Very Important

The following is a repeat citation of a very, very important piece presented to Congress last year.  Deals with Countrywide and, more important, the nuts and bolts of the mrtgage crisis.

http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf 

David Brooks: Op-Ed Columnist - An Economy of Grinds - NYTimes.com

(c) 2010 F. Bruce Abel

David Brooks writes pieces that are often hard to categorize, but I read everything he writes.  This one deserves note and reading over and over again.  It covers an interesting class view that fits with my own.

Knowing Brooks's Republican political-history, this piece is not of small import.  David Brooks is slowly feeling his way into a world-view that is anti-establishment, anti-corporate.  Far from where he was during the Bush years.  Click on and start at the beginning.

Op-Ed Columnist - An Economy of Grinds - NYTimes.com: "Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint."

Natural Gas Guru: calvin trillin

Natural Gas Guru: calvin trillin: "Posted: 14 Oct 2009 11:09 AM PDT
According to Calvin Trillin (or, more accurately, the probably-at-least-semi-fictional interlocutor he meets at a bar in Midtown), the financial crisis was caused by smart people going to work on Wall Street. In the old days, the story goes, it was the lower third of the class that went to Wall Street, and “by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”
Then, however, as college debts and Wall Street pay grew in tandem, the smart kids started going to Wall Street to make the money, leading to derivatives and securitization, until finally: “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was.”"

Goldman Sachs -- "Sociopaths"

(c) 2010 F. Bruce Abel

The best comment yet on the Goldman hearings earlier this week, from "KT NY":

(Who else ever started a piece with the word "telling?" Very effective.)

April 28th, 2010 10:51 am

Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."

What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.

What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.

Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.

There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.

Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse

And some good from the Globe & Mail, especially the comments after the article, in today's Business section:


http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog

Magnetar -- Remember This Name

(c) 2010 F. Bruce Abel

This posting by James Kwak (skip over the Simon Johnson piece for the moment), is a must, must read.


The Baseline Scenario


--------------------------------------------------------------------------------
Greek Bailout, Lehman Deceit, And Tim Geithner

Posted: 13 Apr 2010 04:53 AM PDT

By Simon Johnson

We live in an age of unprecedented bailouts. The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble.

The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures. Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?

But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times).

The sharp decline in market confidence last week – marked by the jump in Greek yields – scared the main European banks, and also showed there could be a real run on Greek banks; other Europeans are trying to stop it all from getting out of hand. But there is no new program that would bring order to Greece’s troubled public finances.

It’s money for nothing – with no change in the incentive and belief system that brought Greece to this point, very much like the way big banks were saved in the US last year.

If anything, incentives are worse after these bailouts – Greece and other weaker European countries on the one hand, and big US banks on the other hand, know now for sure that in their respective contexts they are too big to fail.

This is “moral hazard” – put simply, it is clear a country/big bank can get a package of support if needed, and this gives less incentive to be careful. Fiscal management for countries will not improve; and risk management for banks will remain prone to weakening when asset prices rise.

If a country hits a problem, the incentive is to wait and see if things get better – perhaps the world economy will improve and Greece can grow out of its difficulties. If such delay means that the problems actually worsen, Greece can just ask Germany for a bigger bailout.

Similarly, if a too-big-to-fail bank hits trouble, the incentive is to hide problems, hoping that financial conditions will improve. Essentially the management finds ways to “prop up” the bank; on modern Wall Street this is done with undisclosed accounting manipulation (in some other countries, it is done with cash). If this means the ultimate collapse is that much more damaging, it’s not the bank executives’ problem any way – their downside is limited, if it exists at all.

The Greeks will now:

Lobby for a large multi-year program from the IMF. They’ll want a path for fiscal policy that is easy in the first year and then gets tougher.
When they reach the tough stage, can’t deliver on the budget, and are about to default, the Greek government will call for another rapid agreement under pressure – with future promises of reform. The eurozone will again accept because it feels the spillovers otherwise would be too negative.
The Greek hope is that the global economy recovers enough to get out, but more realistically, they will start revealing a set of negative “surprises” that mean they miss targets. If the surprises add to the feeling of crisis and further potential bad consequences, that just helps to get a bailout.
The Greek authorities will add a ground game against the European Central Bank, saying things like: “the ECB is too tight, so we need more funds”. We’ll see how that divides the eurozone.
In their space, big US banks will continue to load up on risk as the cycle turns – while hiding that fact. Serious problems will never be revealed in good time – and the authorities will again have good reason (from their perspective) to agree to the hiding of issues until they get out of control, just as the Federal Reserve did for Lehman Brothers. Moral hazard not only ruins incentives, it also massively distorts the available and disclosed information.

As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.





The Cover-Up

Posted: 12 Apr 2010 06:59 PM PDT

By James Kwak

Wall Street is engaged in a cover-up. Not a criminal cover-up, but an intellectual cover-up.

The key issue is whether the financial crisis was the product of conscious, intentional behavior — or whether it was an unforeseen and unforeseeable natural disaster. We’ve previously described the “banana peel” theory of the financial crisis — the idea it was the result of a complicated series of unfortunate mistakes, a giant accident. This past week, a parade of financial sector luminaries appeared before the Financial Crisis Inquiry Commission. Their mantra: “No one saw this coming.” The goal is to convince all of us that the crisis was a natural disaster — a “hundred-year flood,” to use Tim Geithner’s metaphor.

I find this incredibly frustrating. First of all, plenty of people saw the crisis coming. In late 2009, people like Nouriel Roubini and Peter Schiff were all over the airwaves for having predicted the crisis. Since then, there have been multiple books written about people who not only predicted the crisis but bet on it, making hundreds of millions or billions of dollars for themselves. Second, Simon and I just wrote a book arguing that the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself. Since, probabilistically speaking, most people will not read the book, it’s fortunate that Ira Glass has stepped in to help fill the gap.

This past weekend’s episode of This American Life includes a long story on a particular trade put on Magnetar (ProPublica story here), http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going a hedge fund that I first read about in Yves Smith’s ECONned. The main point of the story is to show how one group of people not only anticipated the collapse, and not only bet on it, but in doing so prolonged the bubble and made the ultimate collapse even worse. But it also raises some key issues about Wall Street and its behavior over the past decade.

This will require a brief description of what exactly Magnetar was doing. (If you know already, you can skip the next two paragraphs.) It’s now a cliche that a CDO is a set of securities that “slices and dices” a different set of securities. But it’s slightly more complicated than that. First there is a pile of mortgage-backed securities (or other bond-like securities) that are collected by an investment bank. The CDO itself is a new legal entity (a company) that buys these MBS from the bank; that’s the asset side of its balance sheet. Its liability side, like that of any company, includes debt and equity. There’s a small amount of equity bought by one investor and a lot of debt, issued in tranches that get paid off in a specific order, bought by other investors. The investment bank not only sells MBS to the CDO, but it also places the CDO’s bonds with other investors. Whoever buys the equity is like the “shareholder” of this company. There is also a CDO manager, whose job is to run the CDO — deciding which MBS it buys in the first place, and then (theoretically) selling MBS that go bad and replacing them by buying new ones. The CDO itself is like an investment fund, and the CDO manager is like the fund manager.

According to the story, in 2006, when the subprime-backed CDO market was starting to slow down, Magnetar started buying the equity layer — the riskiest part — of new CDOs. Since they were buying the equity, they were the CDOs’ sponsor, and they pressured the CDO managers to put especially risky MBS into the CDOs — making them more likely to fail. Then Magnetar bought credit default swaps on the debt issued by the CDOs. If the CDOs collapsed, as many did, their equity would become worthless, but their credit default swaps on the debt would repay them many, many times over.

The key is that Magnetar was exploiting the flaws in Wall Street’s process for manufacturing CDOs. Because the banks made up-front fees for creating CDOs, the actual human beings making the decisions did not particularly care if the CDOs collapsed — they just wanted Magnetar’s money to make the CDOs possible. (No one to buy the highly risky equity, no CDO.) Because the ratings agencies’ models did not particularly discriminate between the contents that went into the CDOs (see pages 169-71 of The Big Short, for example), Magnetar and the banks could stuff them with the most toxic inputs possible to make them more likely to fail.

Now, one question you should be asking yourself is, how is this even arithmetically possible? How is it possible that a CDO can have so little equity that you can buy credit default swaps on the debt at a low enough price to make a killing when the thing collapses? You would think that: (a) in order to sell the bonds at all, there would have to be more equity to protect the debt; and (b) the credit default swaps would have been expensive enough to eat up the profits on the deal. Remember, this is 2006, when several hedge funds were shorting CDOs and many investment banks were looking for protection for their CDO portfolios.

The answer is that nothing was being priced efficiently. The CDO debt was being priced according to the rating agencies’ models, which weren’t even looking at sufficiently detailed data. And the credit default swaps were underpriced because they allowed banks to create new synthetic CDOs, which were another source of profits. So here’s the first lesson: the idea that markets result in efficient prices was, in this case, hogwash.

By taking advantage of these inefficiencies, Magnetar made the Wall Street banks look like chumps. This American Life talks about one deal where Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.

But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)

So who’s to blame? The first instinct is to get mad at Magnetar. But this overlooks a Wall Street maxim cited by TAL: you can’t blame the predator for eating the prey. Magnetar was out to make money for its limited partners; if it had bet wrong and lost money, no one would have bailed it out. Although I probably wouldn’t have behaved the same way under the circumstances, I have no problem with Magnetar.

I do have a problem with the Wall Street bankers in this story, however. Because losing $880 million of your own company’s money to make a quick buck for yourself is either incompetent or just wrong. And allowing Magnetar to create CDOs that are as toxic as possible — and then actively selling their debt to investors (that’s where the banks differ from Magnetar, in my opinion) — is either incompetent or just wrong. But even so, I don’t think the frontline bankers are ultimately at fault. Maybe they were simply incompetent. Or maybe, they were knowingly exploiting the system to maximize their earnings — only in this case the system they were exploiting was their own banks’ screwed-up compensation policies, risk management “systems,” and ethical guidelines.

In which case the real blame belongs to those who created that system and made it possible. And that would be the bank executives who failed at managing compensation, risk, or ethics, endangering or killing their companies in the process. And that would be the regulators and politicians who allowed these no-money down no-doc negative-amortization loans to be made in the first place; who allowed investment banks to sell whatever they wanted to investors, with no requirements or duties whatsoever; who allowed banks to outsource their capital requirements to rating agencies, giving them an incentive to hold mis-rated securities; who declined to regulate the credit default swaps that Magnetar used to amass its short positions; who allowed banks like Citigroup and JPMorgan Chase to get into this game with federally insured money; and who failed at monitoring the safety and soundness of the banks playing the game.

The lessons of Magnetar are the basic lessons of the financial crisis. Unregulated financial markets do not necessarily provide efficient prices or the optimal allocation of capital. The winners are not necessarily those who provide the most benefit to their clients or to society, but those who figure out how to exploit the rules of the game to their advantage. The crisis happened because the banks wanted unregulated financial markets and went out and got them — only it turned out they were not as smart as they thought they were and blew themselves up. It was not an innocent accident.

Rubin -- How to Read My Blog on Him

I will continue to build on my first recent blog, "Rubin -- Are You Nothing But a Sandwich?" So when you enter my blog today and the following week or so go back to that blog item.

Lehman -- From Globe & Mail

(c) 2010 F. Bruce Abel

From Globe & Mail for a change.

Emily Chasan
New York — Reuters Published on Thursday, Mar. 11, 2010 10:11PM EST Last updated on Friday, Mar. 12, 2010 10:21AM EST
Lehman Brothers Holdings Inc. used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, a court-appointed examiner found.
In a 2,200-page report made public on Thursday, examiner Anton Valukas, chairman of law firm Jenner & Block, reported the results of his more than year-long investigation into the firm's collapse, which deepened the global financial crisis.
The examiner said that while some of Lehman's management's decisions “can be questioned in retrospect” and the firm's valuation procedures for its assets “may have been wanting,” those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse.
He said, however, that the bankruptcy estate, which is now being liquidated for the benefit of Lehman's creditors, could have claims against former Lehman chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt.
The examiner said there was also sufficient evidence to support a possible claim that the firm's auditor, Ernst & Young , had been “negligent” and that Lehman could pursue claims against the firm for “professional malpractice.”
He did not find that Lehman's directors had explicitly violated their fiduciary duty. But he said some top executives may have not lived up to professional standards.
Mr. Valukas also said actions by rival banks JPMorgan Chase & Co. and Citigroup that restricted Lehman's liquidity in its final days may have worsened the bank's downward spiral.
The long-awaited report contains explosive allegations about a gimmick, known as “Repo 105,” that was used for the sole purpose of manipulating Lehman's books, contributing to the firm's demise.
The examiner concluded that the gimmick, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not.
An attorney for Lehman's former chief executive said in a statement on Thursday that Mr. Fuld “did not know what those transactions were.”
“He didn't structure them or negotiate them, nor was he aware of their accounting treatment,” lawyer Patricia Hynes said, noting that the firm's outside auditor and legal counsel had not raised any concerns about the transactions with him.
The examiner also said a claim could be based on Ernst & Young's failure to abide by professional standards relating to communications with Lehman's audit committee.
A spokesman for Ernst & Young did not comment, saying the firm had hadn't reviewed the findings.
The report was allowed to be unsealed by U.S. bankruptcy Judge James Peck on Thursday.
The examiner said Lehman could be found to have been insolvent as far back as Sept. 2, 2008, even though it did not file for bankruptcy until Sept. 15.
The report, which details the harrowing days of September 2008 before Lehman filed the largest U.S. bankruptcy in history, also revealed the roles that the firm's Wall Street rivals played in its collapse.
The examiner said JPMorgan made mounting and increasingly aggressive calls for collateral in the days before Lehman's Sept. 15, 2008, bankruptcy filing.
On Sept. 11, JPMorgan executives met and decided that the collateral Lehman had posted “was not worth nearly what Lehman claimed it was worth,” the report says.
The next day, JPMorgan asked for an additional $5-billion in collateral.
About that time, JPMorgan discovered that one of the securities posted by Lehman, an asset-backed security known as Fenway, was “worth practically nothing as collateral.”
JPMorgan declined to comment and a Citi representative had no immediate comment.
In the report, the examiner detailed an interview with JPMorgan CEO Jamie Dimon where Mr. Dimon said he told Mr. Fuld in every conversation “that he did not want to harm Lehman.”
The examiner found Lehman could have potential claims against JPMorgan Chase & Co and Citibank in connection with demands for collateral and certain changes made to guaranty agreements in Lehman's final days that hurt its liquidity.
“Lehman's available liquidity is central to the question of why Lehman failed,” Mr. Valukas wrote in the report.
The report described how Bank of America executives backed away from a deal to buy Lehman that lacked U.S. government aid.
Bank of America's due diligence team concluded Lehman's commercial real estate valuations were too high, and identified $65-billion to $67-billion in assets the bank “would not have wanted at any price,” the examiner's report states.
And Barclays PLC has received some assets improperly when it ultimately took control of Lehman's core U.S. brokerage in a hurried bankruptcy court transaction, Mr. Valukas said in the report.
Barclays declined to comment and Bank of America representatives were not immediately available.
Under U.S. bankruptcy law, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company's debts exceed $5-million.
Lehman, which had more than $600-billion in assets when it filed for bankruptcy, is planning to file a reorganization plan later this month that will explain how the firm intends to complete its bankruptcy and the examiner's report has been viewed as integral to that process.
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Gretchen Continued

(c) F. Bruce Abel

Here's just one comment among probably many after the excellent article by Gretchen Morgenson (never know how to spell her name...thus prefer to call her Gretchen).

We (the people) should spend all day Sunday pondering this article and how our society should Get Even/Correct.



andrew
NY
February 6th, 2010
2:01 pm
If AIG was paying out billions to Goldman and others as early as 2007 under those swap contracts, how could AIG Financial Products have possibly reported profits to support those enormous bonuses.AIG must be the dumbest or the most fraudulent company in history. Either they wrote sweetheart contracts with lucky employees of AIGFP who were allowed to collect bonuses on underwater contracts, or they simply closed their eyes and raided the corporate treasury.It is shameful that taxpayers had to bail out AIG and self-evident that the motivation was the benfit to Goldman by Goldman alums.

"I.O.U." -- Excerpt

Excerpt
‘I.O.U.’


By JOHN LANCHESTER
Published: January 5, 2010
Introduction
Skip to next paragraph
Related
'I.O.U.,' by John Lanchester: Laughing All the Way to the Bank (January 6, 2010)
Annie Hall is a film with many great moments, and for me the best of them is the movie's single scene with Annie's younger brother, Duane Hall, played by Christopher Walken, the first of his long, brilliant career of cinema weirdos. Visiting the Hall family home, Alvy Singer — that's Woody Allen — bumps into Duane, who immediately shares a fantasy:
"Sometimes when I'm driving . . . on the road at night . . . I see two headlights coming toward me. Fast. I have this sudden impulse to turn the wheel quickly, head-­on into the oncoming car. I can anticipate the explosion. The sound of shattering glass. The . . . flames rising out of the flowing gasoline."
It's Alvy's reply which makes the scene: "Right. Well, I have to — I have to go now, Duane, because I, I'm due back on the planet Earth."
I've never shared Duane Hall's wish to turn across the road into the oncoming headlights. I have to admit, though, that I have sometimes had a not-too-distant thought. It's a thought which never hits me in town, or in traffic, or when there's anyone else in the car, but when I'm on my own in the country, zooming down an empty road, with the radio on, and everything is moving free and clear, as it hardly ever is with today's traffic, but when it is, I sometimes have a fleeting thought, one I've never acted on and hope I never will. The thought is this: what would happen if I chose this moment to put the car into reverse?
When you ask car buffs that, the first thing they do is to give you a funny look. Then they give you another funny look. Then they explain that what would happen is that the car's engine would basically explode: bits of it would burst through other bits, rods would fly through the air, the carburetor would burst into fragments, there would be incredible noise and smell and smoke, and you would swerve off the road and crash with the certainty of serious injury and the high probability of death. These explanations are sufficiently convincing that I find that the thought of putting the car into reverse flits across my mind only very temporarily, for about half a second at a time, say once every two or three years. I'm sure it's something I'll never do.
For the first years of the new millennium, the whole planet was zooming along, doing the equivalent of seventy on a clear road on a sunny day. Between 2000 and 2006, public discourse in the Western world was dominated by the election of George W. Bush, the attacks of 9/11, the "global war on terror" and the wars in Afghanistan and Iraq. But while all that was happening, something momentous was taking place, not quite unnoticed but with bizarrely little notice: the world's wealth was almost doubling. In 2000, the total GDP of Earth — the sum total of all the economic activity on the planet — was $36 trillion. By the end of 2006, it was $70 trillion. In the developed world, so much attention was given to the bust in dot-com shares in 2000 — "the greatest destruction of capital in the history of the world," as it was called at the time — that no one noticed the way the Western economies bounced back. The stock market was relatively stagnant, for reasons I'll go into later, but other sectors of the economy were booming. So was the rest of the planet. An editorial in The Economist in 1999 pointed out that the price of oil was now down to $10 a barrel, and issued a solemn warning: it might not stay there: there were reasons for thinking the price of oil might go to $5 a barrel. Ha!
By July 2008 the price of oil had risen to $147.70 a barrel, and as a result the oil-producing countries were awash with cash. From the Arab world to Russia to Venezuela, the treasury departments of all oil-producing countries resembled the scene in The Simpsons in which Monty Burns and his assistant, Smithers, pick up wads of cash and throw them at each other while shouting "Money fight!" The demand for oil was so avid because large sections of the developing world, especially India and China, were undergoing unprecedented levels of economic growth. Both countries suddenly had a hugely expanding, highly consuming new middle class. China's GDP was averaging growth of 10.8 percent a year, India's 8.9 percent. In fifteen years, India's middle class, using a broad definition of the term meaning the section of the population who had escaped from poverty, grew from 147 million to 264 million; China's went from 174 million to 806 million, arguably the greatest economic achievement anywhere on Earth, ever. Chinese personal income grew by 6.6 percent a year from 1978 to 2004, four times as fast as the world average. Thirty million Chinese children are taking piano lessons. Two-fifths of all Indian secondary school boys have regular after-school tuition. When you have two and a quarter billion people living in countries whose economies are booming in that way, you are living on a planet with a whole new economic outlook. Hundreds of millions of people are measurably richer and have new expectations to match. So oil is up, manufacturing is up, the price of commodities — the stuff which goes to make stuff — is up, the economy of (almost) the entire planet is booming. Who knows, optimists think, with the global economy growing at this rate, we can perhaps begin to think seriously about meeting the United Nations' Millennium Development goals, such as halving the number of hungry people, and of people whose income is less than $1 a day, by 2015.1 That seemed utopian at the time the goals were set, but with the world $34 trillion richer, it suddenly looked as if this unprecedented target might be achieved.
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Dreier in Vanity Fair

(c) 2009 F. Bruce Abel

This article on Marc Dreier is the story of the century, not Madoff's.

http://www.vanityfair.com/business/features/2009/11/marc-dreier200911?currentPage=1

Dreier on 60 Minutes Last Night

(c) 2009 F. Bruce Abel

I found the 60 Minute segment on Dreier fascinating and generally agreed with the following author in the WSJ this morning:


http://blogs.wsj.com/law/2009/10/05/postgaming-marc-dreiers-performance-on-60-minutes/

I found the quote of the judge to be questionable -- that Dreier was the sharpest lawyer who appeared before him.

Private Equity, Thomas Lee and Simmons Mattress

http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?hp=&pagewanted=all

Stomach-Turner re Madoff V

Ben Stein is No Stock Market Guru But He's Good on Madoff

And the comments after the article are good too:



http://finance.yahoo.com/expert/article/yourlife/173771

Nocera -- Some Meat, Not Enough

SEC goes after small fries because of the metrics; misses Madoff:
http://www.nytimes.com/2009/06/27/business/27nocera.html?_r=1&8dpc

Trustee Goes After One Investor in Madoff Case

This "feeder" should have known the returns were too high, sometimes 300% a year:
http://www.nytimes.com/2009/05/02/business/02madoff.html?_r=1&hpw

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.

http://www.chron.com/disp/story.mpl/hotstories/6381669.html

Oh Shaw Summers!

[Before you delve into what follows, be sure to click onto the 157 "comments" of this New York Times article of this morning. The thoughtful ones are quite articulate on the delicate nature of the problem we are facing, and exactly who can extract us from the problems, and thus exectly who has the knowledge of what's going on, with trillions in the balance, too.]

"It is a quicksilver business and wildly lucrative."

Between the Hedgies:

http://www.nytimes.com/2009/04/06/business/06summers.html?hp

From the second page of that article:

[D. E. Shaw] is nothing like a button-down Wall Street brokerage firm. Jeans, sweatshirts and sandals are common. The firm has not one, but two libraries, where textbooks on computer coding are stacked near academic finance journals dating to the 1960s. For a time, the décor included light bulbs strung from the ceiling on
various lengths of wire, each determined by a computerized random-number generator.

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Financial disclosure form, released by the White House:
Lawrence E. Summers, director, National Economic Council
Related
Financial Industry Paid Millions to Obama Aide (April 4, 2009)
Times Topics: Lawrence H. Summers
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It is a quicksilver business and wildly lucrative. Mr. Shaw is said to be worth $2.7 billion, and today his firm manages $30 billion.

At Shaw, Mr. Summers, the professor, was often the student. The arrogant personal style that turned off some Harvard colleagues seemed to evaporate, Shaw traders say. Mr. Summers immersed himself in dynamic hedging, Libor rates and other financial arcana. He seemed to fit in among Shaw’s math-loving “quants,” as devotees of math-heavy quantitative investing are known. Traders joked that Mr. Summers was the first quant Treasury secretary because he had once ordered dollar bills to
be printed with the transcendental number pi — 3.14159... — as the serial number.

“We could call or e-mail him anytime,” a former Shaw trader said. “He always asked me more questions than I could ask him. He would dig through my entire way of thinking.”At Harvard and at Shaw, Mr. Summers cultivated a small circle of financial professionals — particularly hedge fund managers — to serve as an informal brain trust. He consults with them on policy matters from his perch in the White House. Among these insiders are Kenneth D. Brody and Frank P. Brosens, the foundingpart-ners of another hedge fund, Taconic Capital Advisors, for whom Mr. Summers did consulting work from 2004 to 2006.

Mr. Summers reached out to Mr. Brosens in December to discuss the Obama administration’s economic priorities. This year, he campaigned to have him run
the federal office overseeing the $700 billion bailout program. Mr. Brosens withdrew his name from consideration last month. Others in this inner circle include Nancy Zimmerman, a longtime friend and hedge fund manager in Boston; Laurence
D. Fink, the chairman and chief executive of BlackRock, a large money management company that hopes to play a potentially lucrative role in the administration’s bank rescue plan; H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was briefly considered for a senior Treasury post; and three other top fund managers, Orin S. Kramer, Ralph L. Schlosstein and Eric M. Mindich.

Friends of Mr. Summers say he has always been meticulous about avoiding conflicts of interest and that he was just as careful at D. E. Shaw. For instance, Mr. Summers went to lengths to pay the Social Security taxes on payments he made to even occasional babysitters from the 1980s, said Jeremy Bulow, an economics professor at Stanford, who has known Mr. Summers since graduate school.

“To Larry, it was not about figuring out where the line is and making sure you’re on one side of it,” Mr. Bulow said. “He would never even get close to it.”

In addition to his salary at Shaw, Mr. Summers enjoyed growing wealth through investments in the firm’s funds. Unlike most hedge funds, which lost money as the markets plunged in 2008, Shaw posted returns of about 7 percent in its so-called macroeconomic fund. A separate multistrategy fund lost 8 percent, far less than most hedge funds.
When investors rushed en masse to withdraw their money from hedge funds last year, Shaw asserted its right to block redemptions from its fund. An exception was
made for Mr. Summers, however, because the White House job he was taking required him to divest. A spokesman for Shaw said Mr. Summers’s main job was
not to act as a salesman. But in the fall of 2007, as the financial crisis simmered, Mr. Summers traveled to Dubai for a series of meetings with Shaw’s marketing staff and potential investors. Bankers from across the region flew in for the event. Mr. Summers spoke at several lavish dinners and met with local parties involved in Shaw’s real estate investments in the area, people briefed on his trip said. Last September, Mr. Summers explained to Shaw traders what appeared to be an aberration in a key interest rate, the London interbank offered rate, or Libor, thus helping its traders avoid losses. He spoke at the firm’s 20th anniversary gathering for its investors and at a prominent hedge fund investor conference in Boston, weeks before the presidential election. In December, he attended the firm’s annual holiday party, held in the American Museum of Natural History in New York, beneath the giant model of a blue whale. Even so, Mr. Summers, who, before the crisis broke out, spoke and wrote about the need for greater financial regulation, has not resisted the efforts to tighten up on hedge funds like Shaw. The administration, for instance, is moving toward closing a tax loophole that these funds have long enjoyed. A White House spokeswoman says his actions supporting hedge fund regulation prove he is not biased.

Some people in the financial world say they have more confidence in the White House’s plans because of Mr. Summers’ time at D. E. Shaw. “He had insights into one of the best hedge funds in the world. That can only add value to the things the government is struggling with right now,” said Robert Borden, chief investment officer of South Carolina’s pension fund, which has invested $350 million with Shaw. Mr. Borden met Mr. Summers to discuss how much money a large institution should allocate to hedge funds. “It was a nice perk to have access to some of his thoughts and insights,“ Mr. Borden said.Mr. Summers’s experience in hedge funds might leave some wondering if he will return to private investing when his latest White House assignment ends, perhaps even to run his own lucrative fund. Asked about that, Mr. Shaw laughed. “Oh, boy, I have no idea,” he said. “Thankfully he’s doing what he’s doing. I’m really glad he’s running this. It’s a scary time, and I can’t think of anybody I’d rather see there.”

As readers of this Blog know, I admire and value Larry Summers. But this article goes deeper into his connection with the Shaw Hedge Fund. Does it trouble me? Not really. Larry has his heart in the right place I believe.

What does trouble me is that articles like this make me realize that there are Masters of the Universe out there with black boxes that "see" things that I never could. Moreover they see things that investment advisers cannot see either. Who can compete with them?

And to invest with them requires more money than I have.

But this is off the point as posed implicitly by the New York Times.

Krugman -- A Must, Must Read Today

This fits right in with my re-dictating from Michael Lewis's "Liar's Poker."

http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1

Dowd -- Toxic 'R Us

Precious!

http://www.nytimes.com/2009/03/22/opinion/22dowd.html?_r=1