Wednesday, April 29, 2009

The $1/2 Million Shot

Pretty good:

When Bad Advice is the Best Advice

A nice piece from a caring doctor:

Dowd -- Saturday Night Live Material

Hilarious, but "true?" Matches the best of Hunter S. Thompson and Justice Thomas and the prostitutes and sheep. (See earlier in my blog. Click on Hunter S. Thompson).

Brooks -- Do Not Go After Cheney, Bush

Remember who the Taliban are, not just who we are:

I totally agree with Brooks here in this well-drafter argument.

Tuesday, April 28, 2009

Hot Air: I've Figured Out What Caused Wall Street to Crash and Burn

(c) 2009 F. Bruce Abel


Good to get your "cached" note. Took a licking trading the past three weeks through X, C, RF, which started out as day-trades the latter two in one fell swoop of a buy, then I lightened up (immediately) when C was an immediate loser, but kept half;

X was a big winner for a while, but did you see the earnings last night!! RF I will keep I think. C is probably too late to sell. X -- probably will sell on any rise.

I knew the volatility potential with C and X. Sort of like options thrills. But I feel shitty, of course.

But I've now got the secret to the Wall Street problem figured out -- and I am a microcosm (sp?) of it. Under being a Pattern Day-Trader, you must keep your account above $25,000 or be barred from adding to any position. And it happens during the day, any time the account, computed each minute or so, or even instantaneously, dips below. (On the other hand, it can go back above $25,000, too, and you're free to squander it all on new trades.)

So after a series of nice, somewhat profitable, days of trading, I was transferring money back into my checking account.

Before the open a week or so ago I could see that my account was going to dip below $25,000 in the regular market so I loaded up with C and another slug of X in pre-market while the account still showed I was above $25,000. Otherwise I couldn't trade that day. (One-day delay in moneylink for transferring money back and forth to Schwab)

See, I lost discipline by even factoring in the $25,000 rule and wanting to get orders in before "the window closed." Then I compounded matters by turning a trade into an "investment."

That's the problem that addicts have. That's the problem Wall Street Traders have too.

The computers are there to replace the emotion (addiction) of the trader, and they produce consistent profits, say. But the trader becomes bored. "What am I, a machine-tender?" So he again loses discipline, jumps in with both feet and disregards the "machine."

No need to reply. I know you are busy. But it's good to vent to an insider rather than telling Sissy about the trading disaster.

-----Original Message-----From: Sent: Monday, April 27, 2009 9:07 PMTo: Subject: Re: Cincinnati Musings

Bruce-great to hear from you, sounds like things are going well. (I just found this email in my "draft" box and realized that I never completed and sent it). We've now moved well out of college hoops and are in the weeds of the baseball season. I went to the final game of the Sox sweep over the Yanks last night (we have season tickets here). Last summer we did make it to Great American, courtesy of the good people at Cincy Bell who gave us their tickets behind the Red Sox dugout.Unfortunately our kids are in school until late June up here, so probably no road trips for us. One of these times we will definitely catch up with you and Genny.Things have been great here. Both of my kids (Kyle 10, and Julianna 8) are hockey players, and I picked it up so I can help coach. That keeps me pretty busy (a 7 month season!) and gives me a good outlet to blow off steam when the market is testing my limits. So far I've survived all the ups and downs, which in and of itself probably merits a book. In the meantime, it's mainly a character-building exercise.Glad to hear from you.Regards,Jeff
---------------------------------@: Saturday, March 28, 2009 7:28:18 AMSubject: Cincinnati Musings
From Bruce@Eun’s Computer:

Hey Jeff:

Genny passed along your email. I’ve been wondering about you and your family in these chaotic times. Since you are one of the “good guys” I wasn’t too worried. We’d like to extend an invitation for you and family to enjoy Canada in June when Genny will be home for most of the month.

For the past seven or so years I’ve been developing an expertise in employment law. Since they say it takes 10,000 hours to be good at anything I figure I’ll be pretty good at it by about 92.

But I’m an advocate of Yellow Page “advertising,” which for me means a bolding of my name under “employment law” in the outlier counties’ (Clermont, Butler, Warren) Yellow Pages. For a while I was getting two calls of a morning. (For some reason it’s always in the morning.) This still returns a paltry “living” but it keeps me sharp. And since I have no overhead and no commuting headaches, I love it. And with my new persona of being “nice” to the Bad Guys (employers) I settle rather than having three-year cases that then lose on “summary judgment” (the damn intimidated federal judges, not just Republican ones).

In fact Becca’s husband, Doug Worple, the head of Barefoot Advertising, now BBD&O, has the perfect tag line for a possible advertisement for my practice: “For those willing to settle for less!” – see Abel, or whatever.

I’ve reopened a Schwab account with some of my earnings for trading since Sissy’s trust has (along with everybody else and their trusts) gone down 40% or so on the equity side and on the “bond” side has been in bond funds, some of which had Fannie preferreds (why???; they are not bonds after all)..

I’m sure you have a “book” in you about the financial market as you see it. Care for a ghost writer? I like to write you know.

By the way we live 100 yards away from the Youklis’s, you-know-who’s cousin and wife. (Uncle and wife?) But – now I remember – we did email back and forth last summer and I had to duck out of a ballgame when the Red Sox were in town. Or is Altzheimer’s setting in?

My nephew Marty Bingham has survived the take-over by Wachovia as a bond manager in Charlotte, pretty high up with Wells Fargo.

Back to the weekend and NCAA Basketball!!!


Awesome Cramer Last Night

This segment deals with the Triple ETF's that are destroying the market. Other segments include why the article in the NYT on HWP was a good article but totally misleading for an investor.

I noodled back into Cramer because I bought a few weeks age, and own, 200 shares of X, United States Steel, which fell two points after hours, after a horrible earnings announcement. It just so happened that on October 28, 2008 I typed in verbatim comments of Jim about X. Too bad I didn't go back and research my own blog before i bought X a month ago. It was perhaps the only short sale Jim Cramer has ever recommended on his show, and his reasons were persuasive then as they are now.

One overall theme, which I am relearning, is that the market is too dangerous for the individual investor. The ETF'r of the world are in control so long as the SEC doesn't act.

An Interesting Side Issue With the Madoff Case

Seizure of assets and how America falls behind:

And a separate lawsuit charging J.P. Morgan with complicity:

Monday, April 27, 2009

Geithner and the Finance Club -- Morgenson

Long and detailed. Troubling? Somehow, not. We have to trust somebody.

Krugman -- Money for Nothing

This is a Must Read. Is "it" over and the bankers have won? Krugman hopes not. I hope not. Because they have produced nothing of value except pain.

It occurs to me that May 4th is a key day. Through trading (turned into a "hold") I own 500 Citigroup, and 200 Regions Financial. But still I want there to be some "solution" to the banking problem and some real understanding of what really happened.

The "quants" did this, broadly speaking.

As readers of this blog know, I believe the heads of the banks had no idea what the quants were doing. (I'm not sure "quants" is the right all-inclusive category here, as it also takes "traders" to do the deed.) So, using Brooks's terms, the heads of the banks were "stupid," not "greedy." (If one must choose a dominating term above all.)

Op-Ed Columnist
Money for Nothing

Published: April 26, 2009
On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.
Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.
All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.
Why is this disturbing? Let me count the ways.
First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.
Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”
I’m not just talking about the [1] $600 billion or so already committed under the TARP. There are also the [2] huge credit lines extended by the Federal Reserve; [3] large-scale lending by Federal Home Loan Banks; the [4] taxpayer-financed payoffs of A.I.G. contracts; the [5] vast expansion of F.D.I.C. guarantees; and, [6] more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.
One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.
Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.
So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?
No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.
Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.
We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

Sunday, April 26, 2009

Hedge Fund Arms Race

This explains why my order is executed before my finger is off the button:

Swiss Heartland Voters Ban Nude Hiking in the Mountains

Opacity, David Brooks and Simon Johnson -- Were Bankers Greedy or Stupid? Stupid.

I may have posted this before, but I cannot readily find it. Simon Johnson was on Bill Moyers Friday night and referred to this David Brooks article which discussed Johnson's suggested view of Wall Street. I feel that Brooks has it more right. And I think he now agrees: Bankers did not
understand what they were doing. Instruments were too complex. Things were in fact opaque and they were sold as mathematically transparent.

We see this over and over, and I can think of Procter & Gamble vs. Bankers Trust, some 20 years ago; and Enron, perhaps.

No one in the room wants to be the one to say "I don't understand."

This applies to Simon Johnson too, to some extent!

Op-Ed Columnist
Greed and Stupidity
comments (383)
Published: April 2, 2009
What happened to the global economy? We seemed to be chugging along, enjoying moderate business cycles and unprecedented global growth. All of a sudden, all hell broke loose.
Read All Comments (383) »
There are many theories about what happened, but two general narratives seem to be gaining prominence, which we will call the greed narrative and the stupidity narrative. The two overlap, but they lead to different ways of thinking about where we go from here.
The best single encapsulation of the greed narrative is an essay called “The Quiet Coup,” by Simon Johnson in The Atlantic (available online now).
Johnson begins with a trend. Between 1973 and 1985, the U.S. financial sector accounted for about 16 percent of domestic corporate profits. In the 1990s, it ranged from 21 percent to 30 percent. This decade, it soared to 41 percent.
In other words, Wall Street got huge. As it got huge, its prestige grew. Its compensation packages grew. Its political power grew as well. Wall Street and Washington merged as a flow of investment bankers went down to the White House and the Treasury Department.
The result was a string of legislation designed to further enhance the freedom and power of finance. Regulations separating commercial and investment banking were repealed. There were major increases in the amount of leverage allowed to investment banks.
The U.S. economy got finance-heavy and finance-mad, and finally collapsed. When it did, the elites did what all elites do. They took care of their own: “Money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves,” Johnson writes.
In short, he argues, the U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. Johnson’s remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they can’t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.
The second and, to me, more persuasive theory revolves around ignorance and uncertainty. The primary problem is not the greed of a giant oligarchy. It’s that overconfident bankers didn’t know what they were doing. They thought they had these sophisticated tools to reduce risk. But when big events — like the rise of China — fundamentally altered the world economy, their tools were worse than useless.
Many writers have described elements of this intellectual hubris. Amar Bhidé has described the fallacy of diversification. Bankers thought that if they bundled slices of many assets into giant packages then they didn’t have to perform due diligence on each one. In Wired, Felix Salmon described the false lure of the Gaussian copula function, the formula that gave finance whizzes the illusion that they could accurately calculate risks. Benoit Mandelbrot and Nassim Taleb have explained why extreme events are much more likely to disrupt financial markets than most bankers understood.
To me, the most interesting factor is the way instant communications lead to unconscious conformity. You’d think that with thousands of ideas flowing at light speed around the world, you’d get a diversity of viewpoints and expectations that would balance one another out. Instead, global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time.
Jerry Z. Muller wrote an indispensable version of the stupidity narrative in an essay called “Our Epistemological Depression” in The American magazine. What’s new about this crisis, he writes, is the central role of “opacity and pseudo-objectivity.” Banks got too big to manage. Instruments got too complex to understand. Too many people were good at math but ignorant of history.
The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.
Both schools agree on one thing, however. Both believe that banks are too big. Both narratives suggest we should return to the day when banks were focused institutions — when savings banks, insurance companies, brokerages and investment banks lived separate lives.
We can agree on that reform. Still, one has to choose a guiding theory. To my mind, we didn’t get into this crisis because inbred oligarchs grabbed power. We got into it because arrogant traders around the world were playing a high-stakes game they didn’t understand.

Murder of Cast Members Outside Amateur Theater -- Professor at University of Georgia Does It

Just saw such a local play Friday evening in Middletown:

Unintended Consequences of the Mortgage Bill

As always, Morgenson is good:

Saturday, April 25, 2009

The Word "Bank"

(c) 2009 F. Bruce Abel

It occurs to me that for the bailout to work we must wipe out a word from our vocabulary: "Bank," as in "Oh, you work for a bank, do you? I don't trust you, even though I work for a bank myself. In fact I don't even trust myself here at this bank, because I am addicted to trading credit default swaps."

We must now create another word, another category.

What is that word? I don't know. What about "Trank." This implies trust. But, now that I think about it, the phrase "Bank Trust Department" must be removed also.


Paper read to Joe D'amato's Writing Class at the Glendale Lyceum
Thursday, April 23, 2009

© 2009 F. Bruce Abel

“The Three “M”’s of Manila”

Wherever daughter Genny, who now works in Manila for the Asian Development Bank, goes, world events get refocused in my mind. And who am I to say that trouble on a vast scale doesn’t follow her? Witness: Genny’s last job but the current one, was in Tbilisi, Georgia, in 2007, and involved in part driving periodically into the countryside of the politically “frozen” area of South Ossetia, training farmers in the capitalist business of collecting milk for sale, checking on the milk collection centers and the dairy farmers, near the town of Gori, Stalin’s hometown. In the fall of 2008, of course, this area was overrun by Russians, cows lying dead in the fields. God knows what happened to “Madonna No. 1,” as we called her.

In the case of Lithuania and the Philippines the past was so cruel in so many ways. And I will not mention them here.

Of course the Philippines was a blank and innocent page in my book at first, therefore heavily-influenced by each new person, tour or event that occured. (I, say “blank page” and “of course” because I like to experience places that way. Unlike Eunie, I do not prepare myself for any event or person, or movie, not even about a country which I am to visit.)

In the case of the Philippines I spent the early days of February, 2009, in the awe of the humidity and the Far East and the traffic jams and pollution of this young (average age 21) but Catholic city and country.

Item: During our weekend trip to Corregidor, a trip within a longer visit to Manila, I was astounded to read that $150 million in 1912 dollars had been put into the fortification of Corregidor, that tadpole-shaped, three-square-mile island, so far away yet close to the "inscrutable Far East," and Ft. Mills, in and around “Topside,” built, -- Topside I mean -- among other things, for the training, play and enjoyment of the officers of the U.S. Army.

I hadn’t thought of turn-of-the-century American imperialism in the Philippines more than a millisecond, if ever, or what I will now and forever call “the three M’s” – 1912 American Money, or the MacArthurs, or the Marcos or the Philippeans for many years, but our daughter Genny, and this trip to see how she lived, drew us there.

Now as I write it’s just that we have taken two tours from Carlos.

Despite a two-week attempt to keep this paper in focus as a simple presentation of my achingly deep feelings but guilt-ridden “idyllic” weekend tour of Corregidor with Carlos Celdran and his “Walk With Me” website and Celdran tours -- by ferry out of Manila, I am now forced to give up, as the overall dramatic history of the Philippines swamps my thoughts.

Concrete, which we introduced, is the basic building block of the Philippines. Beautiful concrete. Supplemented with dark teak-like sliding wooden doors and floors. Concrete, which cures in perfect conditions in this climate, stays around for centuries, even after being dive-bombed by both sides in WWII.

The parade grounds of Ft. Mills, Topside in a perfect climate, can be re-seeded to be beautiful for centuries, even after bombings. Caissons, with five-foot thick bunkers, remain no matter what, with their awesome mortars. The jungle can be destroyed into oblivion on a three-mile island, but reseeding by helicopter can retrieve it for the tourists.

I’m not going to talk about generalities of Filipinos, but I cannot resist this line of thought: It has been said that Filipinos are the Irish of Southeast Asia in their universal goodwill – especially toward Americans.

There is also one stretched metaphor I must tweak you with, however awkwardly: It is correct to say that Philippine society under the American “protectorship,” was “stratified.” But on one important island standing at the entry to Manila Bay, stratification was figuratively and literally true during the long period of 1902 through 1942.

I refer to “Topside,” “Middleside,” and “Bottomside,” the three named layers of Army post, Ft. Mills, on the body of volcanic rock and jungle jutting 500 feet out of the South China Sea guarding the Bay of Manila, with the city 26 nautical miles to the south. This island has another name more familiar to you: Corregidor!

“Middleside” contained more cement barracks for the U.S. and Filippino enlisted men, and the Malinta Tunnel, which cut from South to North through the island, was perhaps as startling to me on that February, 2009 weekend as was my first view of the awesome Pennsylvania Turnpike tunnels of the 1940’s, on that first 1946 trip of the Abels to live in Columbus Ohio from Philadelphia, except wider.

Credit Card Comments

This article, plus the earlier one you can find by clicking on "credit cards" label, are important.

Friday, April 24, 2009

Thursday, April 23, 2009

Oh Roger! You Write (and Think) So Well

Economix -- Simon Johnson This Morning

Tough sledding but the main points are simple.

A Brief and Wity Walk Through New York State Politics -- Collins

Oh she's good. And New York is important, et's face it.

Cramer Last Night

It strikes me that the transcript from Cramer is now available right after the show, rather than a day's delay.


More Details on Kellerman Suicide

This article should be read closely. A cautionary tale, certainly.

He was at the crossroads of a whole lot of things. He couldn't take the pressure. Who could?

Tuesday, April 21, 2009

3 x ETF's Are Wealth Destroyers

Obama -- The Big-Spending Conservative, Says Brooks

Andrew Ross Serkin Today

Published: April 20, 2009
This is starting to feel like amateur hour for aspiring magicians.
Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market.
Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.
But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.
Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”
Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at
Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.
“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.
Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank
stocks. They’ve had enough.
Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.
What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.
“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”
But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.
The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.
This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?
“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”
The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.
The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.
But that was before the government reached into its bag of tricks again. Now
Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.
The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.
And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.
The latest news on mergers and acquisitions can be found at

More Susan Boyle -- All the Time

A Flawed But Valuable Article

Life insurance cost cf. the past, etc.

Charles Taylor -- A Master Planner Drawn in Blood

Friends = Longer Life

Very interesting:

And read The Outliers too. Cite to come.

TALF Program is Seen as Open to Fraud

Monday, April 20, 2009

The NYT Article and Sunday's Obama Leaks That Drove the Market Down Today

A surprise to me:

comments (122)
Published: April 19, 2009
WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.
Read All Comments (122) »

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.
The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.

Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.

Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.
Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.

In his budget proposal for next year, Mr. Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually indicated that Mr. Obama might ask Congress for as much as $750 billion.

The most immediate expense will come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 biggest banks. The tests are expected to show that at least several major institutions, probably including Bank of America, need to increase their capital cushions by billions of dollars each.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.

The White House chief of staff, Rahm Emanuel, alluded to the strategy on Sunday in an interview on the ABC program “This Week.” Mr. Emanuel asserted that the government had enough money to shore up the 19 banks without asking for more.

“We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective,” Mr. Emanuel said. “If they need capital, we have that capacity.”

If that calculation is correct, Mr. Obama would gain important political maneuvering room because Democratic leaders in Congress have warned that they cannot possibly muster enough votes any time soon in support of spending more money to bail out some of the same financial institutions whose aggressive lending precipitated the financial crisis.

The administration said in January that it would alter its arrangement with Citigroup by converting up to $25 billion of preferred stock, which is like a loan, to common stock, which represents equity.

After the conversion, the Treasury would end up with about 36 percent of Citigroup’s common shares, which come with full voting rights. That would make the government Citigroup’s biggest shareholder, effectively nudging the government one step closer to nationalizing a major bank.
Nationalization, or even just the hint of nationalization, is a politically explosive step that White House and Treasury officials have fought hard to avoid.

Administration officials acknowledged that they might still have to ask Congress for extra money. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks and may need to provide more money before the financial crisis is over.

Treasury officials say they have more money left in the rescue fund than might be apparent. Officials estimate that the fund will have about $134.5 billion left after the Treasury completes its $100 billion plan to buy toxic assets from banks and after it uses $50 billion to help homeowners avoid foreclosure.

In practice, the toxic-asset programs are not expected to start for another few months, and it could be more than a year before the Treasury uses up the entire $100 billion. Likewise, it will be at least a year before the Treasury uses up all the money budgeted for homeowners.
But the biggest way to stretch funds could be to convert preferred shares to common stock, a strategy that the government seems prepared to use on a case-by-case basis.

Ever since the Treasury agreed to restructure Citigroup’s loans, officials have made it clear that other banks could follow suit and convert their government loans to voting shares of common stock as well.

In the stress tests now under way, regulators are examining whether the big banks would have enough capital to withstand an economic downturn in which unemployment climbs to 10 percent and housing prices fall much further than they already have.

As their yardstick, regulators are expected to examine a measure of bank capital called “tangible common equity.” By that measure of capital, every dollar a bank converts from preferred to common shares becomes an additional dollar of capital.

The 19 big banks have received more than $140 billion from the Treasury’s financial rescue fund, and all of that has been in exchange for nonvoting preferred shares that pay an annual interest rate of about 5 percent.

If all the banks that are found to have a capital shortfall fill that gap by converting their shares, rather than by obtaining more cash, the Treasury could stretch its dwindling rescue fund by more than $100 billion.

The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.
Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall.

R. Allen Stanford Asking for Unfreezing of $10 Million to Pay for Defense

Interesting problem. Not entitled to a state-financed attorney because no criminal indictment has been filed.

Saturday, April 18, 2009

Came Across This Screed on Goldman Sachs

I'm afraid I sort of agree with this thesis, as poorly [intentionally?] spelled as it is:

And I believe the gaming goes on, rendering bailout money down the drain perhaps.

Liddy of AIG Owns a Lot of Shares of Goldman Sachs

Simon Johnson, in his Baseline Scenerio blog today, is outraged. I am not:

What continues to madden me is the press releases Goldman gave out this week etc. as shown in my recent blogs.

Tech Tips -- Select Multiple Files That Are Grouped Together

Hold the shift key down and click on the first file name; then, while still holding the shift key down, click on the last file name in the list:

Andrew Lo -- A Must

Cramer Describes the Day He Caused the Bottom in 1988

I remember this. He and I were emailing, or at least I was reading everything he wrote. Or maybe that came later. I'm not sure. But in any event he cancelled all his sell orders ehen he learned that Greenspan was calling an emergency Fed meeting.

Collins -- Twittering From Texas

Brooks -- Never Ceases to Amaze and Surprise

He's Jewish after all:

A Pension Fund Scandal in NY State Runs Deep and Wide

Pay to Play for The Carlyle Group

Friday, April 17, 2009

GE's Earnings

Even Financial Columnists Can Fall Victim to Fraud From Financial Planners

Krugman -- An In-Depth View of Premature Optimism Now and in the '30's

Floyd Norris -- A Slap-Down of Goldman Sachs

Norris is at his best here.

It gets at the public's anger quite adequately, and drills down to the core misrepresentations implicit in Goldman's fatuous public statements:

From the above:

Yet its denial that it profited from the government’s bailout of the insurance giant is greeted with scorn. People may not be sure about just what Goldman did that was improper, but many seem to think there must have been something.

Why is this happening? David A. Viniar, Goldman’s chief
financial officer, sounded bewildered when I asked him that. “We are so careful in what we try to do. We are so careful about compliance and following rules, and doing all the things we should do,” he said. “I read the stories and I scratch my head.”

Let me try to help. Goldman’s explanations sometimes do not ring true, even if they are. When it announced
its profits this week, it buried an important fact in the tables on page 10 of a news release, and did not mention
it in the text of the release. That fact was that Goldman had lost a lot of money in December, which would have
been part of the quarter had the firm not changed its fiscal year. As a result, that loss does not show up in any
quarterly number. Goldman won’t say if a December-to-February quarter would have been profitable.

Was Goldman’s disclosure misleading? Legally, no. There was full disclosure. But the existence of the orphan month, with its big loss, was largely overlooked
in the initial news stories. When it was reported later,
Goldman was left looking as if it had tried to pull a fast one.

Something similar happened with regard to Goldman’s relations with A.I.G., which owed Goldman a lot of money that it was able to recover thanks to the bailout. Mr. Viniar says that Goldman was fully protected if A.I.G. did default, and that A.I.G.’s bailout had little if any effect on Goldman’s earnings. When I talked to Mr. Viniar, he conceded to me, as he had to others, the obvious fact that Goldman would have been affected if an A.I.G. collapse had led to a systemic failure. But Goldman has not emphasized that, and at times has
seemed to be denying it, as when it said that collateral put up by other firms would have protected it if those firms had collapsed as a result of A.I.G.’s failure.

Then there is the matter of the $10 billion government
investment under the TARP program. Goldman has proclaimed that it wants to pay it back, and get out from government control of things like bonus payments. But it did not mention the $28 billion it has borrowed with a
guarantee from the government’s Federal Deposit Insurance Corporation, a guarantee that is worth a lot to

Mr. Viniar told me Goldman expected to borrow more, probably hitting the maximum $35 billion.

Wednesday, April 15, 2009

Should Feds Bail Out Insurance Companies?

From Baseline Scenerio.

The Baseline Scenario
Why Bail Out Life Insurers?
Posted: 11 Apr 2009 08:35 AM PDT
That’s the question I woke up with this morning. Sad, isn’t it.
The Wall Street Journal reported this week that Treasury will soon announce that it will use TARP funds to invest in life insurers, or at least those who snuck under the federal regulatory umbrella by buying a bank of some sort. The argument for the bailout is a version of the “No more Lehmans” theory: the failure of a large financial institution could have ripple effects on other financial markets and institutions that could cause systemic damage. For a bank, the ripple effect is primarily caused by two things: (a) defaulting on liabilities hurts bank creditors, and (b) defaulting on trades (primarily derivatives) hurts bank counterparties, if they aren’t sufficiently collateralized (think AIG).
My thought this morning was that life insurance policies are long-term liabilities that are already guaranteed by state guarantee funds, so we don’t have to worry about (a), and hopefully most life insurers were not doing (b) - large, one-sided bets on credit risk like AIG. So why not just let them fail and let the states take over their subsidiaries? But then I checked the facts, and it turns out that the limits on state guarantee fund payouts are pretty low. So the scenario is this: you hear bad things about your life insurer, you decide to redeem your policy (usually at a significant loss to yourself), turning it into a short-term liability, and then the insurer has to start dumping assets into a lousy market, pushing the prices of everything further down and hurting everyone holding those assets. Would this really cause a systemic crisis worse than we’ve already got? I don’t know, but no one in Washington wants to take that risk.
Ultimately, though, this goes back to the question of whether this is a liquidity crisis or a solvency crisis. If it’s a liquidity crisis - in which case you would expect to see lots of people redeeming their policies already - then there are better ways to prevent a run on the life insurers. For one thing, if the insurers really do have good assets to cover their expected payouts, the government could just boost the limits on the state guarantees, charge the insurers a premium for the guarantee (insurers already pay a premium for the backstop they get from the states), and pocket the money. Alternatively, the government could act as a reinsurer, taking on some of the payout risk in exchange for a corresponding proportion of the assets and premiums. Using TARP money might work, but since it just adds a few billion dollars to the insurer’s capital (without guaranteeing anything), it’s not a surefire solution.
If it’s a solvency crisis, though, we have to ask whether a few billion dollars of TARP money is enough. The Hartford estimates it is eligible for $1-3 billion of money. (I picked them because they are discussed in the WSJ story, not because I know anything else about them.) It also has $288 billion of assets. How do their assets compare with the assets of, say, a bank? In principle, insurance companies are more closely regulated, and their investment mix (in terms of bond ratings) is constrained. But it’s also true that insurers - especially the large ones - were investing in more sophisticated products in an attempt to earn higher yields. (For details, see pp. 156-76 of the Hartford’s latest 10-K.) And we know that you could lose a lot of money investing in AAA-rated assets. If this does turn out to be a solvency crisis, then this could be the first page of a long story.

Susan Boyle

Many of you may have heard her last night, but if you haven't, listen and watch and be ready to wipe the tears from your eyes, based on her natural talent.

And in the Antwerp Railroad Station, this song from The Sound of Music:

And this background piece on her from the San Francisco Chronicle:

And this later piece in NYT, Saturday, April 18, 2009:

Morgenson -- John C. Bogle

He Doesn’t Let Money Managers Off the Hook

Published: April 11, 2009
EVERY once in a while, if only for sanity’s sake, it is wise to leave our bankrupt era behind and seek out a bit of wisdom from a moral authority. It’s a challenging exercise, given that so many formerly stellar reputations are now shipwrecked and that all those once-smart guys and gals have been reduced to bull-market geniuses.

Times Topics: Gretchen Morgenson

And yet there are a few voices of reason and integrity left in this upside-down world. One is John C. Bogle’s. He is the founder of the Vanguard Group, an author and an investor advocate. With almost 58 years in the money management business, Mr. Bogle has kept his reputation intact. That alone sets him apart.
But Mr. Bogle is also worth talking to because he is a thinker, a sort of financial philosopher. And earlier this month he lectured at Columbia University about, not surprisingly, the financial crisis and its causes. What he said was illuminating.
In his talk, he cited the usual suspects: borrowers, lenders, securitizers, regulators and Wall Street traders. But he also identified one group that hasn’t been singled out for shame: the institutional money managers that allowed the nation’s financial companies to amass enormous risks on their balance sheets and pay gigantic compensation based on false profits. The big funds let this happen without uttering a word.
“When I read the causes of the recent unpleasantness, I haven’t seen one single person who has said that the owners of these corporations, including the banking corporations, didn’t seem to give a damn about how they were being run,” Mr. Bogle said in an interview last week. “We own all this stock but we pretty much do nothing.”
That “we” he talks about really refers to those in charge of our retirement accounts, pensions and savings: mutual funds and professional money management firms that, as institutional investors, control 70 percent of the shares of large public companies today.
Such an outsize stake means that the institutions wield great power and influence over corporate America. Yet, as Mr. Bogle points out, few institutions have played an active role in board structure and governance, director elections, executive compensation, stock options proxy proposals or dividend policies at the companies they own.
“Given their forbearance as corporate citizens,” Mr. Bogle said, “these managers arguably played a major role in allowing the managers of our public corporations to exploit the advantages of their own agency.”
INDEED, while many still believe that the American way of investing makes ours an ownership society, Mr. Bogle says we live in an agency society, one in which we rely on agents — mutual fund managers, pension fund managers — to make our investment choices for us.
An ownership society was an accurate depiction of where this country was 50 years ago, Mr. Bogle says. Not today.
And he says that the trust we have placed in these agents is undeserved. In his view, the agents have failed to serve their clients — mutual fund shareholders, pension beneficiaries and long-term investors; instead, the agents have served themselves.
Consider fees. Charges levied on mutual fund investors are much higher than those that the identical firms exact on pension clients, for example. The three largest money managers, Mr. Bogle pointed out, charged an average fee rate of 0.08 percent to pension customers. This compares with 0.61 percent charged to fund shareholders.
Money managers also haven’t done the kind of due diligence that might have protected their investors from titanic losses. “How could so many highly skilled, highly paid securities analysts and researchers have failed to question the toxic-filled, leveraged balance sheets of Citigroup and other leading banks and investment banks?” Mr. Bogle asked.
Keep in mind that these failures have occurred in spite of the Investment Company Act of 1940, which states that “mutual funds should be managed and operated in the best interests of their shareholders, rather than in the interests of advisers.”
In the face of all this, Mr. Bogle suggests that we force our agents to relearn what being a fiduciary means. A fiduciary, these managers seem to have forgotten, acts for the sole benefit and interest of another. We need to replace the agency society with a fiduciary society, he argues.
To achieve this, Mr. Bogle says, the government must apply a federal standard of fiduciary duty to institutional money managers. This would force them to use their stock holdings as a cudgel, to demand that directors and executives of corporations honor their responsibilities to their owners.
“We need Congress to pass a law establishing the basic principle that money managers are there to serve their shareholders,” Mr. Bogle said. “And the second part of the demand is that fiduciaries act with due diligence and high professional standards. That doesn’t seem to be too much to ask.”
Some money management firms are publicly traded themselves, and Mr. Bogle says that those firms offer an added layer of deep and serious conflicts because executives running them try to serve two masters: their shareholders and their fund clients.
Such conflicts can be resolved only by separating the money management units from the larger, publicly traded firms, Mr. Bogle said. Under such a plan, the Deutsche Bank Group, for example, would spin off DWS Investments, its mutual fund unit, or Sun Life of Canada would divest itself of MFS Investment Management.
And with a fiduciary law in place, Mr. Bogle believes, money managers would be far more responsible about corporate citizenship than they are now.
“The funds should demand with all their voting power that the companies they own are putting the interests of their shareholders first,” he said. “This would have implications for executive compensation, nominating directors, and other corporate governance matters.”
Mr. Bogle doesn’t think that the mutual fund industry will rush to embrace his idea. The powerhouses in the business have battled fiercely against attempts to shine sunlight on their practices or rid their operations of conflicts.
But as our current financial crisis has made clear, there are significant problems in the structure of the mutual fund business, and now is the perfect time to solve them.
“This will create a lot of opposition, but it is not a regulatory solution, it is a principles-based solution,” Mr. Bogle said. “We would gradually develop a series of decisions about how these things fit into the overall fabric of investment management. Is it easy to articulate? No, but is the principle easy to understand? Absolutely. Shareholders come first.”

Rescue Plan For Funds Will Come At a Price (September 20, 2008)
MUTUAL FUNDS REPORT; Why Your Fund Beat the Average, but You Didn't (October 8, 2006)
MARKET PLACE; Real Money Rides on an Argument About the Fundamentals of Investing (August 15, 2006)
Fund Managers May Have Some Pay Secrets, Too (April 16, 2006)

Bogle, John C Get E-Mail Alerts

Promising Test for Dendreon’s Prostate Cancer Drug
More Hotels Facing an Uncertain Future
U.S. Planning to Reveal Data on Health of Top Banks
News Analysis: Obama Stands Firm on a Sweeping Agenda
Harder-Edged Warnings About Britain’s Economy
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So Botox Isn’t Just Skin Deep
Media Executives Plan Online Service to Charge for Content
Tech Recruiting Clashes With Immigration Rules
Goldman Using Share Sale to Return Bailout Funds Go to Complete List »
Crisis Altering Wall Street as Big Banks Lose Top Talent
'Surgical' Bankruptcy Possible for G.M.
Banks Holding Up in Tests, but May Still Need Aid
China Slows Purchases of U.S. and Other Foreign Bonds
Obama See 'Glimmers of Hope' for the Economy
U.S. Imagines the Bailout as an Investment Tool
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In Switch, Magazines Think About Raising Prices
Boston Globe Surprised by Size of Demand for Cuts
Cities Turn to Fees to Fill Budget Gaps Go to Complete List »

A Little Background on Simon Johnson

I Just Wrote These Words

(c) 2009 F. Bruce Abel

I just wrote these words:

“The extreme difficulty of dealing with failed states.”

Who taught me “difficulty of dealing with?”

Who taught me “difficulty?”

Who taught me “difficult?”

It must have been you, Mom.

I know this though: I worked hard with Dad one night

Over the following spelling homework at either Harman or Oakwood Jr. High, and how to remember that there was no "d" in "privileged:"

“He legged it to the privy with Ed.”

Thank you, Dad, I will always remember that night.

Visions of Dad’s home in Brooklyn, where he rolled his own tennis court! And there must have been a privy before indoor plumbing. There certainly was “privi”-lege in that family, as his dad was comptroller of the BMT, so I imagine they might have been the first on the block to get rid of the “privy.”

Vision of Dad at Miami Valley Hospital heaving to breath as he lay there after his final heart attack.

“Leg it, Dad, leg it!”

Friedman -- A New Theme

The extreme difficulty of dealing with failed states such as Afghanistan:

Wissman -- A Hedge Fund Guy Affiliated With Carlyle Group -- Guilty of Securities Fraud

Tuesday, April 14, 2009

Listen Up -- Pandora's Box is About to be Opened

In the meantime Goldman is screwing things up by wanting to return their TARP money to show how "strong" they are, yet they are "secretly" benefiting to the tune of billions, by the following program of the US Government:

And a further analysis which rings true:

The Postmodern Financial Crisis

Came across this today. Sounds pretty good.

It's Worse in England

Another reference to Simon Johnson, who's popping up everywhere!

Herbert -- Guns & Murders -- And a Society Too Immature to do Anything

Auctions Replacing Realtors(R) in NYC

Wierd -- Healthy Mouth, Healthy Sex

Where to Keep Short Term Money

Good on Health Care Policy For Newly-Fired Employees

Monday, April 13, 2009

Simon Johnson This Morning

Backstage and Nakedness

Article, no pictures:

Two Articles of Interest

American Idol's Big Tease
by Guy Trebay

Heir to a Sad Literary Legacy Add a New Chapter of Grief
by David Barstow

Consuelo Mack Saturday

You can watch the show by typing

But the best answer:

Ask your broker-dealer or investment advisor

"Do you do your own self-clearing or do you use an outsource firm?"

The outsource firm approach is key because there is another set of eyes looking at what's going on.

Cohen -- Wonderful as Always

Krugman -- On Republican "Tea Parties"

Interesting. Many truths. We must be vigilent.

Houses Decked Out for Sale -- Are Robbed!

Satyajit Das -- Remember This Name and Read!

On Credit Default Swaps and their dangers:

Reich Says We're Not Even at the End of the Beginning

Let alone the beginning of the end.

Sunday, April 12, 2009

Architecture Now Cover!

The Merton Talk at MIT -- Revisited

The chart goes in about two-thirds down this blog.
Sunday, April 12, 2009
9:52 AM

Robert Merton talk at MIT:

It's best if viewed and played back over and over. Even then it is confusing in part because he is using a light-pointer with his slides which does not show up:

Posted April 5, 2009 on

Here are my notes from listening over and over to some extent:

[no comments are mine]

Tools of financial science.

How does risk propagate so rapidly?

What are the implications to the inevidable incompleteness of all models?

Risk transfer technologies.

Pursuing comparative advantage.

Pursuing risk diversification.

Allows significant wealth particularly for smaller companies and countries.

Cause of finan crisis:

Refers to analogy: “if there were a body lying here.”

One person says: “heart attack”

Another says: “poison”

many possibilities as to why the man died

Will not know the answer until we do the pathology

We’re far from getting through the first stages of it (pathology)

coincidence of things, I think.

Not like Fineman and his O-ring (Challenger Disaster)

Decline in residential housing, began in 2006, before financial rumblings

Very big and very complicated.

I will take a little slice of something I know about.

Put options:

Started in 17th century Amsterdam;

Have been trading them on exchanges for 35 years.

Put option=Asset value insurance.

Plot a picture

Hockey stick

[graph is incomprehensible without seeing where his pointer is]

credit…is about loans, guarantees of loans

credit risk [not talking about interest rate risk]

If you attach a "guarantee" to risky debt = risk-free debt, which is just "time value of money."

What is risky debt?

Risk-free loan (us govt instru); writing a guarantee

When you lend to a risky counterparty, you are
Carrying out two activities:

1. Lending $ thru time
2. Self-guaranteeing (or writing a put option on it)

If volatility of the assets go up, the value of the put option goes up.

Credit default swaps:

AIG is not alone

Guarantee of debt of the issuer. Is all it is.

How is it that things go along smoothly.

Why is that they can come out with more and more losses? Shouldn’t it stop? Where’s it coming from? Hiding? Maybe, but not likely.

How it works:

Back to put option shape of the curve.

Banks make loans:

Which means:

· Lending $ thru time
· Self-guaranteeing
Which means:
1. lending $
2. writing put options on the assets we’re referring to

say, value of house;
value of guarantee bank has written

value of house falls, say

guarantee goes up; it’s worth more

“how sensitive is the value of the guarantee to the movement of the underlying asset, value of the house?” the slope of the curve; if .30 then it’s for each dollar in move of the dollar of the asset it’s 30 cents; .03 then it’s 3 cents

if this goes up what else goes up

for same movement of the asset it gets steeper; gets steeper and steeper;

most people don’t think about just a standard mortgage as having this property embedded in it.

when value of assets goes down their volatility goes up. The effect on the put option is even greater than what I showed you on that graph. In real world the risk is even greater.

As things go down the risk goes up, but most of the models out there tend to be local models that are multivariant regressions. But the problem is that they are local.


What’s happening: wrote a whole lot of credit default swaps. The assets underlying them have all been going down. Whoever’s written these guarantees in pure form. Not only are they losing money, but in increasing …

Things are not conceptually out of control. Not some mystery Black Swan.

People are not recognizing that non-linear curve. What they measure as a 10-sigma event is really a two-sigma event.

Govt writes a guarantee of…the bank’s liability…your deposits. They are writing a put option on them. Govt is writing a put option on a put option. Deposit insur on a classic bank.

So plot curve… starts with almost no slope at all. When that starts to go, the degree of the risk for the govt rises rapidly.

Especially problematic for small countries.

I’ve been talking about plain vanilla loans, vanilla guarantees. Nothing complex.

The good news [then he goes on without the good news; see infra for the good news]:

Innovation and crisis.

Plenty of bad people; plenty of incompetent people.

But there are also well-meaning and ethical people…still a problem.

Structual issue.

100 innovations; lucky if two are successful. Cannot be sure in advance.

Design of a high-speed train. If you don’t have a track you’d be crazy.

Trade-off: you never can go faster than the track. Not satisfactory.

We tend to feel more secure about the familiar than the new even though the risks are the same.

Defined benefit pension plan. Decision to invest in equities. Is equivalent in risk to entering into a total return swap.

GM would be $75 billion. One std devia = $15 billion.

Financed 100% by 30-yrs fixed rate debt. You’d sound crazy.

If you have housing come down you will these effects in the most vanilla of securities.

Only a crazy person would use a math model and then go off fishing (Clark?)

What is not going to change is that models are incomplete in describing complex reality.

Satisfy every constraint
Be totally ethical

Put that on with an incomplete model…will not be random. Assets will be highly pro-cyclical. Bias will be there.

Complexity is “so called” only. Special purpose vehicles (CDO) take… middle risky debt became CDO squared;

Take a garden variety corporation:

Mortgages, never change; stay there for the whole life



On right side:

St debt pension lias

So complexity is not at the core of the problem (which we are used to).

Wonder whether the govt would rather not see these valued.

What can we do about this bank problem?

Very smart, hard-working new administration.

They say “to be determined.”

How do anything without valuing the assets. If you take over the banks as in s&l you do not have to value them.

I see no other way to avoid “that.” What is the “that” that he’s referring to?

We’ve lost $15 trillion just in stock and residential mkts

87 crash similar perhaps; but for full yr came back; no internalized that wealth into their lifestyles.

I’ve relabled all my retirement as “supplemental income.”

Lehman was fully collateralized.

AIG was not.

Doing it on old-fashioned credit rating.

Accounting based rules; misaligned incentives.

Finan engineering got its start at MIT. Need has gone up. Need more who undertand what’s going on.

700 trillion of notional derivatives. It’s not going away.

“Regulators can’t understand.” Either learn how to use the technology …

Set up “Nat Trans Safety Board” just for the capital markets.

“Bad banks” maybe create a sovereign wealth fund.

Putting these assets into that fund to be run for the people of US. If it 20 years, so be it.

We don’t even know the assets that will end up there. Automobile instruments, etc.

Something positive:

We will get through this. One application of how you can use mkt proven. Taiwan as example. Computer chips. Comparative advantage. Return as an economy: part is result of world chip industry. Will he hurt no matter how good they are.

Taiwan-specific characteristics. Their thing. They control that.

What about the risk of the world chop industry.

Can get a portfolio that covers that.

Bec they are focused on one industry…

Contract: a swap

Two parties:

On a given amt we will swap returns;

Ttl rtn on world chip industry

I will get you rtn on all industries

Totally non-invasive

Taiwan now gets far better diversification but still doing just the chip industry.

Emerging markt on graph

6% difference extra; rule of 72.

How long it

Int rate/72

12 yrs to double your money

6 or 5 times bigger after 30 yrs; let’s halve it; pure risk management transfer efficiency

this works for small countries

it’s reversible; Taiwan enters into the opposite swap.