Archive for November, 2008

no dice


When I read Michael Lewis‘s book Liar’s Poker a few years ago, I was left with the uncomfortable feeling that the entire edifice of modern finance might just have become nothing less than the mother-of-all Ponzi schemes. And that the mutant moment could possibly have been the day Salomon Brothers’ Lewis Ranieri invented the mortgage-backed security, based on what amounted to a salesman’s whim. The securitisation business would transform itself over the next 30 years, until its unfortunate reconnection with reality in the mother-of-all Minsky moments. This is how BusinessWeek described Ranieri in 2004, celebrating him as one of the leading innovators of the previous 75 years:-

A less likely financial engineer would be hard to imagine. Ranieri, a Brooklyn native, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon’s mail room set him on the path to trading. A large, volatile man, Ranieri built the firm’s mortgage desk in his own image: “fat guys,” as author Michael Lewis described them in Liar’s Poker, promoted from the back office, who indulged in feeding frenzies and practical jokes while selling strange new bonds to doubtful investors.

Ranieri’s own mortgage bank, Franklin, was closed last week by regulators and has now been taken over by the FDIC.

Michael Lewis, who worked for Salomon Brothers in the 1980s–an experience on which the Liar’s Poker was based–has just written a piece this week in Portfolio in which he is, in effect, calling the end of an era on Wall Street. This is how it starts:-

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

If you did not see the Portfolio article, it’s worth reading all nine pages. It tells the story of a handful of people who saw that there was a wider problem, even if the full scale of the potential catastrophe eluded them too. Guys like Steve Eisman, of FrontPoint Partners, who did not play the standard Wall Street game and, when they had the chance, traded aggressively against the prevailing wisdom. It also paints a granular picture of what a short-seller really looks like, and why we should perhaps see them as the canaries in the coalmine rather than demonise them (as everyone from government to clergy did a few months ago here in the UK). There is a more interesting vignette in there too about how his short-selling was egged on by Wall Street firms for their own purposes. In all, it’s a great article. Lewis reveals, in the actions of his protagonists, some of that concept called bounded rationality, as identified by economist Herbert Simon and others. The following also stood out for me, highlighting the scale of the debt markets versus the more familiar stock markets which journalism, print and TV news, tend to focus on:-

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a fucking zit compared with the bond market.”

This reminded me of some of my own fish-out-of-water experiences, begging for some capital allocation from the selfsame Wall Street in 2001. I was in the middle of a management buyout attempt for the news agency that employed me, the parent of which had been plunged into a Chapter 11 bankruptcy administration. Unsure that this editorial cost centre would work in any other organization, we formulated a set of independent online subscription news services, slicing and dicing our coverage into what we hoped would be viable longterm businesses. The biggest slice had the world of credit derivatives at its core. But at that time the labyrinthine and mushrooming world of the credit markets was one that most journalists or news companies would not have heard of, nor wanted to touch. And so it was. When I offered it to the board of one major company (let’s call them Thomson Financial) I was advised I’d be more successful focusing the business on sectoral equities, because that was “what the market really needed”. Thomson was then aligned in some peculiar defensive editorial content strategy with Dow Jones (now owned by News Corp) against Reuters, now owned by err… Thomson.

Ah well, no dice.

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Jake Thackray was a Yorkshireman and troubadour (no, really), inspired by Georges Brassens. Good hunter-gatherers should be in bed early, but because of a journalistic (if not civic) duty to watch the US election coverage, allied with a bit of US jet-lag, I was accidentally around when the BBC aired a late night documentary on Thackray last Monday. I remember him from my childhood, when he did a regular turn on a consumer rights/light entertainment show called That’s Life, famous for finding dogs that could say “sausages”: the lolcats of its day.

A fortnight ago, the BBC’s highest paid presenter (Jonathan Ross) was suspended, and one of its rising stars (Russell Brand) fired, for an offensive prank phone call to ageing Faulty Towers comedy actor Andrew Sachs concerning the night-time activities of his granddaughter. One defence, I think from a BBC type, suggested that their misdemeanour was perhaps an inevitable part of a risk-taking comedy culture. Despite a Facebook support group set up to defend the two overpaid scallywags’ human rights, and despite the fact that some of my Twitter chums think what happened to the two is a travesty, I am a bit more hard-nosed. Watching Jonathan Ross’s performances over the years, it seemed increasingly likely that there would be a blow-up at some stage, which is now unfortunately squandering BBC goodwill just as it tries to defend its public service remit.

Ironically, self-deprecating Thackray offers a perfect lesson to managers in general, managers of “The Talent” in particular, and the talent itself in this wonderful song entitled The Bull. There might even be a message in there for bankers, central and otherwise. The contrast between the talent of Thackray and Brand/Ross looks quite stark, when it comes to pushing the boundaries of taste and decency for comedic effect.The clip has a slight hiatus, so hang on in there.

And if you’re wondering what that missing verse contains, curiously, I can’t find a CD including this song.  However, a boxed set of Thackray is available below (with a number entitled Black Swan – I wonder what that’s about? ;-) ).

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If there is one thing to be disappointed by in Barak Obama’s US presidential election victory it is that a lot of people who previously despised America are now happily declaring the US to be likeable again. To fall out of love with America because of electoral accidents and occasional egregious foreign policy mistakes, or to believe in some glib caricature of the crass American, ignores the enduring value of the US to the rest of the world. And when I think of the US, its primary virtue invariably seems to be that it’s a country of rejects. I wonder sometimes whether those who do the most loathing of the US might well have been the types the average American ancestor would have had to run away from some decade or century earlier at the point of a bayonet.

A couple of weeks ago, I visited the Ellis Island Immigration Museum with my two children: both newly minted US citizens. They had themselves been through a kind of virtual Ellis Island a couple of days before in the Federal Building near City Hall; after a nearly four-hour wait, they swore allegiance and in return received a certificate and letter from George Dubbya himself. As a special treat–because they were the last and seemingly the only children processed that day–they both got a little flag.

Ellis Island

Ellis Island, October 2008

For the forebears of about 100 million Americans, a five-hour wait at Ellis Island itself was often the final chapter in an escape from famine, humiliation, hopelessness, religious intolerance or full-scale pogrom. The facility closed in 1954, and–if the account of the museum is to be believed–it was a pretty humane place, all things considered, especially compared with other places of mass human transit the world has seen over the past century. While 12 million entered through Ellis Island, only 2 per cent were turned away.

Of course, if you were really posh your immigration details would be processed on board ship; only the cattle class passed through Ellis Island (including the likes of Bob Hope, Irving Berlin, Isaac Asimov and Max Factor). And today, one of the central arguments of our current politics is income inequality. I like to have my cake and eat it on the subject: on the one hand, it never bothers me what others earn, and I certainly believe there need to be good incentives for the creative and entrepreneurial to take risk; on the other, when it starts to be a hot potato you may surmise that something has started to get out of hand–as it has done on Wall Street and among senior executives over the past few years. All reward and no risk. The fuss was perhaps a leading indicator.

Pay differentials are a much less important determinant of long-term economic success (and health), as far as I can tell, than the uneven distribution of grandmothers. Obama, until the beginning of this week, had both grandmothers extant: extraordinary for a man of 47. He was mostly raised by one (his mother’s mother), confirming how important they are in loco parentis. The immigrant experience is not always so fortunate; a limiting factor on economic, entrepreneurial, academic or even sporting achievement can be the availability of extended family to provide logistical (let alone moral) support, especially in a childcare situation. In aggregate, this holds up the progress of the immigrant group. Of course, things may vary in individual cases, and there were indeed a few babushki apparent from the pictures at Ellis Island, along with touching stories of adult children being reunited with their parents.

Well, the youngest Chip Off the Old Hack is not so lucky. Both his grandmothers were carried away by cancer and were thus denied the opportunity to coo over his crib. But such is the wisdom of the US immigration authorities that, a few years ago, they decided that they will naturalize a child through his US grandparent, provided the grandparent meets (or met when living) the necessary residency qualification. So, there are now a couple of extra Obama supporters in the citizenry–not that he needs them at the moment, of course.

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