Archive for the ‘Wednesday's Random Shots’ Category
Wednesday, August 15th, 2012
By Mark Shore
Since the economic decline in 2008, there has been a growing demand of individual and institutional investors to consider various choices of non-correlated investments to reduce tail risk (downside deviation)(i) and correlation risk, often known as alternative investments.
There is a good chance an investor will have stocks and bonds in their portfolio via a 401k, IRA, pension fund or directly into mutual funds. Perhaps they have some real estate either as an investment or the home they live in and maybe some private equity.
In 2008 and 2009, most stocks both domestically and foreign became highly correlated as they headed south and everyone was seeking the exit door simultaneously, thus causing losses to extend as panic selling and the need to liquidate increased.
One of the increasing areas of non-correlation investment is the currency market or sometimes called forex or FX (foreign exchange). In August, 1971 President Nixon removed the U.S. dollar from the gold standard, ending the Bretton Woods agreement and causing currencies to float at market rates. In December 1971, Professor Milton Friedman wrote â€śThe Need for Futures Markets in Currenciesâ€ť.(ii) May, 1972, the Chicago Mercantile Exchange introduced currency futures.(iii)
Copyright Â©2012 Mark Shore. Contact the author for permission for republication at firstname.lastname@example.org Mark Shore publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Always review a complete CTA disclosure document before investing in any Managed Futures program. Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.
Wednesday, December 7th, 2011
With all eyes focused on Jon Corzineâ€™s testimony relative to MF Global Thursday, perhaps it might be time to consider that MF Global might only be one act to consider in this multi-act and often undisclosed tragedy.
The whispered story of private citizen Corzineâ€™s toppling of a regulator at the Commodity Futures Trading Commission (CFTC) is something to which light should be shown.Â In fact, the battle that took place in the late 90s between then CFTC Chairwoman Brooksley Born and then Goldman Sachs Chairman Jon Corzine, who is said to have directed lobbying efforts and the Washington D.C. â€śWorking Groupâ€ť to dispense with the â€śirascibleâ€ť Ms. Born.Â This is a story that has dramatically impacted society, leaving a scare of undisclosed leverage that can even be seen in todayâ€™s debt crisis.
What surprises me most about this story is the fact that it has generally remained untold.Â Hopefully at Mr. Corzineâ€™s congressional hearing tomorrow tough questions, listed at the end of this article, will bring forth additional details regarding the actions of Mr. Corzine and the Working Group.
Mr. Corzineâ€™s tale really should be told by considering a pattern of behavior where the Goldman superstar ignored advice of risk managers and arrogantly rolled over regulators, literally toppling those who dare question his methods of non-transparent leverage management.Â Contrast this to Ms. Bornâ€™s efforts to simply make the leverage transparent and traded on an open, regulated exchange and consider what was left in the wake: the explosion of Long Term Capital Management, the Enron debacle, the deceptively wrapped mortgage credit default swaps that imploded in 2008, and the fireworks display to end Mr. Corzineâ€™s career, MF Global.
To the determent of society, Mr. Corzine has utilized undisclosed leverage throughout his career in a way that is yet to be properly recorded.Â Ms. Bornâ€™s story is simply one her trying to enforce basic derivatives management practices vs Mr. Corzineâ€™s â€śnew schoolâ€ť attitude that bended or broke rules that the U.S. citizen simply didnâ€™t think applied to him or his colleagues at Goldman Sachs.Â If you think it was a fair fight between a principled regulator with old school derivatives management philosophy and a Wall Street oligarchy, I have a trading floor to sell you.
This article addresses how powerful private enterprise forces controlling the levers of financial engineering literally ran through regulators on their quest to impose their unsustainable methods of leverage management on society.
Mr. Corzineâ€™s Rolling of Brooksley Born
Brooksley Born was a demure lawyer, well known and highly respected in the derivatives industry during an era of time when derivatives industry experience mattered at the top of the Commodity Futures Trading Commission (CFTC).Â Upon taking over at the CFTC on August 26, 1996, life-long derivatives industry executive Ms. Born likely never though her career would abruptly end less than three years later, forced from office by the powerful financial services lobby.
Ms. Born discovered an issue that might similarly catch the attention of many in the derivatives industry if they were in her shoes.Â She discovered massive undisclosed leverage in mortgage derivatives over the counter trading and wanted such potentially toxic assets to transparently disclose their contents and be traded on a regulated exchange. Â Logical enough. Â The regulator then dispatched Michael Greenberg, head of the divisions of trading and markets, to simply prepare a list of questions to be answered about the over the counter market.Â The document asked questions and raised issues regarding previous industry fraud, potential default and market collapse and the growth of the OTC industry.Â This internal CFTC document was titled the â€śConcept Releaseâ€ť [link:http://www.cftc.gov/opa/press98/opamntn.htm] and was designed to be nothing more than a thought piece.Â Little did Ms. Born recognize that freedom of thought might get her in trouble with the financial oligarchy.
â€śI thought asking questions couldnâ€™t hurt,â€ť Ms. Born was later quoted as saying. â€śI was shocked at the strong negative reaction to merely asking questions about a market.â€ť
The Concept Release was said to be shock to the system in both New York and Washington D.C.Â It was at this point private citizen Corzine is said to have called the â€śWorking Groupâ€ť into action, an elite club of financial engineers who determined the future of the world economy.Â Operated at a high level by the likes of Â Robert Rubin with Alan GreenspanÂ and Larry Summers at his side, the group was said to have a second layer of devotees with tentacles that spread throughout all major economic levers of power in Washington D.C. Â In response to the Concept Release, Working Group leader Robert Rubin called an emergency meeting of group participants to muster support for silencing Ms. Born.
Concept Release now public, it was the summer of 1998 and Born started testifying before Congress.Â She simply told the truth about transparency and unregulated derivatives â€“ and the financial oligarchy really became uncomfortable.Â Ms. Born warned about how mortgage derivatives traded in unregulated over-the-counter markets lacked transparency and could explode upon the economic landscape. SuchÂ hereticalÂ talk enraged the working group.
Silencing the Principled Regulator Because She Requested Transparency
The orders to the working group were clear: silence the regulator who is requesting transparency and OTC derivatives trading on open markets.Â The Working Groupâ€™s first tactic was arm twisting.Â Ms. Born was first called before Goldman alumni Robert Rubin, who flatly told Ms. Born her agency lacked the authority to regulate derivatives, a move that had some in the derivatives circles shaking their heads in disbelief of Rubin’s remarks.Â This didnâ€™t stop Ms. Born, so the working group turned to the next man on the enforcer list, who happened to be then SEC chairman Arthur Levitt. Â Mr. Levitt’s attempts at persuasion wereÂ similarlyÂ unsuccessful. Â Thus, the third hitter up to bat was Alan Greenspan.Â In published reports, Mr. Greenspanâ€™s face was said to have turned red during the meeting as she told Ms. Born of dire consequences if mortgage derivatives were made transparent.Â Ms. Born held her ground, and the phone lines between D.C. and New York were ablaze with talk of â€śteaching Ms. Born a lesson.â€ť
With the Working Groupâ€™s favored behind the scenes leverage tactics experiencing surprise rare defeat, they turned to overt pressure through Congress.Â Later that year Born received her rebut from Congress, the censure of her powers.Â She later resigned from office effective June 1, 1999 and Mr. Corzine had drawn the blood of his first federal regulator.
One note about the financial oligarchy is that while members may be individually brilliant, the notion that thought on issues can be independent isnâ€™t always valued.Â The group mind think at the time was that non-transparent leverage was positive for the economy (or at least there was sufficient profitability in the deceptive mortgage derivative products to make it positive).Â Thus, any attempts to shine light on proper derivatives management were outed.
This shouldnâ€™t have been a big issue; â€śold schoolâ€ť derivatives management dictated that proper leverage management was transparent and traded on open exchanges.Â Unfortunately for society, this is when Born ran into the â€śnew schoolâ€ť of derivatives management, one that didnâ€™t feel any need for transparency, eschewed disclosure into the actual leveraged components and thought trading on regulated exchanges was a burdensome detail. In short, Ms. Born was introduced to Mr. Corzineâ€™s philosophy.Â It was this moment, newly minted CFTC chairwoman Brooksley Born fought an unexpected a battle between â€śold schoolâ€ť commodities management and a powerful new school that would soon silence the demure regulator â€“ and any future regulator that dared challenge the Wall Street power base.
With a history of rolling over regulation, Mr. Corzineâ€™s behavior with MF Global should come as no surprise, but the financial oligarchy he lead has not always come out on top.
Wall Street Doesnâ€™t Get Its Way All the Time â€“ Just Most of the Time
To be clear, there have been rare successes when the derivatives industry has faced off with equity interests.Â One highly visible example took place when German futures exchange, Eurex, looked to take control futures on the U.S. yield curve in the early 2000â€™s. This effort of off-shore control of futures trading on interest rates, backed by Goldman Sachs, was one of the rare points when the commodity industry successfully fought off Goldmanâ€™s powerful Wall Street force.
In this instance, the whispered story that emerged years after the event was one of the financial services industry and Washington D.C. saying NO to Goldman Sachs.Â At the time of this fight, Goldman wasnâ€™t the current omnipresent force it is now.
Significant preparation for the fight with Eurex was said to take place, but a generally calm approach was taken by those at the top of the CBOT.Â In stories that have emerged long since the event occurred, the real battlefield was said to take place at a dinner in Washington D.C. and private meetings in New York.Â In Washington D.C. a simple argument was said to be made: U.S. control of futures on the yield curve could one day prove to be strategically critical at some future point.Â Fast forward to 2011, with a debt crisis swirling around, this derivatives industry warning could be viewed as accurate.Â In this case, influential forces in Washington recognized the logical argument regarding national interest.Â This was also a time when the omni-potent force of Goldman Sachs did not prevail, to the surprise of some.Â After successful meetings in D.C., the New York meetings were said to have a different tone.
The D.C. argument was said to be different than the equity industry argument.Â In stories that have emerged years after the events took place, CBOT officials were said to gather the major Wall Street players with the exception of Goldman Sachs, of course.Â The core argument was made that it simply wasnâ€™t appropriate for Goldman Sachs to have such omnipresent control over the U.S. futures markets and the financial industry at large.Â Such accurate and prophetic words, as the battle was won but the war was lost.
In short, the battle over the U.S. yield curve was won by the U.S. futures exchanges, racking up a rare loss for Goldman Sachs.Â But ironically the omni-present control by one financial services firm continues.Â With Goldman Sachs now the un-disputed heavyweight champion in financial circles in both New York and Washington D.C., it is ironic that their leader, the man who as a private citizen helped draw first blood from a regulator, was now in front of Congress after a reign of terror through the halls of MF Global.
Betting on a Bailout and Benefiting from â€śWorking Groupâ€ť Connections
Upon taking over at MF Global, Mr. Corzine was said to show little if any interest in the industry in which his firm operated.Â The derivatives markets and its old school methods of leverage management were of little concern, even less concern than were regulators.Â Perhaps it is for this reason when the CFTC gave MF Global a warning regarding toxic sovereign debt over a year before the firm declared bankruptcy, that warning could have been so easily ignored by Mr. Corzine along with warnings form MF Global internal risk managers.Â Instead, Mr. Corzine is said to have relied on inside whispers from contacts in Washington D.C.Â U.S. Treasury Secretary Timothy Geithner is said to have re-assured Mr. Corzine that European bonds would not be allowed to drift into default.Â In other words, Mr. Corzine could ignore the warnings of regulators so as to rely on another government bailout to support his adventures in sovereign debt.Â Â The rest, as they say, is history.
With this as a backdrop, perhaps it is time to get answers to important questions on the record.
Questions that Congress should Ask Mr. Corzine
Mr. Corzine, you were warned on the risk in your positions on several occasions. First, you violated an old school risk management principal to diversify risk away from one significant economic headwind.Â That diversification technique might not be as â€śsexyâ€ť as concentration of risk towards positive economic outcomes, but it tends to work well in a variety of market circumstances.Â Here is the big question: How many times were you warned the risk in your sovereign debt position was too much exposure in one direction?Â Who were the people that warned you regarding sovereign debt and when did those warnings take place?Â Did the CFTC provide MF Global a specific warning regarding sovereign debt?Â Why was that warning ignored?
When U.S. Treasury Secretary and former Working Group member Timothy Geithner visited Wall Street this year, what was the focus of conversations?Â Did Mr. Geithner assure you that governments in Europe wouldnâ€™t be â€śallowedâ€ť to collapse? How did reliance on a government bailout impact your decision relative to highly leveraged investments in sovereign debt?
Mr. Corzine, describe your relationship with regulators and regulation in general.Â Specifically, what discussions did you have with a â€śWorking Groupâ€ť in Washington D.C. regarding the deposition of Brooksley Born as CFTC Chairwoman?Â The first tier of Working Group participants has been placed in the public domain.Â Will you name the second tier of the Working Group and disclose their current positions in the U.S. Government?
Mr. Corzine, the American public finds itself in debt crisis that as early as this summer many in the public didnâ€™t really recognize.Â Â It seems to me that the level of leverage and methods to manage this leverage have pretty much been undisclosed.Â Â I would like your recollection of how undisclosed leverage was defended in 1998 during fights with CFTC Chairwoman Brooksley Born, and then more appropriately how undisclosed leverage led to the downfall of MF Global?Â Â Can you tie together your involvement in the following and specifically touch on how undisclosed leverage was a factor in the demise of Long Term Capital Management, the mortgage / credit crisis of 2008 and your current situation at MF Global?
Mr. Corzine, if you can reflect on the past 15 years of your career, a period of time when one Wall Street financial services firm with one groupthink mentality clearly dominates financial decision making in governments across the world, can you assess the impact undisclosed leverage might have on societyâ€™s future?
Mark H. Melin is author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and was an adjunct instructor in managed futures at Northwestern University. Â Follow him on Twitter @MarkMelin.
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. Â Past performance is not indicative of future results.
The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.
Wednesday, June 30th, 2010
I used to wonder why Michael Bloomberg didn’t run for president in 2008. In hindsight, there were many reasons, perhaps chief among them is that being president would not have done anything to pad his resume. And he probably surveyed the political landscape and decided he didn’t need the headaches.
Two years ago, when Bloomberg was in Chicago to receive the CME Group’s Fred Ardetti Innovation Award, I had a chance to meet him. It was after a dinner ostensibly held in Bloomberg’s honor but that bizarrely turned into a fete of Chicago Mayor Richard M. Daley, who was also in attendance.
I was sitting at the Zoo Table with some other reportersâ€”a mix of local and national guys. We were well into the free wine when we noticed that all of the exchange representatives who rose to speak, either to introduce someone else who was speaking, or to make an announcement, praised Daley and his accomplishments. A couple even called him the best mayor in the country. Finally when it was Daley’s turn to speak, and to introduce Bloomberg, he ended his speech by introducing “The Mayor of the Great City of Chicago, Mike Bloomberg.” With a stone face, the reporter from the Financial Times pulled a pen out of his pocket and pretended to write on his napkin. “That’s news,” he deadpanned.
But I digress.
Unfazed by his new title, Bloomberg spoke for about 20 minutes. As the dinner ended and the guests filed out, I waited around while Bloomberg shook hands and chatted amiably with people he probably didn’t know. After about 10 minutes, Bloomberg was suddenly alone. The guests had left and his security detail was in the hallway, outside the banquet room. I approached him, extended my hand and said, “Excuse me, Mayor. I just wanted to say that I used to live in New York and that I voted for you.”
“What neighborhood do you live in?” he asked, smiling.
“I used to live in Brooklyn Heights, but I live here now. I thought your remarks were insightful. It would be interesting if you shared them on a more national level.”
Instantly Bloomberg knew what I was getting at. I was prodding him to see if he’d tell me whether he was going to run for president. As quickly as it began, Bloomberg signaled our conversation was over.
“Nobody needs to hear me lecture them,” he said, turning to leave. “Nice meeting you. Good night.”
And just like in “The Usual Suspects,” like that, he was gone.
I think about that encounter now and then when I see Bloomberg quoted on topics that interest me. Today I saw a story in the New York Observer that quoted Bloomberg thusly on the New York State Legislature’s proposal to tax carried interest.
“I think it’s the best thing that ever happened to Connecticut,” Bloomberg said. “I can’t imagine why every hedge fund won’t pick up tomorrow and leave.”
Neither can I. I am not opposed to taxing carried interest as ordinary income. However, in this particular case, if New York changes the tax treatment of carried interest for managers working in the city but living in New Jersey or Connecticut, and those states do not adjust their tax codesâ€”which already tax carried interestâ€”accordingly, managers will be taxed twice on their carried interest incomeâ€”once in New York and once in their home states.
I can see where New York would tax the income earned in New York of people who work in the state but who live in adjoining states. And likewise I can see where a state of residence would tax income earned from investments by people living within their borders. But just as, say, New Jersey, should not tax income earned by a Garden Stater through a New York-based business when New York is already taxing the same income, neither should two states levy taxes on carried interest. One or the other folks.
And if this proposal goes through, I wouldn’t bet on the states working it out among themselves. A better bet would be that managers subject to the double taxation follow Bloomberg’s adviceâ€”a loose interpretation of his commentâ€”and pack up their New York offices, leaving the state without that income tax revenue, too.
Wednesday, June 16th, 2010
The role of credit rating agencies in the financial meltdown. The May 6 “flash crash” and how to avoid a repeat. The Fed’s role in the financial system.
Three pretty substantial topics. Today we learned in three separate stories that after all the air, ink and pixels expended discussing how “things are gonna change” nothing, really, is going to change.
News headline: Rating Agencies Dodge Bullet in Wall Street Reform Bill
News headline: Little Change Seen After May 6 ‘Flash Crash’: Panel
News headline: Fed Could Evade Toughest Scrutiny in Wall Street Bill
The ratings agency bullet-dodge is particularly irksome to me. Everyone involved in writing legislation to address the ratings problem agrees it’s a clear conflict of interest for banks to choose their own ratings agencies. Sen. Al Franken (D-Minn.) backed a proposal that would have ended that conflicted practice. Many key people agreed it was a good idea. But when push came to shove, the Democratic leaders in the House and Senateâ€”Barney Frank (D-Mass.) and Christopher Dodd (D-Conn.), respectively, applied the brakes, saying it was “complicated.”
Complicated? You don’t say. Well, sheet, since it’s complicated, we’d better just appoint some people to study it.
Aspects of the “Chicago Way” are even creeping into Congress. Chicago politicians (read: The Daleys) have a longstanding tradition of appointing committees to “study” serious problems like corruption. The committees are appointed to great fanfare. Sometimes they release recommendations for action, also to great fanfare. And eventually, absolutely nothing happens.
And friends wonder why I’ve become so cynical.
Wednesday, April 28th, 2010
At about 3:30 p.m. Eastern time on Tuesday, as I was tuned in to the Goldman Sachs hearings on Capitol Hill, I received an email Real Estate Disposition LLC, a real estate auction firm. I don’t remember ever receiving an email from REDC before, but this one caught my eye.
REDC had sent me its “Deals of the Week” list, which was essentially a list of 11 successful foreclosure auctions that REDC had handledâ€”11 among 125 that the firm is conducting over 65 days.
There was the 1,466 square-foot house in Sacramento, Calif., that sold for $99,750, or 32 percent of its previous high selling price of $310,000. A 1,275 square-foot home in Charlotte, N.C., sold for $20,000, or 17 percent of its previous high selling price of $114,000. A six-bedroom, 5,434 square-foot house in Stockton, Calif., sold for $173,250, or 19 percent of the $908,000 it once fetched.
It was for me a reminder of why the red-faced Carl Levin, Democratic senator from Michigan, and his colleagues on the Senate Permanent Subcommittee on Investigations spent 11 hours haranguing occasionally flustered but generally defiant and visibly unconcerned executives from Goldman Sachs about that firm’s mortgage securities transactions. The trail of blame for the collapse of the housing market, and the broader economy, is long and wide.
Comparisons, made more than once during the hearing, between Goldman Sachs and Las Vegas pit bosses, and between the mortgage securities market and gambling in general, are more appropriate and meaningful than perhaps was intended. As a criticism of Goldman and its role in this episode as a market maker and seller of securities backed by dubious collateral, the gambling metaphor is rhetorical cheap shot.
Las Vegas is a place to which many have flocked in search of easy riches, but relatively few have been rewarded. It is the unofficial capital for a nation with many people who believe they are entitled to get something for nothing, or next-to-nothing. In his book “The City in Mind,” author James Howard Kunstler called Las Vegas a “utopia of clowns.” He has the chapter on Vegas posted online. If you read the opening, and insert the phrase “investment banking” where you see “Las Vegas,” you get sentences like “Even the casual observer can see that [investment banking] is approaching its tipping point as a viable [â€¦] system, particularly in the matter of scale,” and “This is the predicament of [investment banking]. Its components have attained a physical enormity that will leave them vulnerable to political, economic and social changes that are bearing down upon us with all the inexorable force of history.”
It’s not a perfect metaphor, but you get the idea.
Yesterday, as the senators on the dais unleashed their tirades and ignorant loaded questions upon the witnesses, the Goldman executives defended their decisions as correct and appropriate at the time they were made. You can say that you disagree with Goldman marketing securities to clients, such as IKB Deutsche Industriebank AG, that it privately believed would fail, and I would agree with you. It’s bad behavior, similar to a used car salesman selling a car he knows has a high probability of breaking down.
But such transactions are not unusual in the investment banking world, nor are they illegal (probably). And on the other side of that used car transaction, just as in the mortgage securities transaction, is the buyer, whose responsibility includes having the vehicle or security examined by a knowledgeable and reputable third-party. In the case of the car, that’s an independent mechanic. In the mortgage securities case, that third party would have been the bond rating agencies, but they really weren’t third parties, given that Goldman was paying them to rate the securities. It is safe to say in hindsight that the rating agencies’ reputations and knowledge also were questionable, but that was not necessarily known then. The fact that they were being paid to rate securities by the same people structuring and marketing those securities was known; it was just accepted.
Clients who bought the riskiest portions of mortgage-backed securities composed of questionable loans or synthetic collateralized debt obligations based on same had to know the risks. Risk is, in fact, what they sought. They could have purchased as a hedge the same credit protection that Paulson & Co. bought.
Is it Goldman’s responsibility to say, “Hey, we’ve got a synthetic CDO you might be interested in. Here’s the list of securities underlying it. Oh, and by the way, all of those securities are crap.” Or is it the responsibility of the investor to understand what those securities represent and the risks involved? The SEC’s civil fraud lawsuit against Goldman might answer that question, from a legal standpoint at least. Separate lawsuits against the rating agencies may answer other questions.
But let’s go back even one step farther on the trail of blameâ€”to the banks or loan companies that originated the mortgages on which Goldman’s “shitty” securities were based. How ethical is it to approve a mortgage or a refinance loan for a party whose ability to pay is in question from the start? On April 22, The Wall Street Journal published a story examining some of the mortgages that went into the ABACUS deal.
“Some of the people whose mortgages underpinned Mr. Paulson’s wager were themselves taking a gambleâ€”that U.S. housing prices would continue to march upward, making it possible for them to eventually pay off loans they couldn’t afford,” the Journal reported.
“One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house in a subdivision called Highlands Ranch. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.
“Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55%â€”but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000.
“She defaulted in early 2008 and was evicted from the house in early 2009.
“Fremont didn’t respond to requests for comment.”
Yeah, I bet it didn’t. Maybe Fremont should be forced to respond to a subpoena from the Senate investigations subcommittee.
And let’s take one more step back along the blame trail, to the individual borrowers. No doubt some were conned by shady mortgage companies into signing for loans with terms they did not understand. But plenty of others were simply opportunistic, looking to get something for nothing, or at least very little. Buy a house for $125,000, sell it a year later for $300,000. It was almost-free money, given the ridiculously low interest rates and down payment requirements. And thanks to lax income verification standards, encouraged by mortgage lenders looking to process and get paid for as many mortgages as possible before shoving those loans off their books and into the securitization maw, almost anybody could play, regardless of their ability to pay. Many did, and they got burned. Recall the Journal story: people betting they could use home equity generated by rising home prices to pay off loans they could otherwise not afford.
That’s the “long” part of the blame trail. The “wide” part includes Realtors and their public relations arms that somehow managed to pervert the notion of the “American Dream” from everyone having an equal shot at succeeding, no matter his or her background, to owning a home. Home ownership may represent part of the American Dream, but it is not the dream.
It includes real estate agents more intent on cashing in than on finding people good homes they could realistically afford.
It also includes some of the same legislators pointing fingers at Goldman, who voted to relax capital requirements for Fannie Mae and Freddie Mac to further a policy decision made during the Clinton administration to increase home ownership rates.
And it doesn’t even begin to touch on the ways banks used the ratings agencies and accounting tricks to circumvent the capital requirements and weak accounting rules that were in place.
All this was going through my mind yesterday as I watched the Goldman grilling on the Hill. Couple it with the realization that for all the bloviating everyone in that room on Tuesday stands to benefit more from the status quo than they do from any change, and the fact that Goldman has not been all that affected by any of the criticism leveled against it and I wonder, what was the point of it all? Eleven hours, all that oxygen consumption, and for what? What’s going to change?
Back to Kunstler’s piece on Las Vegas. Near the end, he writes, “A nation in denial of all its bad habits and lapsed standards of decency wanted to believe that Las Vegas was a perfectly wholesome place to take children. The themed spectacles just provided an excuse. The fact that Las Vegas pulled it off with hardly a peep from society’s moral guardians attests to the flimsy pretense of family values politics.”
Against considerable evidence to the contrary, we have believed that investment banking in its current form was, if not wholesome, at least necessary. Nobody said anything, at least, nobody credible. The clowns in the jail costumes at the Goldman hearing represented nothing more than pointless political theater, which these days is a visually appealing substitute for substance.
All the lecturing and debating and finger pointing in the world won’t change the reality that we all allowed the current systemâ€”Goldman, Paulson, securitization, etceteraâ€”to become what it is, and for a good while we all enjoyed the benefits. So unless we’re ready to really blow it up, and by that I mean mandate smaller banks that are required to keep loans on their books and remain properly capitalized and incentivized to act in the best interests of their clients as opposed to shareholders, and required to follow strict accounting rulesâ€”for startersâ€”we should drop the pretense of outrage at Goldman’s actions.
Wednesday, April 21st, 2010
I’ve been working at digesting all the mortgage CDO news of late. Magnetar. Goldman/Paulson.
I had managed to work up a pretty good head of righteous indignation against securitization and the Wall Street cabal foisting these synthetic piles of crap on the investing public when I read this Wall Street Journal story today.
The Journal spoke to some of the 100 or so investors on a conference call Monday night with John Paulson. Those investors described portions of the call, including this:
“On the conference call, Mr. Paulson calmly explained the trade with Goldman, which involved a “short” bet on mortgage bonds. He said that the very nature of the transaction required both a “long” and “short” investor, suggesting that investors knew that a bearish investor had bet against the deal.
“Mr. Paulson suggested to clients that the large investors who purchased the Goldman deal and others relied on rating firms, and didn’t do enough of their homework, investors say.”
Upon reading that, I thought back to every story I’ve heard since the Magnetar piece came out describing how the firms behind these CDO deals took advantage of everyday folks via those folks’ pension funds and other unsophisticated investors who either didn’t understand or wasn’t told how these deals were put together. At that exact moment, my sympathy for these investors was greatly diminished.
While I’m still working through my thoughts about the Magnetar and Goldman/Paulson deals, I do know this: Investors, if you don’t understand what you’re buying, don’t buy it. If it seems too good to be true, it probably is.
More from the Journal: “Mr. Paulson sent a letter to investors Tuesday night saying that in 2007 his firm wasn’t seen as an experienced mortgage investor, and that “many of the most sophisticated investors in the world” were “more than willing to bet against us.”
It’s called due diligence for a reason. Investors who lost big on these securities can say they were swindled, or that they didn’t have all the facts. But at the end of the day any investor willing to buy into a synthetic CDO in the kind of mortgage environment we saw in the 2006-2007 period should have had every reason to believe they were going to take it in the shorts. Neither Paulson nor Goldman nor Magnetar caused those mortgage holders to default on the underlying mortgages. Which doesn’t absolve them of responsibility for the way they put those securities together and marketed them, but someone had to buy them. And there was apparently a long line of suckers.
Wednesday, March 24th, 2010
I swear, some days it seems like we should start the equivalent of a police blotter for hedge funds. Today was one of those days.
News headline: Ex-Madoff Aide indicted for Fraud, Conspiracy
News headline: Ex-IBM Exec looks ready to plead Guilty in Galleon Case
News headline: U.K. arrests Seventh Insider Dealing Suspect
Granted, not all are hedge funds, but all involve hedge funds.
I wonder: are the accused corrupt, stupid, unlucky enough to get caught, or actually innocent. A lot of folks have pleaded guilty in the Galleon case, which, given the U.S. Attorney’s Office’s case in the Ralph Cioffi-Matthew Tannin-Bear Stearns matter, may say a lot about the evidence arrayed against them.
I know today was an aberration, and that the vast majority of people in finance â€“ hedge funds included â€“ are honest, hard working folks trying to get it done by the book. But on days like today, I still have to stop and scratch my head and wonder: what were they thinking?
Wednesday, March 17th, 2010
First rule of China Fight Club: Don’t talk about China Fight Club. It seems like a lot of people are disregarding Rule No. 1.
News item, March 17, 2010: “China in midst of greatest bubble in history.” “China is in the midst of ‘the greatest bubble in history,’ said James Rickards, former general counsel of hedge fund Long-Term Capital Management. The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director at consulting firm Omnis.
“‘As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,’ Rickards said…. China ‘is a bubble waiting to burst.’
“Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in Chinaâ€™s economy.”
Interesting. Surely there must be some China bulls. Well, there’s this guy:
News item, Jan. 19, 2010: “Rogers trains guns on Chanos for China remarks.” “American investment guru Jim Rogers has debunked contrarian investor James S. Chanos’ suggestions that China’s investment bubble may lead to a Dubai-style implosion. Rogers said the Chinese economy is not in any imminent threat of collapse, and investors and companies are wise to stay involved with it.
“‘It is absurd to say China is in a bubble when the stock market is 50 to 60 percent below its all-time high. If you have a bubble you have things going through the roof. You have everybody screaming fire every day,’ he said.
“He believes the economic crisis could prove the catalyst for China to take over from the US as the next economic superpower.”
China is an interesting argument to have. Sure, it’s is a repressive, overly-state-controlled country that’s an ecological disaster waiting to happen. But it also happens to hold nearly $1 trillion of U.S. debt, and has a military roughly twice the size of the United States and a population that is currently about four times that of the United States. It’s also located a lot closer to the Middle East - and the oil there - than the United States, with the exception of the United States’ police stations in Iraq and Afghanistan. And it’s signing deals with oil-producing countries to secure access to the economic lubricant.
I wouldn’t bet against China. I wouldn’t move there, but I wouldn’t bet against it. Maybe it is a bubble economy, but if China’s bubble bursts, we’ll all be buried in the exploded-bubble goo.
Wednesday, March 10th, 2010
I’ve been covering hedge funds for about 10 years, and in that time I’ve seen them shift from investments most people had never heard of to topics of conversation among friends of mine with no connection to finance. I used to say I wrote about hedge funds and get a blank stare. The other night I was at a college alumni function with a bunch of younger people I’d never met and every person I talked nodded knowingly when I said “I cover hedge funds.” Reactions ranged from “Oh, Madoff” to “Oh, Greece.”
Granted, not everyone understood the hedge fund connection to the home of the Gyro, but the perception was that hedge funds are somehow, possibly illegally, making money off the misery of another country. (more…)
Wednesday, February 24th, 2010
News item: “Arthur Nadel, a former Florida fund manager dubbed a ‘mini-Madoff’ for running a decade-long investment fraud, pleaded guilty on Wednesday to criminal charges of bilking investors out of as much as $360 million.
“Mr. Nadel, 77, disappeared for two weeks before his arrest in January 2009. He had left a letter for his wife imploring her to use a trust fund for her benefit and “sell the Subaru if you need money,” a reference to their motor vehicle.”
Remember when $360 million was a lot of money? Heck, time was when a man accused of stealing that much money would have had to have conned the government of a developed country. Nowadays, thanks to Bernard Madoff and the Wall Street bailout, a $360 million fraud is nothing. Front-pocket money. Whoops, did I just compare the bailout to a con job?
“I understand the anger and rage of all of the people I let down so badly,” Mr. Nadel told the court. “I want them all to know I will carry this burden for the rest of my life.”
And the people he bilked won’t be nearly so burdened, since they’re hardly carrying anything now that all their money is gone. Although in hindsight, maybe they should have known something was amiss when he showed up for the investor meetings in a Subaru.
“Under the sentencing guidelines for his crimes, he can expect to spend the rest of his life in prison.”
At 77, let’s be honest, that ain’t gonna be that long.