mortgages has an equal claim to the mortgage payments. Therefore, the expected loss for each security is exactly the same as the average default rate of the mortgages.
In a CDO, the investors have unequal claims. By creating some junior tranches (”tranche” is French for “slice,” in case you were wondering) that absorb the first losses, you create a large senior tranche that is buffered and suffers no losses until all of the junior tranches are completely wiped out. This is why the senior tranche can get a AAA rating; the estimated chances are pretty low that enough people will default to wipe out the junior tranches. In a CDO-squared, you take some of the junior tranches of ordinary CDOs, pool those, and then create tranches out of that pool. The amazing thing is that you can then create not only a senior tranche but a mezzanine (middle) tranche of your CDO-squared that has the expected default rate of a traditional AAA bond, even though it is made out of junior tranches. (There are very clear examples of all of this in the paper.)
However, this only works well if the default probabilities of the underlying mortgages are not highly correlated. Assume in an extreme case that defaults among the underlying mortgages are perfectly correlated: either none default or they all default. In this cases, the tranches do nothing for you: if all the mortgages default, then the senior tranche gets wiped out along with the junior tranches.
Furthermore, the performance of AAA-rated tranches is highly sensitive to the default rates of the underlying mortgages. Conceptually, this happens because the amount of protection provided by the junior tranches is not that much bigger than the expected default rate; so if the actual default rate is just a little higher than expected, a much larger proportion of the protection will get eaten up. In the example in the paper, an increase in defaults from 5% to 7.5% can knock a AAA-rated tranche of the CDO-squared down to a BBB- rating.
The conclusion is probably apparent to many readers at this point. The underlying mortgages were more highly correlated than people thought, both because they often came from the same types of developments in the same regions (California, Nevada, Florida), but also because everything in the economy became highly correlated. And as the economy got worse, default rates climbed higher than estimated based on historical data, because all the historical data came from a period when housing prices only went up. While this would only have a “linear” impact on a simple pass-through securitization (double the defaults, double the losses), it had a “non-linear” impact on AAA tranches of CDOs, and especially of CDOs-squared.
Finally, there is one more misunderstood characteristic of CDOs. Securities with the same expected payoffs, and hence the same rating, can have different characteristics. In particular, they can differ in their degree of correlation with the rest of the economy. The authors cite catastrophe bonds (which default only, for example, if a hurricane hits South Florida) as securities that are uncorrelated with the economy. Because of their lack of correlation, they are more desirable than other securities with the same rating, and hence have lower yields (higher prices). Senior tranches of CDOs are just the opposite: they only go bad if the economy as a whole goes bad; that is, they are highly exposed to systemic risk, which almost by definition is difficult to quantify. Because of this high degree of correlation, investors should have demanded higher yields (lower prices). But because investors by and large thought that all AAA securities were comparable, they didn’t demand high enough yields, and the issuers (investment banks) made the difference.
The bottom line is that all AAA securities are not created equal - even if they have the same estimated probabilities of default. And treating AAA tranches of CDOs and CDOs-squared as if they were AAA corporate bonds played an important role in the growth of the structured finance market and, as a result, the overall asset bubble that is collapsing around us.

Gaming the Legacy Loan Auctions
Posted: 29 Mar 2009 03:00 PM PDT
My colleague Ilya Podolyako is back with a comment on the Geither Plan to buy toxic assets, as well as an update to his previous post about the constitutionality of government takeovers of private property. He discusses in particular the possibility (also suggested by one of our readers) that the government could “seize” toxic assets and pay “just compensation,” even in the absence of a bankruptcy or a takeover. Ilya is a 3rd-year student at the Yale Law School and, among other things, an executive editor of the Yale Journal on Regulation. The post below is by Ilya.
PPIP for Legacy Loans = Free Put Options for Banks
I finally got a chance to read through the PPIP plan in detail. I noticed one curious point: under the program as announced, auctions for the legacy loans do not appear to be binding on the contributing entity.
The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
. . .
Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
This is quite odd, since, if I read it correctly, it turns the entirety of the program into a put option for participating banks. That is, they could identify certain assets, put them up for auction seemingly risk-free, check the result, and reject anything below their internal valuation without any further capital contribution.
The structure, which seems to be confirmed by the term sheet (”Once a bid(s) is selected, the Participant Bank will have the option of accepting or rejecting the bid within a pre-established timeframe”), amplifies the lemons problem that Simon and James mention in their LA Times op-ed. If the plan revolved around binding auctions, a temporary market for the toxic assets could develop while investors make government-guaranteed “probing” bets on the precise toxicity of the assets for sale. If banks wanted the auctions to recur instead of being a one-time event (perhaps to sell a larger or more diverse set of loans), they might mix in some good assets with the bad ones. This move would assuage concerned investors and probably make it easier for the banks to get approval from their regulators for the particular sale. Investors who were smart/lucky enough to win the good assets with bids below their “worth” to the bank on a medium-term basis would then get to profit from their decision. Other buyers would want to follow suit, at least until the point in time when they would expect a bank to cash out on any previously established confidence with a large offer of only toxic securities that would earn a lot of money even in the absence of future auctions.
By contrast, if banks can selectively reject bids, they could offer an enticing mix of good and bad assets (say, 50/50) and then accept only the ones that grossly overpay for the bad ones. That is, they would get full power to exclude intelligent, accurate price setters from the auction process, undermining the efficacy of the program to an even greater extent than adverse selection would in a committed-sale context. Of course, it is not clear whether the current setup is objectively worse than the repeated-game lure-and-hook scenario, but the question is worth considering.
Updates on the Constitutionality Issue and the “Brute Force” Plan B
I thought I would provide some clarification on how I see the Fifth Amendment applying to the current stage of the economic crisis.
First, contrary to what some have suggested, the constitutionality of government policy is not irrelevant. As long as the courts are open, private parties can file suit either to stop prohibited actions from going forward, or, in a less extreme scenario, to get money damages. True, courts often dodge heated constitutional issues, but in the 1950’s, they saw it fit to prohibit the nationalization of steel mills during a time of war, so the Fifth Amendment is still a force to be reckoned with.
Second, I am suggesting that sudden regulation of previously unregulated entities would constitute a taking, not that all new regulation does. Retroactivity is key here: the Fifth Amendment protects vested interests from being nullified or diminished by new laws, but does not prevent Congress from forcing new entrants to comply with a fresh framework. Furthermore, cases on the topic make it clear that when investors knew ex ante that they were buying into a highly regulated business, new rules would not trigger constitutional scrutiny unless they explicitly contradicted previous administrative promises. For present purposes, this means that even if Congress passes a bill allowing Treasury to seize hedge funds or nationalize large conglomerates at will, the Department will still have to provide “just compensation” to previous owners.
Of course, the extent of this compensation matters a great deal for evaluating the viability of particular administrative actions. As I mentioned in the previous entry, constitutional law clearly includes contractual rights to cash flows in the definition of property. Stock and subordinated bonds fall into this category. Furthermore, there seems to be judicial consensus that, for constitutional purposes, equity has value even when the operating business appears to be insolvent, provided that this business is not actually in bankruptcy proceedings. The approach makes sense: in the face of uncertainty, both junior debt and common stock constitute a call option, and call options have value even if they are deep out of the money. For example, while Citigroup may well be unable to function without government aid right this second, its common stock is trading at $2.62 because of the possibility that the company will survive the crisis intact and generate dividends/appreciate in value in the future. If the government were to nationalize Citi and push the value of the stock to 0 by decree, it would potentially be on the hook for the entire $14 billion market cap.
The application of the takings doctrine to debt is more complicated. Suppose the government takes over Citi and says it will pay only 30 cents on the dollar for its junior unsecured liabilities, which matches the market price for these bonds. The Supreme Court has wavered on the extent of just compensation required for this 70% haircut. The traditional test for regulatory takings in Penn Central emphasizes diminution of value as the takings metric, and one could argue that paying market price for the assets does not diminish their value. On the other hand, unexpected termination of the option on future cash flows does foreclose the valuable possibility of getting more money back. I really don’t know which way a court would come out here. I do know, however, that a failure to give the debtholders a chance to argue for a higher price for their assets (either in court or some special tribunal) would probably incur judicial wrath for breaching either the takings and due process clauses of the Fifth Amendment or the Seventh Amendment guarantee that civil controversies over $20 will be settled by juries.
Again, if investors in AIG, Citigroup, SAC Capital Advisors, or General Motors knew that this kind of executive intervention was possible when they put up their money, the story would be completely different. It is the sudden imposition of new, costly rules that is the problem. This temporal element highlights the difference between nationalization and various versions of bankruptcy: even if Article I, Section 8 of the Constitution did not explicitly authorize a uniform bankruptcy code, it could pass muster under the Takings Clause merely because some version of the judicial power to settle claims on insolvent debtors was in place long before any current investors were born. That is definitely not true of the power to summarily seize any institution that poses systemic risk to the financial system, as evidenced by the fact that Geithner and Bernanke made their plea to Congress this week in the first place.*
There is an upside to all of this - the “brute force Plan B.” If the Public-Private Investment Partnership fails due to a lack of participation by banks, investors, or both, the government could just file suit in a federal district court to take control over any toxic assets it wants. The fact that the judicial branch would oversee the action would preempt any due process or Seventh Amendment challenges. Banks would come in as defendants in the action. Treasury would still be on the hook for “just compensation,” but in the current political climate, juries are likely to be pretty stingy with taxpayer money. Indeed, banks may prefer a quick hand-over of the assets to actually litigating the claim. For the sake of expediency, the government could also attempt to seize the assets first in exchange for their “market value” and litigate any factual questions later. I am not persuaded that this course of action would actually be any faster, since banks could ask a court for a temporary restraining order to block the action. This would move the policy back to litigation square one, but now the executive branch would look like it was avoiding judicial scrutiny instead of trying to maximally honor the constitution in difficult financial times. All things being equal, it is better to get to the judges first.
Thanks to Jesse Townsend for feedback on the constitutional analysis above.
By Ilya Podolyako; posted by James Kwak

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Nicholas Dawidoff -- And "Shura"

(c) 2009 F. Bruce Abel

Read on. This is not boring, really. Really. (Or maybe it is.)

Nicholas Dawidoff, the author of the lead article on a great scientific thinker, Freeman Dyson, in Sunday's New York Times Magazine, is someone who himself struck us (Glendale Literary Club) as quite remarkable.

Remember this name: Nicholas Dawidoff.

I will later write that in finding this article today, confirms my belief that everything in the world relates to everything else. Personally, and to each of us. In our case (Glendale Literary Clubbers) two of the personalities, Dawidoff and John McPhee (in last week's New Yorker) are "relatives" of people in the Glendale Literary Club, Ted Carman, Sr. and Mary Stewart, respectively. Or it was Ted Carman Sr.'s funeral that brought "Nicky" to Glendale and into our consciousness.

Glendale Ohio, for heaven's sake, here in the middle of the eastern middle-west, not Cambridge, Massachusetts!

First, before going on (and on) talk amongst yourselves or join with me while I finish reading the subject article in yesterday's New York Times Magazine:


Next, here are my minutes of the February, 2004 Glendale Literary Club meeting where Snowden Armstrong gave his paper on Dawidoff and the books that he has written, including one on "Shura" of Harvard:

Snowden’s tale began at Ted Carman Sr.’s funeral in 2001.

By the way, I remember that day. I foolishly looked out at the Presbyterian Church standing in my kitchen at 885 Greenville, realizing too late that I had been too lazy to go to that funeral (50 yards away) because of some other “pressing” matter, or the effort it would take to shower and otherwise clean up. Never again. Oh to have had Snowden’s rich encounter with Dawidoff! As well as paying tribute to a great man himself, Ted Carman Sr.

Back to Snowden: at the reception at the Glendale Presbyterian Church he was standing next to a man a generation younger than he, named "Nicky." Nicky stood at the Presbyterian Church reception as a New “Yawker;” and was a teller of goofy jokes.

Snowden began to realize Nicky was smart, not a smart-alec. He turned out to be one of the most accomplished persons Snowden had ever met.

Let us peel back this particular artichoke of the man and author "Nicky" the way Snowden so beautifully does in his paper:

Nicky was married to Ted Carman Sr.’s daughter Rebecca, Nicky and Rebecca having met at Harvard.

Nicky was an author of the book "In the Country of Country," a book about country musicians from the perspective of their home places and friends.

Snowden wrote

"I thought: how could one so ethnically removed and urban know anything about 'country.' I asked him how he had gained an interest in country music. He replied simply that an uncle had liked country music."
Nicky had also written a book ("The Catcher Was a Spy") about Moe Berg, a Princeton grad, and professional baseball player who had been a spy during World War II; and another about Nicky's grandfather, a distinguished professor at Harvard University: "Shura."

At dinner with Ted Carman, Jr., a day after the funeral, Ted told Snowden that Nicky had spent more than two years trekking the Appalachians and flats of Arkansas visiting with the country musician performers and their relatives.

But his most recent book was about his grandfather, Alexander Gerschenkron, (easy for you to spell!) known affectionately as "Shura," at Harvard, (Snowden gave me a copy of this book, since I went to Harvard Law School, and I have ½ finished it and it is absorbing.)

(FBA ed. note: My best friends at Harvard when I was at the law school in 1961-64) were graduate students in the economics department: Philip and Elmer Schaefer, "whiz kids" from Chicago, and Henry Nejako. The name Gerschenkron I am sure, was bandied about by them, although I couldn’t swear to it today.)

Alexander Gerschenkron had escaped from Russia in 1918; lived in Vienna and thrived there as a professor; had escaped the Germans in 1939 to go to England.

This from Harvard Magazine:

"Being a professor at Harvard enabled Shura to become fully himself, allowed him to decide who he wanted to be and to fashion himself into that man. As a member of that community, Shura found himself in the greatest country in the world, 'the finest thing' in which was Harvard, the best part of which, in turn, was the economics department. Here was both 'a realization of personality and reconstruction.'”

One of the book’s major points is that Russians are show-offs. They may appear to do elaborate things for long-range effects but it is always to get attention at the moment. Shura was interested in anything and would delve into it exhaustively. As Snowden points out he never wrote one great work, but plenty of short great works. He created the economic concept of “Backwardness” as being an advantage to Russia and other countries trying to emulate England’s industrial revolution. While working for the secret service on a project he merely stared at the Soviet Union’s five-year plan numbers and, after months of staring, figured out they were fudging the numbers, and exactly what it was that drove the fudging.

Shura wrote, after spending some semesters in California:

“don’t ever live in California; it’s too beautiful. You’ll spend your afternoons playing chess and gazing out into the Pacific.”

Shura, a Russian, was a show-off but he was so accomplished that Harvard knew he was the king, and all loved him openly.

Nicky, the grandson of "Shura,"standing at the Presbyterian Church -- while less than 50 yards away I was making a peanut butter and jelly sandwich at 885 Greenville Avenue and missing the experience -- is a Guggenheim Fellow and a Berlin Prize Fellow.

Respectfully submitted

F Bruce Abel

Krugman -- America the Tarnished


And the wonderful comments of readers, that follow:


Sunday, March 29, 2009

If You've Got a Pole in Act I, Use it in Act III

Run through Paris naked:


The Gin Game

A CurtainUp Review The Gin Game > There's a wonderful moment in Act 2 of The Gin Game when Weller Martin (Charles Durning) accepts Fonsia Dorsey's (Julie Harris) invitation to a waltz. As he buttons up his suit jacket and raises a hand to smooth down his hair before taking her into his arms we see the man o f substance he must have been before bad luck and worse judgment brought him to seedy indoor porch of the nursing home in which D. L. Coburn's Pulitzer prize winning revival is set. Because Durning is a big, broad hulk of a man and spends most of the rest of the play hobbling around with the aid of a cane his nimbleness during this brief scene is particularly telling. And, of course, he couldn't have chosen a better partner than Julie Harris, not just for this waltz--(according to people associated with the production this was added by the playwright at Ms. Harris' request)--but as his partner in the series of gin games that serve as the dramatic axis for this two-character play.Anyone coming to this revival with memories of Hume Cronyn and Jessica Tandy, will be pleasantly surprised to see that the two forlorn castaways from life's mainstream who they made famous have been thrillingly re-interpreted by Durning and Harris. Anyone who either missed or is too young to have seen the original, should rush to the Lyceum to see how truly fine actors can make your heart ache for two self-deluded, ordinary people whose lives have slid from dreary to dreadful. And to add to their remarkable achievement, this perfectly matched couple, manages to turn your visit to their dreary abode into a barrel of laughs and make the underlying joke of their gin games utterly convincing. The device of a game of cards as a sort of onion that peels away the players' true personalities and situations with each deck that's dealt is of course not a new one and its Pulitzer credentials notwithstanding, The Gin Game could well be a losing proposition with less adroit players. However, Ms. Harris displays the true card player's infallible poker strategy, never once betraying her pose of the lucky amateur. Each triumphant declaration of "gin" is a triumph of buoying the audience's spirit along with her own. As her off-hand, innocence at "knocking" and "gin" declarations produce one win after another, so her nice-Methodist-ladylike decorum becomes suspect of being "skim milk masquerading as cream."As for the "expert" partner's near apoplectic reaction. . . it gradually becomes as unsettling as it initially amuses. If the light tone introduced by that newly added dance scene makes the dark climax somewhat too enigmatic, this Fonsia and Weller nevertheless persuade us that it's not really completely out-of-left-field. Of course, much of the credit for this smooth blend of lightnes and darknes belongs to the director Charles Nelson Reilly. And to give the right sense of place to the evening's developments, James Noone has once again created a wonderfully right on set. The plants in the greenhouse that abuts the spacious but shabby enclosed porch rattle and shake every time a train passes--a symbol of the shivers of fear running through the people warehoused in a place at which no train will stop to take them back to a time and place where they might undo the mistakes that have brought them to this time and place.As I left the Lyceum, I overheard a young man in his thirties say to his companion "I don't think we should send grandma to this one." If he had taken a more careful look around, he would have notice that most of the people in that audience were closer to Fonsia and Weller's age than his. These grandmas and grandpas are obviously gutsier about confronting issues of life and death than the younger generation which is so sadly absent from well-acted Broadway dramas. This is not a depressing play. It's a slice of real life. It's also a celebration of the accomplishments of older people. Given vehicles with which to show off their stuff, veteran actors can serve as an inspiration for anyone who wants to see why Broadway plays used to run for years to audiences of all ages. I only hope that young man and his companion bring not only grandma but their contemporaries to see what fine acting is all about. At a time when theater awards are bursting out all over the place, its too bad someone hasn't created a "best older actor" award during a season that's given us Christopher Plummer in Barrymore and Rip Torn and Shirley Knight in Young Man From Atlanta..©right April 1997, Elyse Sommer, CurtainUp.
THE GIN GAME by D. L. Coburnstarring Julie Harris and Charles DurningDirected by Charles Nelson ReillyScenic Design: James NooneCostume Design: Noel Taylor
Lighting Design: Kirk BookmanSound Design by Richard FitzgeraldLyceum, 140 W. 45th (212) 239-6200Opens 4/20/97 (previews 4/04)-5/25/97(changed to an open run) Closing 8/31/97--but moving on to Chicago<
©Copyright, Elyse Sommer, CurtainUp.

From JohnColeman.typepad.com

September 29, 2007
My first real crush was in eighth grade. There was a girl in my homeroom – we’ll call her Lisa – who demanded all my attention. I

John Burns is Back

I haven't read this yet but welcome back to the world of "Notiraq." You risked your life to report from Baghdad on the war. Now you're in London for a well-deserved tour of duty, and it's G-20. This may turn out to be the biggest assignment you have ever covered. In any event, I've gotten to know you through your interviews on Charlie Rose. Anything you write we must sit up for. Now, having posted this, I will pour my coffee and joyously read:


Yin and Yang

It's the Big Two this week in London.


Shiller and Summers

Summers had it right back then:


House Tax Credit -- Act by December 1, 2009

Under stimulus plan:

Corporate Law 101 -- by Karl Icahn


Saturday, March 28, 2009

Norcera -- Likes Geithner's Plan Announced Last Week


American Energy Monthly Report on Natural Gas

Carlos Celdran is Coming to Toronto

in May, I believe. Who is he? Click on the label named "Carlos Celdran" of this blog. A quintessential performer, if you ever get to Manila, Philippines. A mid-30's live tour guide, spinner of tales and history. His tours are fast-paced and totally off the wall. And up close and personal. Carlos studied at the Rhode Island School of Design, so he knows architecture, history, presentation, style, marketing. In other words everything that matters.

Is Toronto ready for him? I hope so!

I would not be surprised to see him hosting Saturday Night Live.

And his Corregidor tour, going on this weekend, and filled up I'm sure, is a show-stopper that will leave you haunted and your soul aching.

An Important "Orderly" Article

And it's not short either. You will benefit more from this article in your daily life than any other I can think of.


It's not a "tech tip" but I've given it that lebel, as it rises to that level.

Steele on Rush Limbaugh Gaffe

All a put-on???

video cllip included:


later comments are pretty good so keep reading on the attached clip above.

Thursday, March 26, 2009

Here's How the System Collapse Occurs

(c) 2009 F. Bruce Abel

OK, here's how it happens.

Your investment advisor has lost you 40%, say.

OK, it's time to take responsibility. I used to be a trader over ten years ago, while practicing law. Although I lost money, I am wiser now and should have learned something from that distant trading experience.

OK, Schwab says if you make at least 30 trades a quarter (something like that) your commission per trade cannot go above $8.95.

OK, I open an account at Schwab in January with $5,000.

Oh! To trade on margin you need $10,000. OK, I bump this up to $10,000 in order to trade on margin.

Oh,Oh! Notice pops up on the account: Additional margin needed: $15,000. !??? Research and inquiry: "Pattern-Day-Trader Rule."

Oh, you're bad now. OK, there's this rule something like: that if you have three or more day-trades for three out of four days, you must put up enough money so that you have $25,000 in the account. If you do not do this you cannot trade in this account other than to liquidate positions.

A good rule!

They also refer you to Gamblers' Anonymous. No kidding!

I'm down $400 on the $10,000 account, the bulk of this by one "slippage" situation where Schwab had me in 200 MS when I thought I had 100 before I went off to see a client (setting a protective stop loss on the 100, but not the 200, if it was 200, we're still negotiating).

OK, the additional $15,000 (my $10,000 is about even, with 200 SPY's bringing me up) makes me have to cool off until I scrape up the money.

And did I say They also refer you to Gamblers' Anonymous. No kidding!

OK, you've got a back-up line of credit attached to your bank account at US Bank. That's exactly the amount you need to scrape up the $25,000.

Now you've got a Schwab account worth $25,000 and change. But your margin ability is $50,000 with Reg T's current requirement. And, day-trading, your limit is $39,000 for today, going up (I think) to $75,000 after today.

So you "think" of your account now as an account of $25,000, or even $50,000, or even $75,000.

Essentially it's 10 o'clock PM at the Argosy -- no I haven't been there for years -- and, whereas the Pattern Day-Trader Rule is good, it conflicts with the low commission rate for making at least 30 trades a quarter. And the Rule is good only until the trader figures out that he only needs to put the $25,000 up for one day. [ed note 3/27/2009: Schwab says this is not the case] But then when he does so his psychology gets all screwed up again: the "blackjack table" (in my mind) is no longer a $5 table; it's $10, or maybe $25, (and the big-time dealer has just moved in).

So no good rule goes unpunished. Any rule can be "gamed." And human nature will always have the potential to ruin the individual. And with so much money in hedge funds, as we are seeing, it has the potential to ruin the system.

And it looks like Asia and Europe were strong, and Geithner is about to hit a home run before Congress today -- my feeling -- by announcing return of the uptick rule and the SEC is easing the "mark-to-market" rule, and therefore the Dow should be up 3000 points, or at least up some, etc.

Oh God, what have I done?

Forget Stocks...It's Corporate Bonds, They Say


Wednesday, March 25, 2009

In the Beginning There Was "Liar's Poker" by Michael Lewis

  • First read this excellent blog item:


    From the above:
  • I've just read (finally!) Michael Lewis's Liar's Poker: Rising Through the Wreckage on Wall Street, the classic 1989 memoir of life at Salomon Brothers investment bank in the run-up to the Wall Street crash of 1987. Lewis was hired to trade mortgage bonds (yes, the mortgage bonds that precipitated the crash of 2008) fresh from the London School of Economics, dispatched to Salomon's legendary training program in NYC, then shipped back to London.
    Lewis was a gifted salesman who made millions for the firm, but he was also deeply skeptical of the whole enterprise. This is an unbeatable combination, as it situated him perfectly to critically examine the culture, economics and ethics of the overheated bubble as it expanded, expanded, and, finally burst.
    It doesn't hurt that Lewis is a fantastic writer with a particular talent for explaining the minutae of investment banking without making you want to gouge your own eyes out. Through vivid portraits of the movers and shakers on Wall Street, Lewis recounts the origin stories of junk-bonds, corporate raiding, mortgage bonds, the S&L crisis, and the founding of Fannie Mae and Freddy Mac (both founded at the behest of Salomon in order to backstop the mortgage bond market).
    It's been 20 years since this was published, but there's never been a better time to read it. The hairy-knuckled, hyper-competitive, pirahnoid Wall Street and City traders he describes here could be the same hedge fundies who're poised over the tub with razors at their wrists today.
    Liar's Poker: Rising Through the Wreckage on Wall Street
  • I found the above blog after writing what follows:

    Exactly what animals exist on Wall Street? Main Street wants to know! And now, damnit!

    Without comment, one of my most-used categories on this blog is Michael Lewis's "Liar's Poker." You will see why I evoke this book so often (without explanation) and why this book is is a necessity when you read my dictated quotes from my copy of this pawed- and markered-over book.

    I got the book off the shelf after walking Tuesday and having my neighbor Frank, during a discussion of our mutual loss of net worth, say: "What is a derivative?" I used to buy up all copies of "Liar's Poker" just to remind me how quinticential it is, and Sissy works at Friends of the Library! with books aplenty! Then when we moved into our present house two blocks away I threw all copies out except the one. Nevertheless I am going to try to give Frank a clean book, not mine which is marked up for future references.

    Enjoy --

    [Dictated with Nuance; omitted material and spelling errors not necessarily indicated or corrected; playing around with the "outline" and "quote" icon on Blogspot and do not know how to "undo"]

  • "Never before have so many unskilled, 24-year-olds made so much
    money in so
    little time as we did this decade in New York and London."

    "It was
    sometime early in 1986, the first year of the decline of my
    firm, Salomon

    "At Harvard in 1987, the course in the
    principles of
    economics had 40 sections and a thousand students; the
    enrollment had tripled in
    10 years. At Princeton, in my senior year, for
    first time in the history of
    the school, economics became the single
    popular area of concentration."

    "Economics was practical. It
    got people

    "Economics alowed
    investment banking
    recruiters to compare
    directly the academic records of
    recruits. The
    only inexplicable aspect of
    the process was that economic theory
    is, after all, what economics
    students were supposed to know) served
    almost no function in an investment

    "Glass-Steagall was
    an act of
    the U.S. Congress, but it
    worked more like an act of God. It
    cleaved mankind in
    two. With it, in 1934,
    American lawmakers had
    stripped investment banking off
    from commercial
    banking. Investment
    bankers now underwrote securities, such as
    stocks and
    bonds. Investment
    bankers, like Citibank, took deposits and made
    loans. The
    act, in
    effect, created the investment banking profession, the single
    important event in the history of the world, or so I was led to believe."

    "After Glass-Steagall most people became commercial bankers. A
    commercial banker was reputed to be just an ordinary American businessman
    ordinary American ambitions. He lent a few hundred million dollars
    day, to
    South American countries. But really, he meant no harm....
    He had a
    wife, a
    station wagon, 2.2 children, and a dog that brought him
    his slippers
    when he
    returned home from work at six."

    investment banker was
    a breed
    apart, a member of a master race of deal
    makers. He possessed fast,
    unimaginable talent and ambition. If
    he had a dog, it snarled. He had
    two little
    red sports cars yet wanted
    four. To get them he was, for a man in
    a suit,
    surprisingly willing to
    cause trouble."

    "Man for man,
    Solomon Brothers
    was, in 1985 the
    world’s most profitable corporation. Wall
    Street was hot. And
    we were
    Wall Street's most profitable firm."

    "Wall Street traffics in
    and bonds. At the end of the 1970s,
    Salomon Brothers knew more about
    bonds than any firm on Wall Street: how to
    value them, how to trade
    them, and
    how to sell them.... The rest of Wall
    Street had been content
    to let Salomon
    Brothers be the best bond traders as
    the occupation was
    neither terribly
    profitable nor prestigious. What was
    profitable was
    raising capital (equity) for
    corporations. What was
    prestigious was
    knowing lots of corporate CEOs. Salmon
    was a social and

    "In part this is due to the absence
    from the
    market of the educated classes, which in turn reinforces the point
    about how
    unfashionable bonds once were. In 1968, the last time a degree
    taken at Salomon Brothers, thirteen of the 28 partners hadn't been
    college, and one hadn't graduated from the eighth grade. John Gutfreund
    was, in
    this crowd, an intellectual; though he was rejected by Harvard,
    did finally
    graduate (without distinction) from Oberlin."

    biggest myth about
    bond traders, and therefore the greatest
    about the
    unprecedented prosperity on Wall Street in
    the 1980s, are that
    they make their
    money by taking large risks. …Most
    traders act simply as
    toll takers. The source
    of their fortune has been
    nicely summarized by Kurt
    Vonnegut (who, oddly, was
    describing lawyers):
    "There is a magic moment,
    during which a man has
    surrendered a treasure,
    and during which the man who
    is about to receive it has
    not yet done so.
    An alert lawyer [read bond
    trader] will make that moment his
    possessing the treasure for a magic
    microsecond, taking a little of it,
    passing it on."

    "In other words,
    Salomon carved a tiny fraction
    out of
    each financial transaction. The
    Salomon salesman sells $50
    million worth of new
    IBM bonds to pension fund X.
    The Salomon trader,
    who provides a salesman with
    the bonds, takes for
    himself an eighth (of
    a percentage point), or $62,500. He
    may, if he wishes,
    take more. In the
    bond market, unlike in the stock market,
    commissions are
    not openly

    Now the fun begins.
    [Doorbell; to be continued]

Dear AIG -- I Quit


GE Dividend History -- Quarter by Quarter

Dividends hit the account April 27, 2009; $.31 per share.

California's Wipeout Economy

Steven Pearlstein:


Meet the Hedgies Hedgies


Friedman -- Very Good if Wonkish

What great leaders do:


Tuesday, March 24, 2009

Brooks Steps Out of His Zone of Comfort -- To Afghanistan

Pretty good too:


Tech Tips -- How to Continue Numbering in Word Program


Leveraged ETF's -- Why You Should Handle With Care


CP-300 Review


Comments on Krugman on Geithner

Get your math and calculus books out!

and another view through a general editorial in the NYT this morning:


Monday, March 23, 2009

Krugman in Despair

Didn't read this until the end of the day, after the markets soared:


And now read the Executive Comments to this article, espspecially Susan Korniak's torwards the end:


Sunday, March 22, 2009

Dowd -- Toxic 'R Us



The Bespoke Suit


Seven Things Not to Waste Money On


Buying furniture to "present" 885 greenville property:


Si Burick

On this great day for Dayton basketball, (second round of NCAA) I am thinking about a great sports writer who died in 1986, Si Burick, who wrote for the Dayton Daily News and was one of the top sports writers in the country, winning many awards. I would like to go through his papers at the University of Dayton, I believe:


This leads me to the Great Snow Storm of 1950, the weekend of the Ohio State-Michagan game.


I remember mom and dad had their poker group over Saturday night and everybody had to stay for Sunday too. One docter from Dayton died coming back from the game. That was before I-70, I'm sure.

Saturday, March 21, 2009

Natural Gas


Rich and Friedman -- Obama's Katrina; Home Alone

Must read every word. But first listen to the interview with Larry Summers on CBS last Sunday, and the excellent comments of readers/viewers:


And before reading Rich, take note of this hugely important blog of Simon Johnson, economist at MIT, who is hitting all the right notes:


Now Rich's Op Ed piece today:


And the letter to the editor which keys off Rich's article:

To the Editor:
President Obama may not realize it yet, but his Katrina moment has arrived.
This is a defining moment for his presidency, and how he responds will determine the trajectory of his term. He needs to deal with the excesses within the financial industry with the same toughness and conviction that President Ronald Reagan brought to bear during the air traffic controllers’ strike. To date, he is sorely wanting.
We are not interested in the level of outrage the administration is feeling, but in the effectiveness of its response. So far, it has come across as hapless and completely ineffectual. This Obama voter would like to be spared the speeches and the posturing on the Sunday morning shows — action is what is needed.
Paulette Altmaier, Cupertino, Calif., March 17, 2009
And Rich's article six weeks ago, which I did not post, on Tom Daschle's situation which so enraged the American people and forever tarnished Daschle's reputation:
and the excellent comments thereon from other readers/viewers:

Geithner Asking Libby to Re-negotiate Bonus Contracts: Geithner "Mr Libby, uh, please.." Libby "No" Geithner "Please" Libby "No, go away. And get me some more money." Geithner "Ok, sorry for bothering you. How much more money can we give you?"
Posted by themash at 10:32 PM : Mar 21, 2009
+ report abuse + permalink

Real non-sense, break their employment contract, fire them, allow them to reapply for the job with a modified contract. I can't believe a move like that would upset our contractual system or throw it off course as Summer's suggests,"contracts aren't abrogated"? It happens all the time.This can be made law easily. Can you think of how many of us would call or write their Congressperson if was submitted for consideration as law.Yes we can say where US Government $$ goes now happens every minute of every day, it's in the laws all the laws. Summer's seems pretty clueless Bob should have taken him to task.There are plenty of well qualified people for this type of work who did not get us into the mess. Boy could we have used Russert here !
Posted by ckiepper at 11:33 PM : Mar 15, 2009
+ report abuse + permalink

Are kidding me with this this guy Summers. I would let Larry Summers run the local hardware store in my town. And he has PHD? That must stand for Pizza Hut Diploma. The reason America is in this situation is because we put guys like this in charge of things. I am embarrassed for him to hear him spew this nonsence. What's willy nilly is that he is allowed to go on CBS news and spread this nonsense. Larry, why don't you stop brown nosing and tell the truth, fronting for these crooks. And Bob, get better guests.
Posted by someguyinamerica at 10:48 PM : Mar 15, 2009
+ report abuse + permalink

I AM SORRY. I BELEIVE SOMMERS IS WRONG. CONTRACTS SHOULD BE ABROGATED WHEN THEY become a risk to the sytem. Usually intent needs to be proven to show fraud. In this case, it shoud be a new IDEA. Marshall Law for systemic risk contracts...Not bonuses, bets (CDS) without collateral. Too many Trillions. SYSTEMIC REGULATOR. Sommers is not the right guy for it. All the credentials in the world are not enough. We need leadership with GUTS. Marshall Law for the 60 Trillion Global CDS market. COME ON MR President, rise to the occasion. End the deadlock. Time for RULES!!!
Posted by at 9:51 PM : Mar 15, 2009
+ report abuse + permalink

Gee, I wonder why AIG got bailout money in the first place.... Could it be that they hold the insurance on the Congressional pension plan????....While our 401K's and pensions are taking a beating our greedy politicians again thought of themselves first...When hell are we gonna get some intestinal fortitude and have another "Tea Party"....
Posted by WOLFMAN0802 at 6:39 PM : Mar 15, 2009
+ report abuse + permalink

If I was congress I would put a hold on these bonuses what kind of message does this send to America and worldwide when AIG is making a joke out of Obama and congress everybody as already seen the first 140 billion go in 3 or 4 months This is not AIG money this is americas money in everybodys mine this is not there profit so they have no right to give bonuses out of our money especially ridicolous bonuses banks pretty much make there own rules without regulation with there money so if this is americas money why is congress not making regulations congress is should be the law not banks who ask for another 30 billion after a short period of time it would be long before the world loses faith in our government and starts to pull there money out of the america when there people start demanding them to when AIG makes a joke out of every american
Posted by noskoman at 6:37 PM : Mar 15, 2009
+ report abuse + permalink

This crisis will start to get resolved when we understand who caused it and take steps to get them out of the picture. I am referring to Rep. Barney Frank of Massachusetts and Senator Chris Dodd of Connecticut. Through their positions in Congress, they compelled banks to make risky loans and to this day haven't suspended the rules that banks operate under which got us into this mess. They should recuse themselves from any investigation about the financial crisis and not take part in any new legislation until their culpability has been resolved. Then we can move the country forward.
Posted by olevis55 at 6:33 PM : Mar 15, 2009
+ report abuse + permalink

I just transferred from a Lifecycle fund which wasn't aggressive enough for me due to losing $40,000 and in my 40s in a 403b plan and now I'm wondering after hearing Mr. Summers, a male chauvinist pig, formerly from Harvard who left due to his views on women and science with degrees which I hold *** laude a B.S. I wonder if I made the right decision. No, Mr. Summers, we in Boston haven't forgotten your views. It's great for Mr. Bernanke to cheerlead for us since I, for one, called my rep who voted against this crazy bank bailout Mr. Stephen Lynch, but it was cancelled out by Mr. Barney Frank. As Mr. Bernake is cheerleading we hear that AIG is giving big bonuses to the tune of hundred's of millions. I work in the state of RI with the second highest unemployment rate, and I find this terribly repulsive. Everyone just about tarred and feathered Mr. Madoff but as far as I'm concerned that's exactly what our bank's are doing. I have chosen not to bank with Bank of America due to the Merril Lynch bonuses. If the banks continue on this destructive path pretty soon none of us will trust them with their money. So far the only CEO of merit I have heard as of late is the President of Citizens of RI who is going to concentrate on customer service and deposits which lately seems to be lacking in all banks.
Posted by Gadgetgirl84 at 6:18 PM : Mar 15, 2009
+ report abuse + permalink

It's the Chinese. The Chinese own a lot of AIG's worthless paper and want the U.S. Government to pay them. If we don't pay them, the will take their money out of our country (over a Trillion dollars in treasury's). We're a debtor nation and will have to kiss some a#% from time to time. This is one of those times.
Posted by Blitzer2 at 5:30 PM : Mar 15, 2009
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I am beside myself on this one. In addition the shear stupidity of this, someone forgot to prep Director Summers about how to speak when doing a media interview. He sounded like a bumbling idiot. Apparently they don't have a Public Relations person prepping him and giving him Media Training. I couldn't believe Dir. Summer when he said "It's outrageous but there is nothing we can do about it." You have GOT to be kidding me... You're the freakin Federal Government, for goodness sakes! Do something - anything - - besides throwing up your hands...
Posted by Scubajoy at 4:46 PM : Mar 15, 2009
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Nocera -- The Problem With Flogging AIG

Nocera is not very good here -- it's pap warmed over -- but he cannot be ignored:


LaSalle and Dayton Reach Finals

Dayton Flyer fans, remember when the east was east and the NIT was all and Lou Effrat ruled (although Si Burick of the Dayton Daily News was no slouch either):


How to Read This Blog

"Personal Nut Free and Clear"

For the best, very best I mean, summary of where we are -- the despising of Wall Street -- type in and search for "Wolfe" within this blog. Read the first six or so pages.

Doing this myself reminds me why I post so many of my blogs with the title "Liar's Poker." Michael Lewis explained the phenomenon in this book for the first time in the early 1980's. For many years I collected as many copies of this book for my bookshelf, just to remind me of the greatness of this work. (As a friend of mine, Phil Ringo, once gave Dave Young, another friend, and an avid Woody Hayes and Ohio State fan, multiple copies of the book "Woody" for Christmas, a subtle hint that he felt David's worship was a little "over the top.")

It is worth a stroll down memory lane, so to speak, on this blog.

Blow and Collins and Brooks -- Anger Mismanagement

Yes to Blow:

Yes to Collins:


Yes to Brooks:


Yes again to Charlie Rose's interview three nights ago (see blog which caused you readers to spend 16 minutes on average on my blog!)

Friday, March 20, 2009

Trailing Stops


This Fawning CNBC Interview of "Sir" Stanford Was Not Removed!

On a UK website:


Duke March Usage 970 Laurel


todx todx todx todx