Whoever the Professional Left happens to be, I think they all vented in response. One response that never quite rung true though, was this from Krugman:
"What gets me is how unprofessional the whole thing is. [...] if you vent for the sake of venting; if you alienate people you're going to need; then you're just being stupid."
To be fair to Krugman, he was hardly alone on the alienation critique. But I didn't get the "unprofessional" charge. I suppose it depends on what you mean by "unprofessional", but to my mind, for the WH press secretary anyway, the definition of unprofessional surely means going off the agreed script. And is there any evidence that Gibbs went off an agreed script? I haven't seen any.
So this week, it's all about Park51/Cordoba House. And eventually, Obama does weigh in. And he weighs in pretty much where the Professional Left have wanted him to - although he apparently walks it back somewhat, by shall we say hiding behind the Constitution.
It prompts this question from someone on the Professional Left:
Who's this supposed to impress exactly?
People like Joe Scarborough, for example?
So this is the theory. Hippie-punching and the like is not done for the sake of it, but to give the traditional GOP establishment comfort that Obama is not with the loony-left (or whatever moniker is currently in vogue). At the same time, Obama takes certain stands guaranteed to elicit a deranged reaction from the Palinite right, to alert the traditional GOP establishment that this is who is now leading their party.
This is not exactly in line with the Frum theory - that the GOP fear their base, and the Dems hate theirs - but rather that this is some sort of 3-dimensional outreach to disaffected traditional GOP supporters. I have no idea if it is likely to work, but it's an explanation at least of what the Obama political team is trying to achieve.
]]>The obvious question seems to be, what options do they have now? And is exiting the smart thing to do?
Assuming Gretchen Morgenson has correctly described the deal that has triggered the problems, negotiating an exit price with their swap counterparties is the only option they appear to be exploring.
I suppose the reason they are looking at it this way is they are working on the belief that they properly entered into the contracts and so have certain obligations by which they must abide. But what if these transactions were wrongly entered into in the first place?
Back in the heady days of Thatcherite Britain, one local authority, the Borough of Hammersmith and Fulham, decided to gamble on interest rates - think Orange County on a somewhat smaller scale. (some of the ancillary details are pretty funny, like trade confirmation kept in a shoebox under a secretary's desk). But instead of paying up when the swaps went bad, the citizens of the said Borough, now alerted to what the authority had been doing with tax-payers' money, sought to have the contracts annulled on the principle of ultra vires. In other words, that the Borough Council was not permitted under the relevant UK laws to, basically, gamble on interest rates.
The citizens won. It went all the way to the highest court in the land, and the swaps were declared void.
So, could something similar apply for the Denver Board of Education? I don't know the relevant laws to which they are subject, but let's take the ultra vires argument on its own.
What was the Board looking to do with the exotic financing agreement?
It was not just looking to raise debt finance, it was looking to ensure "lower debt costs and a potential saving of $129 milion in pension costs over the next thirty years".
The key word here is "potential". This is therefore not a fully hedged transaction, by definition; it is a play by the Board to get something extra from the transaction from speculating in the rates market. The downside, in theory, was capped (in practice, it wasn't, because the auction-rate securities market and insurance provider on the bonds both ran into trouble), but the upside was supposed to be that if interest rates moved in a particular way, the trade would deliver the sort of money needed to cover a looming pension shortfall.
Morgenson's article goes on to outline some of the incentives for the participants in this transaction and some critical commentary on the actual form this transaction finally took. But that's perhaps beside the point - the more fundamental question is why the Denver Board of Education decided it was okay to play the interest rates markets. The precise timing of the deal, the so-called perfect-storm scenario that has magnified losses beyond what anyone foresaw, is all quite separate from asking why the Board should be entering into these sorts of deals.
No-one would argue that the Board has the right to raise the necessary finances to operate public schools, but is it lawful for it to speculate in financial markets? Is that legitimate financing, in line with the Board's mandate and in compliance with laws for education authorities?
The courts have been asked before, maybe it's time to ask this question again.
]]>Much of the piece is a pretty thorough reaming of libertarian jackassery (which gets even better in the comments section - Wolf (to commenter): "Life is unfair, you say. And your response? Make it more so. An impressive position! "), but it was actually another paragraph in this same piece that stole the show for me. He writes:
The vote is more evenly distributed than wealth and income. Thus, one would expect the tenor of democratic policymaking to be redistributive and so, indeed, it is. Those with wealth and income to protect will then make political power expensive to acquire and encourage potential supporters to focus on common enemies (inside and outside the country) and on cultural values. The more unequal are incomes and wealth and the more determined are the "haves" to avoid being compelled to support the "have-nots", the more politics will take on such characteristics.
Sounds about right.
]]>"Primarily in response to our client needs, our equity derivatives business was short volatility entering the second quarter and posted poor results," Chief Financial Officer David Viniar said on a conference call with reporters on July 20. "We took the other side because you know we deal with our clients all the time," he said. "We had that position going into the quarter and volatility just spiked."
As "technically true, but substantively crap" statements go, this is a really good one.
Just to provide a little of the context here, Goldman's results last week were impacted by pretty ordinary trading profits - and here in this call, David Viniar is expanding further on where certain larger trading losses crystallized.
And obviously, Goldman is still dealing with the Abacus mess - the SEC fine was one thing, mollifying client concerns that it screws them over is the meta-battle right now for the firm. So what better way than to tie a relatively disappointing trading quarter with the line, "what can I say, we're the kind of folks that will take one for our clients."
Let me explain what actually happened.
Goldman sells equity derivatives by the truckload to clients, and life insurers are particularly reliable purchasers of these things called variance swaps. As the linked Bloomberg article explains, this is a product that helps insurers hedge against a stock market collapse, although the true risk is actually explained by a complicated sounding thing called "implied volatility". In plain English, implied volatility is essentially investor expectations on the volatility of the stock market, and the purchasers of variance swaps are taking a position that will benefit them if actual volatility rises above expectations (they lose if volatility ends up lower than expected)
Goldman Sachs, as Viniar says, takes the other side of the trades. This is self-evidently true, Goldman trades as principal, so if a client goes long volatility, Goldman is short.
What's deceptive is presenting the notion that Goldman was overall short volatility "primarily in response to client needs". You see, when Goldman takes the short side of the trade, it doesn't have to remain short. It can hedge the risk, probably with another bank, and it will hedge itself if the firm's view (agreed by trading heads and risk managers) is to go long volatility (or at least, not go short).
What actually happened last quarter is Goldman sold the derivatives and collected its usual premia on the variance swaps, and had separately established a view that it would remain overall short volatility, so it sat on an unhedged position of an agreed magnitude. Maybe they thought hedging was too expensive, far more likely, they just wanted to be short. And why not? Historically, at least looking back the last 5 years and stripping out the mayhem of H2 2008, VIX at the start of the previous quarter was still rather higher than usual. What's not to like about that trade?
A lot, of course, when it ends up losing you possibly in the region of nine figures. The spike last quarter was pretty extreme, and anyone short volatility like Goldman would have been in fat-tail territory.
Still, polishing this turd the way Goldman has with the "we did it for our clients" spin is splendidly brazen. The truth is, they'd have done these trades with clients regardless of their view on the market - they might have done the trades at marginally higher levels to squeeze about a bit more of a premium, but they'd still have done them.
Lastly, and this again is where Goldman is as usual very finely attuned to the political atmosphere, Goldman is suggesting that these trading losses are not proprietary trading losses. Because they came about from client-driven business. This is Grade A bull, but right when the stringency of the Volcker rule is under the microscope, the timing is impeccable.
The Volcker rule proposes that proprietary trading be banned (or at least isolated) by firms, like Goldman, that are backstopped by the Fed. And here's Goldman spinning a large proprietary-trading loss as a client-trading loss. The truth is, no-one in the industry believes that unless you tackle head-on firms which trade as principal (i.e. all the big firms), can you realistically clamp down on proprietary trading; this is a prime example why.
Anyways, next conference call when probably Goldman will be reporting another successful quarter, maybe some bright spark can ask David Viniar if their profits came from positions that existed "primarily in response to client needs". I'd expect they'd have a ready and polished answer, but I'd still be interested to hear it.
]]>"...let's see a report on "Small Business Economic Trends"... on page 18, small businesses were asked what's the "single most important problem", and yep it's sales. Hands down the biggest concern, has been since early 2008 (note further, that for the entire prior 12 years, tax was a bigger concern)."
Here's what showed up in Krugman's column today:
"Or read through the latest survey of small business trends by the National Federation for Independent Business, [...]
The charts at the back of the report, showing trends in business perceptions of their "most important problem," are even more revealing. It turns out that business is less concerned about taxes and regulation than during the 1990s, an era of booming investment. Concerns about poor sales, on the other hand, have surged."
There was a typo in my original post, it should have read "entire prior 22 years", but otherwise, I'm thinking, did Paul Krugman get the idea to look at this report, and exactly the same section of the report I wrote about... from me?
A Cafe small-timer can dream, can't he?
]]>I guess one question is whether Krugman decides to punch a fellow columnist in the kisser, or asks that the ombudsman does it for him. We'll see.
But for anyone tempted to buy in to Brooks' arguments, some words of warning.
1. Brooks knows next to nothing about Keynes. For example:
The theorists have high I.Q.'s but don't seem to know much psychology. Lord Keynes, though a lesser mathematician, wrote that the state of confidence "is a matter to which practical men pay the closest and most anxious attention."
Keynes, right, he was a brilliant mathematician. His Treatise on Probability, probably his most technical work and arguably a fore-runner to Taleb's "Black Swan", could only have been written by someone who got a first in maths at Cambridge. If there are new Keynesians who reckon they are better mathematicians than Keynes, Brooks should start naming names. Otherwise stop writing crap.
And as to the matter which "practical men pay the closest attention". Well, let's see a report on "Small Business Economic Trends"... on page 18, small businesses were asked what's the "single most important problem", and yep it's sales. Hands down the biggest concern, has been since early 2008 (note further, that for the entire prior 12 years, tax was a bigger concern).
As Brooks later wrote, "You're a practical executive, and you have some concerns". Yes you do. Soft demand, it's a really big concern.
2. Brooks has no sense of why Krugman is beating up the austerity scolds. To wit:
These Demand Siders have very high I.Q.'s, but they seem to be strangers to doubt and modesty. They have total faith in their models.
No, Krugman's point, one of them anyway, is that the model cited by austerity scolds recommends a policy that is the opposite of austerity. The issue is not Krugman having "total faith" in a model, it is that counterarguments are grounded in bad faith.
3. Brooks has no sense of what the arguments were when the first stimulus programme was announced. He writes:
The Demand Siders don't have a good explanation for the past two years.
Okay, here's what Krugman said at the time:
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now [it was, because of the tax-cuts in the program that were correctly predicted (even by supply-siders like Marty Feldstein) to have little impact] , is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."
4. Brooks doesn't understand the zero-bound. No, really:
Maybe monetary policy is the only strong tool we have.
Someone go tell him to push on a string.
He writes later:
Professors Lauren Cohen, Joshua Coval and Christopher Malloy of Harvard surveyed 42 years of government spending increases in certain Congressional districts. They found that federal spending increases dampened corporate hiring and investment in those districts. You wish somebody could explain that one to you before you pass on more debt burdens to your grandchildren.
Explained. If you don't get the zero-bound problem, you don't get anything.
5. Brooks doesn't know why business sentiment is poor. See:
...you do talk to entrepreneurs in Racine and Yakima. Higher deficits will make them more insecure and more risk-averse, not less. They're afraid of a fiscal crisis. They're afraid of future tax increases. They don't believe government-stimulated growth is real and lasting. Maybe they are wrong to feel this way, but they do. And they are the ones who invest and hire, not the theorists.
See Point 1. Weak demand trumps everything, especially bullshit anecdotes.
6. Brooks doesn't accept the concept of a temporary stimulus:
Once programs exist, it's nearly impossible to kill them. Spending now creates debt forever and ever.
Aside from the non sequitur here (endless indebtedness is not an inevitable consequence), the point remains that a permanent increase in the size of the government is not what's being advocated. Bad faith arguing, again?
7. He uses big words he doesn't understand.
Focus on the fundamentals. Cut programs that don't enhance productivity.
What are those fundamentals? Unemployment, the Output gap? Well gee, if only advocates of a fiscal stimulus were focused on that, you know, like they already are and were writing about it as recently as last week.
What about productivity? Why is this an imperative currently? Lack of jobs is the biggest problem today, not depressed wages. This is not to say that the government should not be investing in programs that improve human capital (read, research and development programs), but this has as much relevance to the pros and cons of fiscal stimulus as whether reading the New York Times op-ed page today causes permanent brain damage.
You've been warned.
]]>This:
"all the countries who are now in trouble were once countries who found themselves able to borrow at surprisingly attractive rates. In fact, due to external market conditions, these rates were actually often somewhat lower than they were used to paying. This did not end well."
In other words, given where we are today, we now know markets mispriced sovereign risk. (I want to assume that when she writes by "this did not end well", she is referring to investors currently holding sovereign paper, but this would be dangerous guessing on my part.)
The heart of the deceit is captured in this phrase - "external market conditions". Markets price sovereign risk where they do - according to the efficient markets hypothesis anyway, by assimilating all available data. The upshot, the pricing of sovereign risk, is the rate at which countries are able to borrow. Saying "external market conditions" brought rates down... is saying factors outside of the market, which the market evidently still took into account, caused lower rates than the market would(/should?) otherwise have demanded.
This is braindead Randianism 1.01 - Markets would be awesomely efficient if they didn't internalize stuff they shouldn't. (Sometimes repackaged as markets are efficient if you ignore the examples of when they aren't.)
Still, it does allow a critical point of agreement with McMegan, that markets do sometimes misprice risk, sometimes with very dangerous consequences. So, obvious question - if we agree that markets misprice risk, why should our fiscal policy be set according to where we presume markets will price sovereign risk?
Maybe the point here is that McMegan isn't smart enough to carry off the market fundamentalist propagandizing, but this post by her goes to the heart of the gross intellectual dishonesty behind her philosophy. There are better charletans, but they all operate on the same basis... that when the systems fails to do what market fundamentalist theory says it's supposed to do, don't blame the system.
]]>Of course the Israeli military boarded a ship in international waters and killed people aboard the ship... which is either one of two things - an act of war against the nation under whose flag the ship is sailing; or a crime committed in that same nation.
And of course, the ship was carrying goods destined for Gaza. So the literal answer to the headline question is, "yes".
But was the aid convoy the prime target?
I'll come back to this.
It is instructive I think to try to look at this through Israeli propaganda, and one tack they have taken seems to be this:
They mean blockade, and the interpretation of international law is pretty cute. Naval blockades are lawful in times of war. They are also legal if Security Council approved. You can parse this Israeli statement numerous ways, I guess I would focus on the use of "a time of armed conflict" which is a wonderfully tractable term, with minimal legal relevance but typical "war on terror" linguistic and propaganda value.
If this is the best Israel can muster as a "legal" defense, hinging on an argument that the blockade, endorsed by no other country in the world, is lawful, then they knew they had no legal grounds for taking this action.
So why go ahead and take such an obvious PR hit by going after an aid vessel, and killing several of the people on board?
Because Israel wanted to send Turkey a message. It was Turkey and Brazil who entered into the agreement with Iran just two weeks ago to store enriched uranium, and this just as the latest sanctions programme was set to be voted on.
This attack on an aid flotilla is part of another round of high stakes geopolitics. The aid workers were collateral damage as Israel aimed to provoke Turkey. Ankara was the target of the raid, with the Iranian nuclear programme the strategic backdrop to this all.
What precisely Israel wants from all of this is, smarter people than me can guess, but the notion that this was such a brazenly stupid and illegal act strikes me as far-fetched. Netanyahu has gambled on something, that if he corners Turkey, the US, the NATO alliance even, he'll redirect current policy towards Iran. By authorizing an action that can legitimately be construed as an act of war, but Bibi is set on testing where Western priorities lie.
]]>This Glenn Greenwald post was really quite bizarre. Or perhaps I should have expected it, my assumption that people on the live-and-let-live side of the aisle were of broadly an equivalent mindset on this issue was apparently quite mistaken.
Greenwald picked up on the rather obviously fallacy of equating sexual orientation and sexual activity. Kevin Drum was the guilty party on this occasion, and on this narrow point, I agree completely with Greenwald.
What had triggered Drum's ire was Andrew Sullivan's assertion that "If someone's entire private life is on the table except [the question of if they are gay], it's a function of homophobia."
And whilst I don't want to be diverted into how and why both sides have been talking past each other in arguing this assertion, it's worth remembering how this argument kicked off.
Here's where Greenwald hits the crux of his argument:
Indeed, the very notion that it is "outrageous" or "despicable" to inquire into a public figure's sexual orientation -- adjectives I heard repeatedly applied to those raising questions about Kagan -- is completely inconsistent with the belief that sexual orientation is value-neutral.
Well okay, but if sexual-orientation is value-neutral, why is it an issue of any relevance (whether for a SCOTUS nominee or anyone else)?
Further Greenwald:
If being straight and gay are precise moral equivalents, then what possible harm can come from asking someone, especially one who seeks high political office: "are you gay?"
You've just undermined the value-neutral premise of sexuality, which aside from any moral objective here, appears to play right into the hands of people who would want it to be an issue. Or am I missing something?
The clear take from Greenwald's piece that he regards sexuality as an important element of anyone's identity - "there's no doubt that it is a very substantial factor in one's life experiences and understanding of the world" - so I would assume he leans toward the Sullivan view that public figures should be willing to explain their sexuality.
But this is unfortunately where the council of perfection runs into a very large practical difficulty. Sexuality is not able to be objectively confirmed. If it were possible for a person to state on a form their sexuality, and for it to be subject, eg to a medical check, that would be one thing; but it's not like that. There is literally no way, no matter what someone declares, that the issue would be left to lie. It would inevitably lead to deeper questions about sexual activity, what you do in private, anything that will enable people to form a view over whether you are who you say you are.
That's why Sullivan's initial premise, that outlawing a discussion of sexuality is tantamount to homophobia, is so misguided. When you put sexuality on the table, nothing is any longer off it. No-one, gay or straight, should ever be subjected to that level of scrutiny, regardless of the public position they should hold. Why? Because it is neither relevant - sexuality should indeed be value-neutral - nor conclusive, and anyway, an individual's views on Equal Rights protections should be the operative criteria for looking at how they would approach these sorts of questions if they arise during their public service.
In his update to the original post, Greenwald addresses the "give up" of privacy by referring to the financial disclosures Kagan has had to make. Exactly how knowing someone's sexuality is comparable to knowing their material interests is lost on me. And further, he compares providing spousal details to declaring one's sexuality. Given the current restrictions on gay marriage, I think the more relevant point is that the sort of confusion an openly gay SCOTUS nominee could give rise to, in terms of what they should disclose about any current partner. In any event, I don't think there's much dispute that certain spousal information needs to be disclosed, but this should be the case whatever the nominee's sexuality. If the nominee is not legally married or in a legal partnership, well then there's nothing to declare. End of.
Now maybe this all this "could only be written by a straight person". That's fine, I'll happily stand behind any argument that demands equal treatment of gay and straight people, especially one that draws a line about what is acceptable scrutiny of anyone's private life, regardless of their sexual orientation.
]]>I guess the first thing to say is that Robin Hood is as near as damn it to fictional. There is no reliable evidence that Robin Hood, or Robin of Loxley, ever existed. There is an abundance of folklore about anti-monarchy heroism... and not just from the 13th century, obviously... but that's the startpoint, that Robin Hood is quite likely a figment of our imagination.
I'll skip past Amity's peon to Reaganomics, the myth-making there is entirely predictable, and so too the rather wierd Sarah Palin = Maid Marion comparison. (No, really. I thought Shlaes might have been joking, but there's no trace of irony.) But do remember that Palin is Marion, this is relevant again later.
She does write: "This Robin Hood is rather about freeing people from tyranny by cutting regulation and taxes." Okay, I haven't seen the film, but I will go out on a limb and say - cutting "red tape", not going to be part of the story. Cutting taxes... well okay, I can buy that. After all, the Robin Hood legend does hold that taxing the poor for the benefit of the plutocracy was what triggered the revolt. So whatever.
But this is where the irony-deficit widens. Apparently:
"Magna Carta principles are, of course, ones dear to Tea Partiers' hearts"
Right. The cornerstone of the Magna Carta (there were several, but let's take the most famous one of 1215 which I assume she is referring to), was establishing the writ of habeas corpus. Just one example of tea-partiers embracing this principle would be gold-dust.
(Just to clarify - Robin Hood had nothing to do with the original Magna Carta. Obviously. He was fictional. But from what Shlaes writes, there is in the film some Magna Carta that King John finally agrees to sign (but does not?). But she apparently assumes this Magna Carta sets out the same principles that the original Magna Carta contained - just because the same (real) King John was presented with them.)
Those principles that Shlaes assumes are Tea Party staples - "the king's freedom to act is limited, that punishment must fit the crime, that arbitrariness on the part of a leader is itself tyranny, that kings must follow the law" - reduce to: respect for the rule of law and the principle of proportionality.
Someone remind me how the the tea partiers, who cry foul over democratically passed legislation and threaten revolt over any sort of increase in the top marginal rate, have any semblance of respect for either the rule of law or proportionality.
And just when you think the irony-deficit might have reached default levels, she closes off with:
The only part of the story missing is who will be the 2010 Robin Hood. From Ron Paul, Rand Paul, Governor Tim Pawlenty of Minnesota, to Governor Mitch Daniels of Indiana, and Palin herself [ed. See above, I thought Sarah Palin was Maid Marion. Is she the Peter Sellars of the wingnut imagination?] there is no shortage of candidates.
First of all, unlike Robin Hood, these are all real people. Second, what role exactly are they supposed to play? Lead harrasser of IRS auditors? Sarah Palin's love-interest? Look, whatever you want to say about the tea partiers and their friends, they have the right to participate in the democratic process, you know, by running for election. Back in early 13th century Britain - not at all.
I guess you need to have been a History major to have overlooked this.
]]>an advisor on international economic issues to George W Bush during his Presidential campaign. Then she joined the White House and served as Special Assistant to the President for Economic Policy on the National Economic Council. She was a member of the President's Working Group on Financial Markets and the President's Working Group on Corporate Governance. While in the White House, she was responsible for all financial market issues for the President, which included corporate governance, bank regulation, Government Sponsored Enterprises, mortgages, deposit insurance, terrorism insurance issues, anti-money laundering, and international finance issues. She was in charge of liaison between the White House and all the financial regulators including the Federal Reserve and the SEC.
Quite a CV there.
So, what does she think of the Goldman case, where the offenses are alleged to have taken place right on her beat?
In short - "Shit happens".
"I suspect that the actual legal case against Goldman Sachs is pretty weak. If what they were doing was selling something to someone knowing that somebody else valued it higher, that's called a market..."
Okay, Pippa in her long cv, does not mention any legal qualifications. So her opinion on the case is, shall we say, pretty weak. And further, just because person person x paid 3 dinero to person y for a widget does not mean that this is evidence of a properly functioning market. If person y fibbed about what sort of widget person x was getting... let's just say there are applicable laws on the books, one of which is being used to bring Goldman into court. The specific legal question here is around what constitutes a fib. What is not a fib however, is to point out that Dr Malmgren is hawking economic snake-oil.
So what about banking reform? You think maybe, given her recent career, that Dr Malmgren might have some ideas about how to prevent a repeat of the financial apocalyse of 2008.
Instead you get - "Shit happens. Ps. trying to clear up the mess... uh, that's politics".
No, really:
"It's highly unlikely that what the Dodd bill contains is going to prevent these kinds of crises in future or redress what's happened in the past," Malmgren said. [ed. Okay, well then we should try fix it, no? Crisis prevention in future, especially, seems like a sensible idea.]
"What's important is to be seen to be doing something about the incredible losses that have been incurred by the American public and frankly the global public as well. [ed. How about "what's important" is putting in place mechanisms to stop it from happening again? 2008 and the fall-out from it - really, really been a big fucking problem. Or was it only Hank Paulson from within the Bush administration who figured this out?]
If it serves that purpose, there are votes in it, that's the important thing." [ed. Ah yeah, winning elections, silly me for forgetting that nothing else matters.]
In some of my more reflective moments, I try to imagine that perhaps the Bushies weren't as bad as they seemed at the time. That maybe they cared about many of the things that, you know, people with a conscience also care about.
But then you come across something like this, and reality slaps you in the face. Here's someone who spent, it seems, every single one of the Bush years comfortably camped in the White House - a personal advisor to the President, so someone who clearly fit right in - whose attitude toward banking reform is:
"Governing? Who the hell cares."
Few people, to whom the issues at hand were more relevant, were closer to the President when the worst financial crisis for 80 years struck the world economy. She must know that the near double-digit employment stemmed directly from the meltdown.
And her take-away today is that what matters is that politicians are "being seen to do something". What a worthless sack of shit.
]]>the bill doesn't solve the basic epistemic problem, which is that members of the establishment herd are always the last to know when something unexpected happens.
This actually isn't an epistemic (i.e. cognitive) problem. It is a logical, or definitional, problem. The "Establishment" defines for itself what is, or is not, expected. Therefore when an "unexpected" event occurs, the Establishment, which had decided the event was unexpected, will be the last to know. The logic speaks for itself.
Or in other words, Brooks' thinking is pretty screwed from the outset. (Side point, had Brooks spent a minute of time boning up on George Soros's theory of reflexivity, he'd never have started from such a clueless premise)
So it should come as no surprise that the rest of the column is brimming with stupid.
In no particular order of relevance, Brooks wrote the following:
The folks in Washington would learn that centralized decision-making is often unimaginative decision-making, and that decentralized markets are often better at anticipating the future.
Uh, okay. The market for mortgage-backed securities, in fact all funky debt-backed securities, was about as free and decentralized as you could wish for. And how good was this market at "anticipating the future"? The point here being that even if markets are "often better" at discounting the future, they are catastrophically wrong often enough for the Establishment not to sit on its hands and fail do anything about the risks.
What's pretty striking about the people - like John Paulson and Michael Burry (who Brooks cites) - who saw and bet against the mortgage market, is that to a person they were not mortgage experts. In fact they knew next to nothing about fixed income markets, Burry was a so-called "value investor" and Paulson a merger arbitrage guy, which are pure equities strategies.
It goes without saying that Brooks missed this point completely.
Further, there's this half-truth:
And as for Fabulous Fab, he seems to be the product of the current amoral Wall Street culture in which impersonal trading is more important than personal service to clients, and in which any product you can sell to some poor sucker is deemed to be admirable and O.K.
You know, Fabulous Fab is in trouble because he allegedly misled investors. That's not a matter of finding a "poor sucker", that's about telling fibs. Whatever ethics lesson you want to draw from Fab, it's got little to do with suckers and the like.
But this is the nugget for me. David Brooks has a real problem with centralized decision-making. In this column alone:
One might have thought that one of the lessons of this episode was that establishments are prone to groupthink, and that it would be smart to decentralize authority in order to head off future bubbles.
And:
we are living in the great age of centralization.
And:
The folks in Washington would learn that centralized decision-making is often unimaginative decision-making
Oh yeah, already mentioned that.
Still, you get where Brooks is coming from. And he even ventures out to voice support for a proposal he likes. The proposal is this:
Force the big financial institutions to issue bonds that would be converted into equity when a regulator deems them to have insufficient capital.
(It's a proposal of Sebastian Mallaby's, apparently. Hmmm.)
So Brooks thinks decentralization is the lesson "Washington would learn", but in turn supports a proposal which would give "a regulator" the sole ability to trigger an option converting a bank's debt to equity. Leave aside some of the practicalities of mandating convertible bond issuance (how much, what maturity, should it count as capital from day one (as is currently the case)), just dwell on the fact that Mr Decentralization wants one regulator invested with the right to trigger conversion. (sub-question, why can't the market decide for itself where and when to trigger conversion? If you think the market is better at anticipating the future, doesn't that make sense?)
Substantively, how a power of this sort fundamentally differs from empowering a regulator with resolution authority over failed institutions is surely a question beyond Brooks's IQ and pay-grade.
Just wanted to point this all out.
]]>- In 2006 and 2007, what was your job?
- I was the head of the Bear Sterns asset-backed trading desk. Subprime-backed debt was one of the asset types we traded.
- So you would be familiar with a deal such as Abacus 2007-AC1.
- Yes, very much so.
- What was your relationship with John Paulson?
- I had no direct relationship as such, the hedge fund Sales team managed the relationship with clients like Paulson, and I'd be brought in when the client was interested in asset-backed trades.
- So you met with Paulson then?
- Yes. On several occasions in 2006 and 2007. He was a well-known bear, a big client of ours, taking short positions especially on subprime mortgages. From memory, Paulo Pellegrini was in all the meetings, Paulson in most of them.
- And what sort of things were discussed in these meetings?
- I couldn't itemize everything we discussed, but broadly, Paulson was constantly looking for new ways to short the subprime market. Creating new trades, looking for new opportunities. There was really nothing untypical apart from the type of assets he wanted to trade against - there were very few active bears in this market, but he was one of them.
- Did Paulson ever propose that you structure a synthetic CDO, referencing assets that he wanted to bet against?
- He did. I can't remember exactly when he first raised this idea, whether it was him or Pellegrini, but it was probably toward the end of 2006, and I recall clearly discussing the idea with him.
- What was your initial feeling about the idea?
- It made perfect sense from Paulson's point of view. The attraction of a synthetic CDO is that it enables an investor to effectively place a leveraged bet against a whole asset-class, rather than doing piecemeal trades, one-by-one.
- Explain that a bit more.
- Okay, Paulson had a very negative view on the subprime market. Up to late 2006, as I understand, he was only betting against individual subprime securities, because that's all the market could really offer. A rough comparison would be that, say he thought the Red Sox were going to have a bad season, he had only really been able to bet against the Sox on a game by game basis. What he really wanted was to be able to bet against pretty much their whole season. That's a bet that would pay off a whole lot more for him.
- You said the request "made sense", so did you go ahead and structure a CDO like this?
- We thought about it, but in the end it was a clear no.
- Why not?
- A few things, but mainly, we didn't want to be selling securities to investors when those securities had been the brainchild of someone who wanted them to fail, and fail badly.
- So the key point was that Paulson wanted this transaction?
- It was.
- Does it make a difference having an independent manager, like ACA, down as the asset selector?
- In theory it should, but our feeling at the time was that it didn't matter in the end because the prime motivation for the trade came from a bear.
- You were quoted, in Greg Zuckerman's book, "The Greatest Trade Ever", page 181, saying of the idea, "It didn't pass the ethics standards; it was a reputation issue, and it didn't pass our moral compass. We didn't think we should sell deals that someone was shorting on the other side". Were those your words?
- I'm sure, it was an on the record interview, and it's how I felt about the idea.
- What was your view of the subprime market overall, around the same time?
- I wasn't a bear. I certainly thought some securities would not work out, and investors working further down the credit curve, buying BBB-rated securities and less needed to be careful, but I would never have predicted the complete rout. In the long run, I probably felt the opposite.
- So you didn't think much of Paulson's bearish view?
- I respected it, but I didn't have a particular view on whether he'd make money off of it. I mean, maybe some bets would pay off and others wouldn't, that's pretty normal for any hedge fund manager.
- So if you weren't swayed by Paulson's view, why wouldn't you follow through on his CDO ideas?
- Quite honestly, because it didn't feel right. Paulson is not the only investor to whom we owed obligations, and you could see problems arising almost the moment you started marketing the product?
- What sort of problems?
- I'm not a lawyer, so I wouldn't presume to know exactly what needs to be disclosed, but if this were my deal you'd have to say somewhere that a bear was behind it. And obviously the bear wants as little as possible disclosed, that's entirely their right as I see it, but it makes the completion of a deal extremely difficult. Because how can you be upfront with everyone? How does everyone get comfortable?
- Is that why the deal didn't "feel right", because you wouldn't be able to complete it?
- No, not exactly. It didn't feel right at the start, and that view was confirmed when you thought about how you'd have to go about marketing it.
- Are you suggesting that there's no sound way to market this type of deal?
- Legally, as I've said I'm not a lawyer, I don't know. But this was my business, it still is, and I still haven't figured how you do this given the types of things investors care about.
- Would you be prepared to bet against a short, someone like Paulson?
- I do it every day.
- Would you be prepared to structure a trade on which other people have bearish views?
- Again, this happens nearly all the time.
- So where does one draw the line?
- Professionally, you draw the line where one set of clients' interests are directly opposed to anothers', and where there's going to be no zone of agreement on the level of transparency. And it is an intermediary's job to figure this out, obviously it is helpful when the law is clear, but often you find areas where it's a judgement call.
- Is the law clear here, with respect to CDOs?
- I don't know, I'm not a lawyer.
- But you'd not do this deal?
- Not unless the two sides were willing to explain themselves to each other.
- And would that ever happen?
- I highly doubt it.
]]>But let's work our way up from the bottom of the barrel. McMegan - I've had my say. Sebastian Mallaby, likewise. This is maybe not a coincidence, but Michael Barone uses Mallaby's exact language, describing the SEC case as "flimsy".
In fact, they reached their decision of the basis of curiously similar reasoning:
Mallaby: "The firms that bought Goldman's securities knew perfectly well that some other investor must be taking the opposite position."
Barone: "... the sophisticated firm buying the CDO must have assumed the seller believed its value would go down."
No really how CDOs work, but I'm not repeating what I wrote in the original Mallaby post.
This however, is not bad. Nicole Gelinas gets a couple of things wrong - people selling securities do not necessarily do so because they think the value of those securities will decline - but she at leasts understands why it's foolish to say this is a "flimsy" case. Aside from the lack of precedent here, the key point is, as she says:
It seems dubious, at best, for a market maker, unbeknownst to the buyer, to allow a short seller to help systemically design a financial instrument so that it will intensify all losses
That's exactly right.
We don't know if this is illegal, but "dubious, at best" is what makes this such a radioactive case. That and the fact billions of dollars ride on the outcome.
]]>It was entirely predictable that heaps of people would pile in with an opinion on the Goldman case without the barest understanding of the charges or the business to which they relate. But it is still interesting to see the ways people succeed in making fools of themselves.
Unless the SEC is sitting on more evidence than it has laid out so far, the charge sheet looks flimsy.
Er, no. The charge sheet is not flimsy, at the very least you shouldn't be saying that unless there were ample case-law against which to form a view. And here, there isn't. This is uncharted territory. If Paulson's involvement in asset selection (technically, reference obligation selection) is a material fact, the charge sheet is pretty strong. It's the first "if" that no-one is too sure about.
If Goldman has become a poster child for excessive power on Wall Street, the SEC might become a poster child for government power run amok.
Yes, enforcing 80-odd year old anti-fraud laws is the very definition of power run amok. Civil rights laws, some 30 years younger than the Securities Act, I mean heaven forbid the crazy gubmint try to enforce those.
The securities in question, so-called synthetic collateralized debt obligations, cannot exist unless somebody is betting that they will lose value.
This is like what would happen if you let monkeys loose in NASA.
Synthetic CDOs, or synthetic securitization technology generally, does not exist as a single-use financial kit. One of the early vintage CDO products, called BISTRO, was structured to help JP Morgan reduce its regulatory capital requirement. These became very popular with banks and investors and regulators - but no-one was purposely betting against anything.
Later in the day, when CDOs became more of a casino game (although many, many investors never saw it as such), banks had migrated to using so-called Gaussian copula technology - and anyone proposing to write intelligently on CDOs should be forced to read up on the intellectual genesis of this technique. David Li's model spurned the correlation trading business, where the eggheads went to work slashing the cost of risk-managing a CDO (though not necessarily passing on the savings to investors).
It was only extremely late in the day that the correlation game was joined by the Paulson trades, where instead of using the eggheads to actively manage the correlation risk, banks simply arranged a derivative where they sat in the middle sucked out bid-ask spread.
To return to Mallaby, his argument "cannot exist" unless he is talking out of his ass.
One of the big losers in the deal was IKB, a German bank with a big business in mortgages.
Not true. IKB was almost exclusively into business lending - it's parent, KfW is the German mega-mortgage shop. IKB, for reasons I can never quite gather, decided to go balls and all into the CDO business, but it really wasn't a mortgage shop. Ever.
Perhaps the SEC is suggesting that Paulson's involvement changes this logic, because the hedge fund manager is famous for making billions from his mortgage bets?
No. If you read the SEC complaint, as Mallaby hopefully has done, it is the nature of Paulson's involvement that was the material fact, according to the SEC. Paragraph 70 is really not complicated: "GS&Co and Tourre knowingly, recklessly or negligently misrepresented in the term sheet, flip book and offering memorandum for ABACUS 2007-AC1 that the reference portfolio was selected by ACA without disclosing the significant role in the portfolio selection process played by Paulson, a hedge fund with financial interests in the transaction directly adverse to IKB, ACA Capital and ABN."
More Mallaby:
Next, the SEC complains that Paulson had a hand in designing the securities
No, not "next", and that is not the complaint. The complaint is that his involvement was not disclosed. Paragraph 70, above... really, really, not difficult. And in case Mallaby thinks I am being deliberately obtuse - no, Goldman should not have disclosed that it was Paulson who was short, they need only have said that someone being consulted on the portfolio selection was going to short it.
Finally, the SEC asserts that Goldman, and specifically its young mortgage whiz, Fabrice "Fab" Tourre, tricked ACA into believing that Paulson meant to bet on the mortgages' soundness, not the other way around.
Just a shout out to the Post's editors... "not the other way around" is potentially very misleading.
This is the nub of the case, and if there's proof that Goldman or Tourre was dishonest, the SEC could yet emerge with its reputation intact.
Still, no. The rub is that Goldman "knowingly, recklessly or negligently" misled investors. Dishonesty may not come into it.
Nearly there.
As the deal was taking shape, ACA and Paulson met repeatedly. If ACA had any doubt as to Paulson's intentions, surely it could have asked him a straight question rather than relying on alleged hints from Goldman. Throughout the negotiations, Paulson kept proposing notoriously low-quality mortgages for the bundle and vetoing high-quality ones. It should have been obvious to ACA that he meant to bet that they would go down.
I won't belabor the point that Paulson's close involvement is being argued as a material omission. But the rest of this argument is voyeurism. Paulson was Goldman's client, not ACA's. Mallaby has already indicated that puts limits on what ACA could get from him - or even about him from Goldman. But the nub is that ACA did not know he was proposing crap and vetoing high-quality... and why would they (all notes carried the same Baa rating), if they believed he was going long the portfolio.
Anyways, a turd-trifle still deserves a cherry on the top, and Mallaby delivers.
Much is wrong on Wall Street, and Congress should pass some version of the regulatory package that is bottled up in the Senate. But the premise for more regulation is that the regulators will behave responsibly. Let's hope the SEC remembers that.
Really? The premise, and someone please kick me in the junk if I am being an idiot, is that existing regulations are... shall we say, flawed and inadequate. Or maybe the financial crisis and Great Recession are already distant Village memories, you never know with these people.
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