Links Easter


The Best Minds of My Generation Rortybomb. More on PPIP gaming.

Green shoots and tea leaves Paul Krugman

G7 Industrial Production Crashing Jesse

Hamptons Home Sales Plunge 67% Barry Ritholtz

Crisis Altering Wall Street as Big Banks Lose Top Talent New York Times. John Robb beat me to the punchline: Talented grifters leave the big banks for new scams

Obama Stakes His Fortunes on Failed Banksters: Jonathan Weil, Bloomberg

Awake and Sing! Frank Rich. In fairness, this is not one of those “must read” Rich pieces, but it does contain an amazing Summers tidbit. The man has no shame

Credit Default Swaps – Through The Looking Glass Satyajit Das. A great takedown.

Antidote du jour:

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  1. Pixie

    NY Times article does undermine the argument, often recited on this blog, that investment bankers have nowhere else to go and therefore compensation caps won’t chase talent away.

    The article suggests that compensation ceilings will encourage the better bankers to look for work elsewhere. (The weaker bankers, you’re right, will probably have to stay put.) I’d argue this is not favorable for the US government’s stake in these banks because the people leaving made money without using much, if any, balance sheet and are not the bankers who created this mess. (The bankers who caused the humungous losses are in most cases long gone.) ….

    In any case, compensation is likely to fall sharply this year anyway. The market has changed and the lack of revenue from prop trading and the principal side of the business will mean that the pie is smaller. I think this is a structural change, too, but who knows.

  2. Richard Kline

    —And good riddance. That ‘talent’ built _nothing_.

    Put in an appearance at my local anti-bankster protest in Seattle. Which the local hardcore Republican newspaper didn’t deign to mention (though no surprise). While putting up an article on a demonstration east of the mountains against ‘government in the bailout business’ organized by the psychoright Republican ‘kill the Government’ cabal (though no surprise).

  3. Richard Kline

    And about that Public-Pirate Interrment Program—we dig, they bury— . . . oh not today. I’ve got blisters on my fingers.

  4. Russ

    That the MSM keeps validating this Orwellian/gangster terminology like “talent” just shows how completely captive they’ve become.

    (Compare this from Goodfellas: “He’s a good fella; he’s one of us.” to today’s conventional “He’s a talent, he’s one of us.”
    In both cases, the allegedly positive term is completely unanchored from any comprehensive frame of reference, and in that context in fact simply means being “good” or “talented” at crime.)

    The Frank Rich piece is bizarre. I was wondering by what process of cognitive dissonance can he, in the same piece, correctly identify Summers as being a perfect crystallization of everything that’s gone wrong with the system, yet look to Obama as representing the great hope for reform, when Obama’s action in exalting Summers to the 1st or 2nd highest economic position (depending on who O really listens to the most) in his administration represents a radical approval and validation of everything Summers is and stands for.

    I don’t know yet whether Obama is a hard core corporatist ideological warrior himself the way Summers and Geithner are, or whether he’s just clueless and in over his head and doesn’t even realize what he’s done here, but either way the result is the same: a seamless, despicable direct continuance of Bush/Paulson.

  5. Anonymous

    Given Larry Summers insulted women while he was at Harvard, why does Elizabeth Warran, also from Harvard, have a top role in the Obama administration? Elizabeth’s last report was excellent. Is it Obama’s sense of humor?

  6. Richard Kline

    Satyajit Das: “The unpalatable reality that very few, self interested industry participants are prepared to admit is that much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency. The process was entirely deliberate. Efficiency and transparency are not consistent with the high profit margins that are much sought after on Wall Street. Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents.”

    So Pixie, care to counter-argue comment on _that_?

  7. Anonymous

    Thanks for that Bowdoin article. It’s easy to make sentimental judgments about name-brand liberal arts schools, and facts about a school’s debasement are invaluable.

  8. Anonymous

    It is a lie that “Larry Summers insulted women at Harvard.”

    During the brouhaha referred to, Summers made statements that are absolutely true and an expression of the best possible science.

    Depsite his statements’ truth, he was crucified because “feminism” is a fanatical religion that issues fatwahs against anyone that does not worship at their temple/mosque. Comapred to Amerian “feminists,” the Taliban are stauch defenders of the 1st amendment.

  9. dearieme

    There is a non-zero probability that Summers’ speculation about women and science was unusually accurate for him.

  10. dearieme

    “Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents.” No doubt; but then why does anyone buy them?

  11. Anonymous

    The author of the CDS article did not once mention side letters:

    When you realize that most of these things were totally fraudulent because the writer of the CDS contract wrote a side letter essentially cancelling the contract (but not the fee), it becomes pretty easy to refute all of the supposed ‘benefits’ the author mentions at the top of his article.

    Also, one of these articles mentioned Greenspan. I’d like to see a new trend re: Greenspan. Instead of prefacing his name with ‘former Chairman of the Federal Reserve’, I would recommend ‘former Charles Keating shill’.

    There’s no question he’s earned that title.

  12. Joseph Oppenheim

    I think the public’s penchant to look every day for what popular prognosticators have to say at every latest piece of economic news, is complete nonsense.

    We are a society which is mania driven. This is just another example of a mania-predisposed society slowing a maniacal dependency on the current incarnation of “fortune tellers”.

    It has been said that the problem with the world is that fools are certain and the intelligent are full of doubt.

    Seems to me, it is best to just have some generalized permanent plan to handle both good and bad scenarios, then pay close attention to what is happening currently and react impassionately – not getting greedy when good things are happening and not panicking when things turn bad. And, currently, there have been some good things happening. To ignore them, are ignoring FACTS, always a dangerous thing.

    But, sure, the same crowd which bought into all kinds of manias, is now maniacal over “fortune tellers”. Oh, well!


  13. Pixie

    To Richard Kline – none of the people in the NYT articles has anything to do with CDSs (and probably nothing to do with today's mess). Moelis is media M&A banker and the article also interviews bosses of new equity sales & trading firms and independent research boutique.

    You may disagree but I think the indiscriminate demonization of financiers is irresponsible.

    Generally speaking, I also think financial innovation, like scientific or technological innovation, can be a force for good and for ill. I think Das's article overstates the case but is rhetorically effective, but that's a much longer discussion.

    Happy Easter.

  14. Anonymous

    Figuring out ways to get around the ‘anti-gaming’ rules seems easier that it was for me to buy beer at the local 7/11 when I was 14.

    First, it is in the interests of BAC, C, WFC, GS, MS to get the taxpayer to pay upwards of 80% for junk for which no one will pay 10%.

    These ‘dealers’, independently, to be sure, will offer to buy call options on a mortgage index (I’m sure MarkIT is already working on such an index). The srike price will be 150% but the premium that they are willing will be awfully close to the what the private investor puts into the PPIF.

    For example, a private investor joins a pool and puts up the $5 Million (taxpayer puts up $95 million) to buy some assets from C.

    In an ‘arms length transaction’ (and to protect taxpayer interests, of course), the PPIF sells a call for $10 million on the MarkIT Mortgage Index to C.

    Investor gets 50% of the $10 million (gee, the value of the initial investment).

    No Tsy rule has been broken as C has no involvement with the fund and C is not buying back any of its own assets.

    Only a cynic would point out that the C effectively sold assets worth $10 for $70 ($80 from the PPIF less the $10 for the option premium).

  15. Anonymous

    I suspect people buy financial products for many of the same reasons they buy lottery tickets. Regardless, if a large majority of the system is gamed, savers have little option to buy anything other than opaque financial products.

    The main thrust of Das’s comment is indisputable. In an efficient market, outsized gains should generally only be the product of luck. If outsized gains were commonplace in any sector, theory suggests that competitors would flood such sector and whittle away the expected returns on both labor and capital to a level that approached other sectors. This obviously did not happen in finance over the last 30 years. In fact, one could easily claim with a lot of evidentiary support that what happened in the last 30 years of finance was the classic insurance scam: sell insurance and keep inadequate reserves to meet future claims based on current risks. I’m in the finance business, by the way. We’re not smarter than everyone else. We’re just in a gamed system, with abundant market failure based on inadequate information and abundant government support that allows us to maintain high rents in an oligopoly.

  16. Anonymous

    Damn, I hate writing textual white noise but it sure feels like that is what I am doing.

    While we keep preaching to the choir here, the congregation is glued to the big screen tv and the propaganda that comes out of it. There will need to be more pain felt by the public before there is opportunity for positive change. I think the opportunity for change is coming but it is painful to see the antisocial behavior that we are witnessing from our government and corporations that is precipitating the crisis. There is also no guarantee that the fascist complicit media will not further the ruination of our democracy.


  17. Plantation Capitalist

    “Generally speaking, I also think financial innovation, like scientific or technological innovation, can be a force for good and for ill.”

    The problem really is that there was no innovation. When a new product crashes the system, that is not innovation. When the new financial product is specifically designed to obscure, or decieve, that is fraud. It is hard for anyone to say that this was caused by a few bad apples. The depth of the deceit is international in scope and includes top to bottom complicity in the financial community.

    Far too many layers and levers were aligned to ascribe this as accidental. It was, and continues to be, a criminal conspiracy, that I am afraid includes our own government.

  18. fresno dan

    From Das, “The specter of banks, some of whom have needed capital injections and liquidity support from governments to ensure their own survival, offering to insure other market participants against the risk of default of sovereign government (sometimes their own) is surreal.”

    I have been reading and reading about CDS’s, mostly because I like to understand economic incentives and such. But what I’ve come to understand is that the “market” often doesn’t price things efficiently, or in accord with reality in the short or LONG TERM. The long run can be a minute, a decade, OR a lifetime. The “market” is, often as not, irrational, emotional, uninformed – prices can be set by a minority or a majority, and prices can remain “mispriced” due to inertia.
    Look again at Das’s example quoted above – people are BUYING that stuff. People either do not know what they are buying, or buying it to sell to someone who doesn’t know what they are buying.
    As “dearieme” said, why do people buy this stuff? Well, I buy stocks for the “long run” because being an American, that is how I was indoctrinated. Somehow, the invisible hand assures that the gains are distributed to investors like me (even though I know nothing of the details of the business and I perform zeor oversight). When I really think about it, it does seem preposterous – you get a return for nothing, other than provideing the money. Not only do you get more than a bond, it really is safer (due to inflation taking away your bond returns). And it is best to just leave it to the professionals, and not worry my pretty little head. The money I “invested” seems to have made the investment class very well off – me, not so much. I used to believe that it was NOT a zero sum game – I am beginning to believe that what I believed was in error

  19. Roger

    To those reading the comments but who haven’t looked at the tweenbots site. You really should go and have a look. It will make you smile and I think we could all use that right now.

  20. Anonymous

    Satyajit Das’s blogpost is sophomoric.
    First, he pretends to be an expert but ignores what a CDS is : a VERY complex contract based on a credit underlying. Because of this complexity, there are many reasons that explain why cash and CDS markets are at different spread levels,the main one being that a CDS contract embed the capacity to borrow the underlying bond to short it. Borrowing bonds in the corporate market is difficult and costly, no wonder it has an impact on the price ! This is the same mechanism at work when spot and forward prices on equities and currencies are different. If you can’t understand that, don’t get any close to this market. Nobody is forcing you after all.
    Second, complexity in the credit world is not anything new. Ultra-complex balance sheet with cascade of liens on different assets, or contingent liabilities existed for ages (Ask Warren Buffet…). The pricing of such clause was and still is opaque, an opacity much greater than what we have today in the CDS market. Don’t make the mistake of being afraid of the prices that you see on the relatively transparent CDS markets, be afraid of the murky accounting of banking books of Banks and reserves of Insurance Companies. This is where the abyss lies.

  21. Brad

    Pardon if I an not in sync with other comments in this thread but I was quite happy to see Yves mentioned in a prominent article about financial bloggers. NC is still my #1 bookmark after a full year! A heartfelt thanks to Yves and this fine cadre of collaboator bloggers contributing here. Happy Easter to all. Bloggers saved my 401k and nest egg (as it turns out before I found NC which is ten times the caliber of, for example, Denninger). I wish I knew how to contribute besides vectoring the curious and intellectually capable here; my talents run towards engineering rather than research though. Tyler Durden (John Galt?) type quantworks is my current project angle but on an entry level. Take care and well wishes.

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