Category Archives: Media

That Darn Elusive Black Swan

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“The profit motive is a good thing when it operates in an environment where bad bets are punished with losses and good investments are rewarded. Only government can distort that healthy profit-and-loss system, giving people incentives to make bad decisions. And it’s in this environment that greed is no good to anyone. It turns out, however, that greed—or better, rational self-interest—can help our economy stabilize faster than government ever could. As the lubricant of our economic system, self-interest will cause a million market actors to recalibrate and to direct resources to projects that create value in our society. We the people will temper our irrational urges and mitigate our risks if government restores the rules that let profit and loss bring discipline. But if government continues to change the rules to bias the market in favor of irrational behavior, rent-seeking, and corporatism, the chaotic aspects of the system will continue to wobble out of equilibrium. Black swans will become commonplace.”

Max Borders in The Freeman

Thanks to Mike Martin for pointing out the piece.

Comment:

This is a nice piece pointing out how metaphors govern our thinking – we talk about the economy as it were a machine when it’s actually more like an  eco-system. Interestingly, Tom Wolfe made a similar point about the misuse of metaphors in Freudian psychology (for eg. the term repression, as though the body were in need of an outlet to blow-off steam).

But there are at least two things I object to here.

One is – greed isn’t rational self-interest. That’s a complete confusion of terms. Gordon Gekko-like greed is anything but rational. It’s compulsive.  The self has many other  interests and drives besides doing down other people. Rational self-interest is the prudent self-interest of “right reason,” as the Catholics call it. A well-ordered reason. Not one that’s the slave of your drives. It’s self=governing reason which produces genuine self-interest.

And two: sigh.  None of this was a black swan.  Taleb himself doesn’t claim it was, either.  Black swans only make sense in talking about  an un-manipulated world, I would think. Taleb was talking about the way risk is modeled. He says on his website that he uses the banks in his book as an illustration and then gives some quotes in support, which, he says he wrote between 2003-2006 (the book was published April 2007).

But Felix Salmon at Portfolio.com points out that his actual comments on Fannie in an interview before they went bust were quite vague.

However, the author of this piece is spot on in the rest of this comments.

I’ll try to  post my calls on this, not to prove I can predict the markets (I can’t), but to prove that we don’t have a market. We have a kind of rigged puppet show, which you can (sort of) predict, not because of any genius on your part, but because of the obviously crooked motives of of several leading actors. The only special skill you need for this is the ability to recognize propaganda.

I know I came across Fannie’s corruption when I was researching Goldman Sachs in July 2006 from the Washington Post which had a long series of excellent articles on it from 2004. So, how was this crisis unexpected?

Here’s my piece (from 2006)

“Most recently, regulators are looking into claims that Goldman (among others) helped managers at the US Federal National Mortgage Association (known as Fannie Mae) prettify their books to maximize performance bonuses at the company entrusted with keeping US home loans afloat. Which means that Goldman was center-stage not only in the credit and derivative booms, but in the housing boom too. (Goldman and the other firms deny wrongdoing.)”

My original investment report on which this article is based had much more on Fannie and I will post it here. I’m pretty sure there were plenty of  prominent people in the financial world who had already decided that Fannie was going to go bust. In fact, I think a lot of people had taken short positions on it.  I’m not sure how on that basis you could argue this crisis was a Black Swan.

Geithner’s New New Plan

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“Geithner’s new plan is meant to attack what is widely viewed as the major failure of the bailout program so far: the inability to rid banks of a mountain of soured loans and troubled mortgage-backed securities.”

More at MSNC

 Comment

“The inability to rid banks of a mountain of soured loans” is a major failure? It’s the whole point of the exercise, so if that isn’t working, the entire business is a diddle.

Oracle of Omaha Moodily Silent

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Our Billionaire In Omaha, the virtuous Warren, who wisheth us all to pay our taxes with the same glee as he doth, hath not spoken? Wherefore?

Wherefore is he moody? Or, it  Moody’s? 

Wherefore art Warren’s fingers to be found in so many pies? Including AIG and its corrupt dealings with General Re…..and Goldman, of which we need say no more…..and now Moody’s?

Tell us it ain’t so!

Excerpt from the International Herald Tribune piece on Buffet’s ties with Moody’s:

“Berkshire owns a stake of roughly 20 percent in the Moody’s Corporation, parent of one of the three rating agencies that grade debt issued by corporations and banks looking to raise money. In recent months, Moody’s Investors Service and its rivals, Standard & Poor’s and Fitch Ratings, have featured in virtually every account of the What Went Wrong horror story that is the financial crisis………

…Moody’s rated Lehman Brothers’ debt A2, putting it squarely in the investment-grade range, days before the company filed for bankruptcy. And Moody’s gave the senior unsecured debt of the American International Group, the insurance behemoth, an Aa3 rating — which is even stronger than A2 — the week before the government had to step in and take over the company in September as part of what has become a $170 billion bailout.

Mr. Buffett, 78, one of the world’s richest men, is known for piquant and unsparing criticism of his own performance, as well as the institutional flaws of Wall Street. But on the subject of the conflict of interest built into the rating agencies’ business model, Mr. Buffett has been uncharacteristically silent — even though that conflict is especially glaring in his case because one of the companies that Moody’s rates is Berkshire. (Its Aaa rating, for the record, is the same as the one from Standard & Poor’s. Fitch downgraded Berkshire for the first time last week.)”

Gold Above 940

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Wow. Bernanke opens his mouth and the dollar sinks to 84.5.

Can’t he read a RED STOP sign?

And this weird thing here: I saw a  piece on bond yields and when I looked it up on yahoo, it’d been removed.

/cnnm/090318/031809_credit_market.html http://news.yahoo.com/s/ynews/ynews_bs262‘

Here’s  the URL for the original site:

CMWire – The Capital Markets Newswire

But when I looked through Capital Markets wire just now I couldn’t find it.

Here’s a copy of  the google search result for the piece:

Mar 18, 2009 … Yields plummeted by the widest margin since 1987. … 14:41 AIG chief asks execs to return bonuses» CNN.com. AIG chief Edward Liddy told lawmakers ….. (

Corrects the headline to reflect that Treasury yields plunged). …
cmwire.com/ – 39 minutes ago – Similar pages –

(http://www.google.com/search?hl=en&q=yields+plunge+1987+cnn&btnG=Google+Search&aq=f&oq=)

Update:

OK – I found the piece. It’s by Deborah Levine and I found it at Market Watch.

I think the original wire report on CMWire and Yahoo might have been taken off to make the headline look less alarming, so that the reference to 1987 didn’t spook stock investors – the media’s target patsies.

You can see that the article now reads – “Treasury prices soared Wednesday, sending yields plummeting….”

The powers that be want to keep the poor Dow’s chin up at least for today before the big bad short sellers come out in droves…

“Treasury prices soared Wednesday, sending yields plummeting by the largest amount since 1987 after the Federal Reserve surprised bond investors by saying it would buy $300 billion in longer-term Treasury securities over the next six months.”

http://www.marketwatch.com/news/story/treasurys-soar-after-fed-says/story.aspx?guid={7DB91E8A-FD87-4BD4-9296-3C6EA402C920}&tool=1&dist=bigcharts&

Meanwhile here are the details at Bloomberg  on the FOMC decision:

” This Wednesday, the Federal Open Market Committee of the United States’ Federal Reserve made a unanimous decision to keep the Fed Funds rate unchanged at the 0.25% to 0% range. The rate decision was not a surprise for a good number of investors since the Federal Reserve stated clearly on its last FOMC statement that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”. Even so, today’s FOMC statement sounded a bit more dovish than expected, not reflecting the positive performance of the U.S. stock, bond and credit markets over the last two weeks. The Federal Reserve said “it sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term”. In addition,  “to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.” So once gain, the Fed said it will employ all available tools to promote the resumption of sustainable economic growth and this makes us believe that the Fed will continue to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets. In other words, the Fed will use quantitative easing. Currency traders reacted very negatively to the FOMC statement driving the U.S. dollar lower against the world’s most heavily traded currencies.”

 Comment:

What are they doing? Blowing smoke in everyone’s eyes pretending they see deflation in store in order to throw everyone off the inflationary scent?  Hoping meanwhile that gold doesn’t pop up too much and give the game away before they finish the next mighty round of mortgage hot potato? (Most plausible scenario).

Or, are they really terrified of having so destroyed the capital base of the economy that they think something, anything (maybe another financial instrument’s been discovered we haven’t heard about)  has to be done. And since all they have is a printing press., well why not use it? Off with the heads of the middle class, the thrifty, the savers, those who have no debt, the creditors!  (Also plausible, though probably only if combined with the theory above).

There’s a third option, but I’ll explore that in another post.

And why is Bill Gross pumping this whole business to the public?

“You want to continue to buy what the government will buy,” Pimco’s Bill Gross told CNBC.

From now on, it will be Pimpco to me. Sorry.

Revisiting the Financial Media, March 2007

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“The DJIA numbers, which is what most people mean when they talk about the market being up or down, are seriously misleading because they don’t represent the whole market — only a handful of very highly capitalized, very unrepresentative stocks.

 

It’s the DJIA that has been hitting new highs since 2006 — to cheerleading and pom-poms from the press. But a lesser-known index, the Standard & Poor 500 (S&P500) shows what’s going on much better. A 10-year chart of the S&P 500 shows that it’s not hitting any new highs but is actually buckling as it struggles to regain its 2000 heights. In the process, it seems to have formed the two ominous peaks that symbolize what is known as a Double Top to stock traders. A Double Top is a classic signal of a potentially drastic reversal in the offing. And as if to underline where things could be heading in a hurry, Goldman Sachs bank, the fountainhead of financial speculation in the economy (Goldman’s former boss, Hank Paulson was hired as Treasury Secretary), has taken a wallop too. Goldman, note, is heavily invested in China and in the US housing market.

 

Moral of the Story: Anyone with their pension funds or children’s college money riding on this market shouldn’t bank on living too happily ever after….”

 

That’s from  a piece I wrote in March 2007:  “Fairy-tales from Grimm that just got Grimmer”

Two years….and how much has changed.

 

Don’t Nationalize, Says Only Pundit Who Has Nationalized a Bank…

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“People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization — government seizing control of ownership and operations of a company — is not a viable option.

Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country’s seventh largest bank…..”

William Isaac , who actually did nationalize a bank, says don’t do it, at the Wall Street Journal.

Comment:

Glad to see confirmation for my argument (I’m always a little nervous  – who wouldn’t be? – criticizing highly credentialed people like Paul Krugman).  But sometimes pundits, like emperors, really don’t have clothes and you have to call them on it.

Any one can see that Sweden is too different from the US to make a valid comparison.

Anyone can also see that nationalization doesn’t automatically get rid of the pain. It might (or might not) postpone it.  In fact, it’s likely to make it worse, in the opinion of many people with real world experience in banking and investment, not just theoretical expertise (which is all most economists have).

It’s also interesting to me that all those austerity measures which IMF experts thought were just fine for Asian and African countries are off the table in the US. That tells you how bogus these debates are. No one is even considering letting any of the banks go bust. The only possibilities on the table are how to give government money to them. The three options being debated are:

1.  Infuse capital on an ad hoc basis by applying certain tests to decide which and when (Obama administration), assuming the system to be fairly sound.

2. Infuse capital without  taking the banks over, by buying their bad assets at higher than market value or by insuring them, so they get cheap capital

3.  Infuse capital by taking the banks over, firing managers, transfering off the bad assets (where? to whom? how?),  recapitalizing them and then selling them back to the private sector.

Now, 3 is supposed to be so much better for tax payers than the other 2, but without access to details and transparency, there is no guarantee whatsoever that it will be. It would depend on what happened to those bad assets. In fact, the additional bureaucratic measures involved look to add their own additional burden.

The main issue, as I see it is, is monopoly and corruption. In the recent past, we’ve seen that taking-over or infusing capital into selected banks has taken place via other favored banks. There’s evidence (I’ve posted on this on Wachovia and others) that the rescues were actually used to funnel government money to the rescuer bank. I think the Lloyd’s-HBOS deal was something of that kind.

Not on the table at all is the simple free-market solution: let the banks go under.  Let them liquidate. If necessary, adjust laws and regulations to make the process as quick as possible so it doesn’t clog up the courts. Perhaps also adjust insurance requirements for a temporary period so that the impact on businesses is reduced.

There will be pain. But there’s going to be pain regardless of what proposal goes through. The bottom line is there was a party and now there’s a bill –  and no one wants to pay. But that’s not how the real world operates. Someone will pay.The only question is will it be the people who incurred the bill or the general public? The rest of the talk about “too big to fail” “the economy will collapse” etc. are all obfuscations, projections and self-serving hypotheticals….

Greenspan Eggs On World War IV: China Versus US

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Some more blows in the ongoing World War IV, known as the War on Terror to the masses. WW IV was always about the perception of the US (and the Anglosphere in general) that the growing economies of China, and to a lesser extent India, posed a threat to access to world resources. The War on Terror was simply a pretext to establish bases from which WW IV could proceed at a more comfortable pace.

Thus Alan Greenspan’s recent piece in the Wall Street Journal, blaming Asia, especially China, for the US housing bubble:

“The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005. That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble…”

Read this along with remarks by Tim Geithner in the Obama administration that China was manipulating the yuan to help its exports ( a sentiment also voiced by Obama during the elections).

That’s the perspective from which the little fracas (actually it’s the biggest fracas between China and the US since 2001) in the South China Sea should be seen. The USNS Impeccable – a civilian ship under Navy control – was apparently conducting surveillance in what it claims was international waters (where US doctrine insists on international freedom to move) but within the 200 mile zone in which Chinese economic control obtains. Chinese vessels came within 25 feet of the US ship which sprayed them with water, and then left.

This  week China will also be unveiling plans for an increase of 15% in its defense spending, including expansion of its naval capacity.

Bernie’s Web: Madoff Fraud Hits $64.8b, Includes Family, Say Prosecutors

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Turns out that Bernie Madoff’s fraud took clients for more than what investigators originally claimed – $50 billion. Latest count is $64.8 billion  and it’s not clear that that’s the end. (Correction: I read that wrong. $64.8 is the figure alleged by prosecutors. Others say the statements are inflated and the actual losses might be less).

The new reports show things to be different from the picture the media originally gave us.

Now it looks as if Madoff didn’t promise just middling returns of 7-10% to everyone (which would imply that the scheme was believable and not on its face suspect).  The truth is he lured many people with promises of an incredible 46.5% returns that he claimed he generated through a technique called “split strike conversion” – a technique that was demonstrably incapable of providing such returns consistently.  In other words, fund managers, investors and regulators who had been doing their due diligence, would have known without difficulty that he was lyng through his teeth.

Now, this isn’t the first time this angle of the story has been reported, but it’s the first time the media has been willing to admit that Madoff’s scheme was an outrageous, flagrant fraud that went on for decades under the noses of the very people now writing the stories about it in righteous indignation (the New York Post, in this case). Regulators were told repeatedly by reliable people that Madoff was running a Ponzi scheme. Where were they?

Why do I bring all this up? To lay to rest the idea that more regulation (presumably by the same bunch of corrupt, incompetent, treacherous hacks in DC and New York) is going to help things.

More interesting details from the Post article:

* Contrary to early reports, the Madoff family and an inner circle of Madoff friends seem to be deeply involved with money laundered through “an English bank.”

* Wife Ruth is now “an object of investigation.”

* It seems that low-level employees were hired to create the appearance of a trading operation, with money even being moved from New York to Europe and back to bolster that impression (shades of Enron’s Potemkin office).

Mainstream Media Hints at Gold Suppression Scheme

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“Bloomberg Television on Sunday interviewed Juerg Kiener of Swiss Asia Capital and Jonathan Barratt of Commodity Broking Services about gold, and elicited from them an acknowledgement that bank safety-deposit boxes might not provide such secure storage, the banks themselves possibly being insolvent; a doubt that the exchange-traded funds in gold have the gold they claim; and a complaint that the short position in silver is concentrated in only one or two banks.

That is, the word about the precious-metals price suppression scheme is steadily reaching investment professionals around the world…”

So say the intrepid folks at GATA, the gold anti-trust action committee.

Obama Backs Off From Holder’s Remarks

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“One post, by Stephan Tawney on the American Pundit blog, said that “our attorney general is black, both major parties are led by black men, the president is black.”

“And yet,” Tawney wrote, “we’re apparently a ‘nation of cowards’ on race.”

Obama was asked whether he agreed with Holder. He hesitated for five seconds before responding.

“I’m not somebody who believes that constantly talking about race somehow solves racial tensions,” Obama said. “I think what solves racial tensions is fixing the economy, putting people to work, making sure that people have health care, ensuring that every kid is learning out there. I think if we do that, then we’ll probably have more fruitful conversations.”

That’s from  the International Herald Tribune.

Comment:

Nice to hear that President Obama agrees with the Mind-Body Politic.

But then again, we have a strange and well-documented way of being a wee bit ahead on a few things (check out the tab ‘articles’). And on that note of unbecoming self-satisfaction, I will return to my labors tweaking this blog.