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      As you’d expect from the title, both more and less than it seems. The impact on oil prices is not that big a deal, despite the screaming. If they were to, say, wind up at $75/barrel for a few months, well the last time we had prices that high was… less than a year ago. […]
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Book Review: The Big Short

In the last couple of months, I have started to receive mail from “Wealth Management” financial advisors like Merrill-Lynch.  This is funny for two reasons: 1. I have no wealth to manage and 2. after reading the book, The Big Short: Inside the Doomsday Machine, by Michael Lewis, the last people in the world I would give my money to is Merrill-Lynch.  They were one of the last companies to figure out how to make money during the subprime housing bubble.

The Big Short is about those esoteric “instruments” that Wall Street developed to suck money out of America, the rampant fraud that signified a bubble and some ragtag outsiders who accurately predicted the bursting of that bubble and made a lot of money in the process.  Our cast of characters, the good guys, if this tale has any heros at all, includes Michael Burry, a one-eyed neurologist with Aspberger’s syndrome who liked to read prospectuses for fun, Steve Eisman, an iconclastic hedge fund manager at Frontpoint, and a “garage band” hedge fund called Cornwall Capital consisting of Charlie Ledley, Jaimie May and Ben Hockett.  With the exception of Eisman and Hockett, the rest were amateurs, just dabbling in money markets and placing bets on unlikely events.

For each of these three groups of people, there was something unique about their approach to the financial market.  Michael Burry was discovered by investors who read some of his blog posts about where to put their money in the stock market.  He was persuaded to manage other people’s money and started Scion Capital.  But unlike other financial managers, Burry told his investors that they had to be in it for the long haul.  The Cornwall Capital guys started with $100,000 and the crazy idea that if you want to make money in the financial world, you have to bet against conventional wisdom.  Steve Eisman was raised on Wall Street.  He came from a family of analysts that seemed to think the Wall Street investment companies had a fiduciary responsibility towards their investors.

The Big Short follows our outliers throughout the last decade as they discover the subprime housing market and start to wrap their heads around the concept of collateralized debt obligations and credit default swaps.  As they wander their way through the complexity and deliberate opacity of the bond market, they start to realize that it is fueling a bubble.  Eisman quickly sees that the subrpime mortgage business is encouraging fraud when his Jamaican baby nurse tells him she is over her head in debt from the 5 townhouses she’s bought in Brooklyn.  Wall Street firms were writing teaser rate loans for people who didn’t have the income to pay when the balloon rate would kick in.  Then they bundled the loans, sliced them up and sold them to unwitting investors who didn’t read the prospectuses.  Michael Burry was one of the few who did read them.  With his sharp analytical mind, he calculated when the bubble would burst and was one of the first people to place a bet on the losses when he asked for custom credit default swaps from Morgan-Stanley and Goldman-Sachs.  Charlie Ledley and Jamie May thought the subprime market was too good to be true so they bet against it too.

The book takes us through the complicated maze of the financial world from Wall Street to Las Vegas and Berkeley and introduces us to a bunch of colorful characters.  There’s the almost allegorical investment fund manager who just passes his investors money through the CDO market, the salesman from Deutsche Bank who lays out how the whole Ponzi scheme works and the Morgan Stanley guy who loses more money for his accounts in the meltdown than anyone  in history.

Our good guys start to get more alarmed as the enormity of the coming armageddon starts to take shape.  Well before the crash, they challenge the ratings firms and bankers in public, write letters to their investors describing what’s happening and even have a social conscience when they make a trip to the SEC and try to explain it to a clueless government official.  When the proverbial $hit starts hitting the fan, they’re as anxious and distressed as everyone else even though they each made a ton of money.  In Burry’s and Cornwall’s case, the events were so unsettling that they gave up managing money.

There were a couple of take home messages for me.  For one thing, I absolutely do not trust Wall Street after reading this book.  There may be some honest brokers out there but not nearly enough to handle the trillions of retirement dollars that pass through their Bloomberg terminals every day.  Another disturbing thing is how disconnected Wall Street bankers and brokers seem to be with the lives of average Americans.  They don’t take care of the money they’ve been entrusted with.  It’s almost like it’s not real to them.  They might as well be manipulating poker chips or Monopoly scrip.  And it didn’t seem to occur to them that the vast number of Americans who got trapped into teaser rate loans were not going to be able to pay their mortgages when the loan readjusted.  Just where did these geniuses think the money was going to come from in a decade when wages were essentially flat and made more difficult to come by due the short term thinking of the institutional investors?  One curious thing is the timing of the bubble burst.  It started in March of 2007, well before the primaries of 2008.  The guys at Cornwall Capital started to get concerned that they were going to be exposed financially when the government came to the rescue of strapped mortgage holders.  But that never happened.  As we all know, Hillary was the one in favor of a homeowners bailout; Obama was not.  It makes Obama’s “win” even more suspect.

As you guys might know, I listen to books on my iPhone and rate my them by sponge count.  That is, the book has to be engrossing enough that I won’t even notice that I’m cleaning the kitchen.  I give this one 4.5 sponges.  It was easy to get engrossed in the book, so much so that I was laughing out loud while I was walking around Ikea.  But I was about 2/3’s of the way through the book before sentences like “And so it was that Ben Hockett found himself sitting in a pub called the Powder Monkey in the city of Exmouth in the county of Devon England, seeking a buyer of $205 million dollars of credit default swaps on the AA tranches of mezzanine sub-prime CDO’s” didn’t make me stop the audio and rewind.  So, if you’re new to mezzanine subprime tranches, expect some confusion at first.  Lewis does an excellent job of parsing it for the uninitiated but it’s still dense material.

I recommend the audible version in particular because it includes a 10 minute interview with the author at the end.  Lewis is pretty tough on the Obama administration.  He says it has made financial reform harder by hiring the guys who were most responsible for letting it the subprime bubble happen in the first place.  He has no respect for Geithner.  Lewis also thinks that Obama blew it when he took office.  He could have used the momentum and mandate he had in early 2009 to clean up the mess.  He’s now wasted his political capital on a lousy health care reform bill and has let the financial mess simmer, ready to boil over in another meltdown.  From what I can tell, it ain’t over yet, folks.

Highly recommended.

Note: I bought this book on my own and wasn’t asked to review it.

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Tuesday Ramblings plus a Caption This Photo!

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Hello my dearest Conflucians!  We’ve been doing a lot of money talk here at the blog.   Even though I don’t know jack about finance or economics like my more illustrious brethren here, I thought I’d add my two cents (about what we all have in our wallets and purses now) regarding the crisis.

So, anybody feel that Obama brand of Hope pouring through your soul?

Yeah, me neither.

Instead, I feel fear and cynicism all rolled up in a ball of “f__k you” and it’s the same kind I felt during the Bush 2.0 years.

Remember 7 years ago when Bush took office and brought us the Iraq war based on false information?  Yeah, and 7 years later we are still fighting that war.   BASED ON FALSE INFORMATION.   From my view at the bottom of the totem pole, I can’t shake the feeling that our financial meltdown is engineered the same exact way the Iraq War was.  And since it’s Tinfoil Tuesday (h/t to Stateofdisbelief), I’m betting that all this financial meltdown is an illusion made to appear like a crisis/catastrophe.  Here’s a quote from Conflucian Resident Economist DakiniKat that really stuck out at me:

The market seems to have stabilized for awhile as Ben Bernanke has been giving speeches and making appearances every where he can.  For those of you  that really want to take on empirical studies in Economics (econometrics and all), this is a part of a strategy he outlined in  Monetary Policy.

From my simplistic, peasant, lay-woman’s point of view, Wall Street is just some glorified Las Vegas gambling casino without the neon lights and flashy shows, although it very well could be.   It’s all speculation, opinion-based gambling.  For example, if there’s a rumor that corn farmers are scared that next years crops aren’t going to be as plentiful as last year, suddenly you see corn stock (pun intended) plummet and by the end of the day thousands of workers are laid off.   All based on speculation.  There’s no gradual or incremental adjustment to curtail the possible loss of corn, no riding out the storm, none of those things.  Actions are taken swiftly and severely in a matter of hours.  You punch in at 8 am, rumor gets released at 9:30am, stockbrokers go bezerk on the trading floor by 10:00am and you walk out with a pink slip by 5:00pm.   Who suffers?  You and me.  Who started the rumor?   No one will ever know (because no one is held accountable anymore), maybe a sugar ethanol lobbyist firm, who knows?   Then the fear/hope peddling cycle goes wash, rinse, repeat.

Yet in the same way Wall Street reacts to bad news via the government, all it takes are positive words and Wall Street shall be healed.  Here’s what Big Dawg said:

It used to be gospel in the nation’s power center: Presidents didn’t talk publicly about what the markets were doing. The notion was that anything a president said on this subject could be too easily misinterpreted, sending Wall Street into a dive.

Now, former President Clinton says he thinks President Barack Obama should talk more optimistically about the prospects that the nation will recover from its current deep economic woes.

Remember Obama’s quote regarding pressuring Congress to pass the stimulus package because a failure to act “could turn a crisis into a catastrophe.” President Obama learned that fearmongering got Bush 2.0 what he wanted, so he’s continuing the fear-peddling push.  Scare the masses into submission!  Worked for Stalin & Bush 2.0.  F__k Hope.

Color me a rainbow of stupid, but I ask myself the following questions:

  • If Wall Street is the gear that keeps America afloat since so many of our conglomerates which own everything trade publically, why do they depend on the government for morale-boosting if they are that powerful?
  • Why is it that Wall Street trading goes up when positive words are spewed by the President and the Cabinet, or it goes waaaay down when negative words are said, like “stimulus package?”
  • Who the f__k is really in control?  Is it truly Wall Street?  Who controls who?
  • And why is it that the only people that are benefiting from everything are banking conglomerates? And like MYIQ said below, where’s the money?
  • Bush 2.0’s agenda was clear as a bell.  Bush 2.0 started a war to get the oil speculators going batsh_t crazy and hike the price of gas and oil, which made Exxon-Mobil and other oil companies VERY happy while many families around the world choose between fuel or food.   But what is Obama’s agenda? Instead of oil, Obama is favoring the super elite global bankers.   What is it that global bankers want?
  • And what happens to us, the people who sweat and bleed to make this country the great place it should and could be?

Well, looks like Obama and the O Cabinet are heeding Big Dawg’s words, because some of the pesky peons that Hillary and Bill understand so well  (i.e. the people footing the bill a.k.a you and me) aren’t as drunk on the Hopium as Obama (and the media) would like.  Daily Telegraph from the UK has this to say:

Barack Obama goes upbeat on economy after popularity declines

President Barack Obama has launched an upbeat strategy over the economy in the face of approval ratings that have dipped below those of George W Bush at the same stage of his presidency.

As well as sounding more optimistic, the president will push more aggressively against Republican critics – painting them as belonging to a “party of no” – and sharply remind the public that the problems he has to cope with were very largely inherited from Mr Bush.

Mr Obama is changing his rhetorical course after criticism from fellow Democrats, including former President Bill Clinton, that he has sounded too negative in the first weeks of his presidency.

This week he will speak forcefully to Congress and the public about the need to pass his $3.6 trillion budget, which will double the national deficit, while stressing his belief that there is hope ahead.

The new president has already told an audience of business leaders that the economic crisis “is not as bad we think”. Over the weekend, Mr Obama assured investors of the soundness of investments in the US economy, after Chinese premier Wen Jiabao expressed his alarm about the safety of the “massive” number of US Treasury bonds Beijing was buying.

“There’s a reason why even in the midst of this economic crisis you’ve seen actual increases in investment flows here into the United States,” Mr Obama said. “I think it’s a recognition that the stability not only of our economic system, but also our political system, is extraordinary.

“I think that not just the Chinese government, but every investor, can have absolute confidence in the soundness of investments in the United States,” he added.

And of course, let’s make China super confident that their investment in the US of A is safe and sound.   Ni Hao, Wen Jiabao!  A-OK in the USA!  Mi casa es su casa, right Wen?

But wait, here comes Larry to add his input as well:

Lawrence Summers, chairman of the national economic council, exemplified the administration’s new approach with a populist swipe at AIG for paying in excess of $100 million in bonuses to staff, despite receiving $170 billion of taxpayers money.

“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at AIG is the most outrageous,” he said on ABC on Sunday.

Mr Summers has also said Americans are showing “too much fear” about the economy.

Ok, let me stop right there.  Larry Summers???  Populist???  Outraged over AIG getting bonus money from the bailout???  BWAHHAHAHA!!!!   Slap on the wrist for AIG!  Bad little bankers!   Americans showing too much fear?  So it’s now OUR FAULT we’re feeling fear?  BTW, China, it’s not our corrupt government giving banking conglomerates unlimited amounts of money that’s at fault, it’s our citizens freaking out over nothing!  Nothing to see here.

Earth to Larry Summers:  When you are at your job and 1/2 of the workers on your floor are suddenly asked to leave at the bat of an eye, wouldn’t you be afraid?   When you’ve scrimped and saved for retirement only to watch that 401K lose 10-15 years worth of investment, with businesses suddenly shutting down, industries coming to a screeching halt, wouldn’t you be afraid?   It’s like RD said this morning:  it’s financial terrorism.  And with oligarchal and misogynist assholes like Larry Summers (among the many in Obama’s cabinet), running this whole speculation game from his cushy office, betting on fear/hope and gambling away the future of America like a craps game in the Bellagio, I’m very frightened.  And there is nothing Larry or his puppet prince president can do or say anything to change that except saying the words “I RESIGN FROM OFFICE, EFFECTIVE IMMEDIATELY.”

Despite the control the financial sector has on the White House, Wall Street also controls the financial sanctity of our nation.  If all they need are inspiring words to invest and trade confidently for our nation to prosper, I hope that they can see these:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

  • Thomas Jefferson, (Attributed)
    3rd president of US (1743 – 1826)
  • Let Thomas Jefferson repeat that last part again:

    The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

    And with the 2 or 3 bailouts (I’ve lost count) – WE, THE PEOPLE, are the owners of these institutions.  We always had the power, it’s just that the perception buttons of hope/fear is what controls Wall Street and in turn, Wall Street controls our livelihoods and/or survival.

    And I’m f__cking tired of it.

    I was going to post Rage Against the Machine’s – “Killing in the Name,”  but for some reason the video’s not showing in the preview, so here it is.

    The financial machine  is killing the name of life, liberty and the pursuit of happiness.  I don’t know what to do next, except the only thing people do when they’ve had enough.   Protest.

    PS:  To the Irish Conflucians, Happy St. Pat’s Day!

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    Tuesday: What’s the hurry?

    The problem has been building for a long time.  Mortgage foreclosures have been on the rise for a couple of years now.  But precious little has been done about it except for the sanctimonious to shake their fingers at “those people” who got in over their heads.  Sure, there have been many people who built mansions they didn’t need and couldn’t afford or got in on flips that flopped.  But there were many other average Joe Bagodonuts for whom owning a home is a part of their lives they anticipate eagerly, like a sign of being an adult.  And there’s the mortgage interest deduction that you don’t get as a renter.  And home values only go up over time, right?

    Well, sure they do.  That is, if wages also go up over time.  But what if they don’t?  Eventually, the supply exceeds the demands of people who just get priced out.  Then there are the risks of an overvalued house, a mortgage that balloons, an income that does not and suddenly, everything is at risk. One unexpected illness or layoff can land people in foreclosure.

    But lawmakers didn’t worry overmuch about those “irresponsible” people who financed the American Dream with mortgages that were intended to turn a profit for someone else.  When the bank wants its money, average Joes have very few ways to plead for a little time or relief.  Bankruptcy is costly and punitive these days.  So when the foreclosure is iminent, many people leave everything behind and just walk away.  It’s just the way things were.  You win, you lose.  Those people were looooosers.  Too bad for them.  I got mine.

    But now that the banks themselves have fallen on hard times, the milk of human kindness is oozing from the administration.  Not one second can be spared to relieve them of their bad decision making.  Their anxiety must be relieved, quickly.  “Hurry, HURRY!  Something dreadful may happen.  Like Weapons of Mass Depression.”

    Hey, wait a minute.  If we’re headed for a Depression, then don’t we need to follow more tried and true formulas to get ourselves out?  Relief has to come from the bottom up, not just the top down.  Didn’t we debunk the “trickle down” theory during the Reagan/Bush era?  Voodoo economics, remember?

    So, what’s really the hurry, guys?  With the election a little more than 40 days away, what are we really being set up with?  Anglachel has some theories and scenarios in Partisans and Pigs.  It sounds like a trap.  It’s a schadenfreudelicious trap in some respects, alarming in others.  I keep thinking it couldn’t happen to a nicer Product.  The NYTimes has an article on the Republicans cranking up their righteous indignation, right on schedule.

    Meanwhile, Madame President of our Hearts, girds her loins and takes her case to the American people for a comprehensive, multi-faceted solution full of wonky goodness. With leadership and compassion, she’s remembering who really needs to be spared a dime. Besides, if you don’t have the time to do it right, when will you have time to do it over?