What Yves said

Yves Smith at Naked Capitalism has a long post about former Goldman Sachs Vice President Greg Smith’s new book on the company.  Smith’s book, Why I Left Goldman Sachs, describes the atmosphere at Goldman and how vulnerable clients are in an environment when making a deal and the gigantic fees that come with it is more important than selling a complicated and flawed financial instrument to unsophisticated clients.  Yves gives her own insider view of Goldman and why the company has gone ballistic over Smith’s book while at the same time insisting that Smith was too junior to know what was going on.  The money quote comes at the end of her piece:

Goldman has such a strongly developed internal culture that even a change at the top would take a while to percolate through, and Smith appears to have seen the impact.

I can relate.  Those of us in the lower rungs of the pharmaceutical industry witnessed a similar phenomenon.  At one point, we were governed by scientists and MDs who rose through the ranks to head the companies.  But that started to change radically in the 90’s during the era of many mergers and acquisitions and it really accelerated in the 2000s.  The financiers began to have more influence at about that time and we read accounts of CEOs under fire from analysts to cut research and outsource heavily. In retrospect, it looks like they were setting up pharma companies for their next M&A deals but eventually, all of the restructuring and Wall Street culture of constant change tricked downwards. The performance and compensation system changed, adopting Jack Welch’s program that was designed for GE salespeople, until it resembled Enron with even the lowly lab rats ranking each other, hoarding resources and actively engaging in cutthroat activities in order to avoid the ax.  And that, my friends, is about the worst thing you can do to a research organization.  Collaboration is essential to research.  By the time Wall Street values had trickled down to our level, we could see that they were more suited to the sales executives but in the labs were alien, out of place and destructive.  When it got to the point that lab equipment repairs had to be justified and we were forced to charge other departments for services we used to provide as part of our project collaboration, it was over.

So, I have no doubt that whatever Smith witnessed at Goldman was significant, profound and deeply disturbing.  It may be a similar situation where the business has begun to run amok and eat itself from the inside out, where policies no longer make sense and where the bulk of his time was spent pushing the competition in the next office off of his pedestal.  At that point, it’s no longer a functional business.  It’s a game of winner take all musical chairs.

Yves speculates on the reasons why Smith doesn’t spill all of the beans on Goldman or is even as detailed in his account as someone like Michael Lewis.  Some of those reasons include his relatively low level and institutional omertà.  But another possible reason is that there are few former insiders, even low level insiders like Michael Lewis who can write well on what are pretty complex financial instruments and make them intelligible to the average consumer.   I loved Lewis’s book The Big Short but it wasn’t until I was halfway through the book before I understood enough of it that I saw the humor in some of Lewis’s passages.  Now I know what Wall Street was up to but I doubt that even many Wall Street analysts truly understand the math and models behind their dynamic proprietary programs.  If Greg Smith understands them, there’s probably a lot he can’t divulge without  getting the Goldman legal department to bear down on him.

In any case, Smith’s book sounds interesting but I probably won’t be adding this one to my audible queue.  It’s not because I don’t think it is a worthy read or can’t learn more.  It’s just that through Karen Ho’s book Liquidated, and Lewis’s The Big Short and Boomerang, I think I get the picture well enough to know what went wrong.  But if you don’t have the time or patience for more than just a high level summary. it sounds like Greg Smith’s book might be just the horror story to keep you up on a cold and stormy October evening.

Ira Glass asks a good question

In today’s NYTimes By the Book post, Ira Glass says  he likes to read non-fiction, and that Michael Lewis’ book on the financial collapse of 2008, The Big Short, is one of his favorite books.  (Here’s my review.)  I like his selections but I’m a little surprised that he didn’t have his nose stuck in a book when he was a kid like I did. I just assumed Glass was more well read than I am but maybe he’s just a whole lot smarter.  Go figure.

Then the interviewer asks him “What’s the one book you wish someone else would write?”. And Ira says what’s been on all of our minds lately:

Could someone please write a book explaining why the Democratic Party and its allies are so much less effective at crafting a message and having a vision than their Republican counterparts? What a bunch of incompetents the Dems seem like. Most people don’t even understand the health care policy they passed, much less like it. Ditto the financial reform. Or the stimulus. Some of the basic tasks of politics — like choosing and crafting a message — they just seem uninterested in.

I remember reading in The Times that as soon as Obama won, the Republicans were scheming about how they’d turn it around for the next election, and came up with the plan that won them the House, and wondered, did the House Dems even hold a similar meeting? Kurt Eichenwald! Mark Bowden! John Heilemann and Mark Halperin! I’ll pre-order today.

We’ve been wrestling with that question for four years and still don’t have an answer.  The closest I can come to it is that Democrats represent a lot of competing interests and currently will not nominate a leader that will unite them around some common themes with the kind of energy they need.  And because they opted to go the easy route, ie “take the money and run”, they’ve been co-opted by the very same people they need to craft a message against.

But even if you can get a unifying message together, you still need to hire someone good to deliver it and Democrats have a nasty habit of picking candidates who are cool “intellectual” types who don’t look like they want to get their hands dirty practicing politics.  The fact that so many Democrats hate the last Democratic president who was actually a master politician tells you everything you need to know about why the Democrats have voluntarily hobbled themselves.  I’ve suggested a big, unibrowed, Genghis Khan, FDR style Democrat.  Maybe someone like Ed Rendell.  But Hillary would do just as well.  As James Carville once said of Hillary, if she gave one of her balls to Obama, they’d both have two.  But the secret is to get a politician who likes politics and doesn’t think that being political is beneath them.

So, competing interests, co-option, lack of unifying principles and strong leadership.  That’s my theory and I’m sticking with it.

Forget Heileman and Halperin, please. {{rolling eyes}} I’ll write the damn book.  Just offer me an advance.

Does anyone else want to take a crack at this?

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Republican strategy meeting post election 2008:

Was Obama Wall Street’s BIGGEST Short?

Blankfein (left) and Jamie Dimon (center) at the White House, March 2009

You gotta love Lloyd Blankfein for finally telling it like it is.  Wall Street thinks we’re all suckers.  If you don’t specifically ask whether a security or CDO is crap, shitty or junk, they have no obligation to tell you.  That’s not their job.  They just sell the stuff.  It’s the 2010 version of “I just take orders”.  There’s got to be another Milgram experiment just waiting for a post doc in yesterday’s hearings.

Here are some gems from Lloyd:

Levin asked Blankfein if Goldman has to disclose to investors in securities it sells that the firm plans to take and keep the short side of the transaction.

“I don’t think we have to tell them,” the chief executive replied. In addition, he said that when underwriting a securities offering, Goldman has an obligation to conduct thorough due diligence and provide full disclosure of the assets and risks involved in the deal.

Mortgage-related securities that Goldman underwrote and sold delivered the specific exposure that clients wanted, Blankfein explained. “There are a lot of opinions about how a security will perform against the market it’s in.

“Investors we’re dealing with on the long or the short side know what they want,” he continued. “If they ask the salesperson their opinion, they have a duty of honesty. But we’re selling securities all the time that are weak. The same securities that were the subject of those comments can probably be bought today for pennies on the dollar.”

and this from the NY Times:

Mr. Blankfein was asked repeatedly whether Goldman sold securities that it also bet against, and whether Goldman treated those clients properly.

“You say betting against,” Mr. Blankfein said in a lengthy exchange. But he said the people who were coming to Goldman for risk in the housing market got just that: exposure to the housing market. “The unfortunate thing,” he said, “is that the housing market went south very quickly.”

Senator Levin pressed Mr. Blankfein again on whether the his customers should know what Goldman workers think of deals they are selling, and Mr. Blankfein reiterated his position that sophisticated investors should be allowed to buy what they want.

Mr. Blankfein was also pressed on the deal at the center of the S.E.C. case. He said the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.”

Risk.  That’s what Goldman Sachs was selling.  It was all wrapped up in a pretty fiction of established Wall Street investment houses, where bankers arrive at their offices in chauffered limos and eat in luxurious dining facilities and work out in gold plated gyms.  It all looks very clubby.  But the reality was that these people were running a giant Monte Carlo casino using the hard earned retirement funds of carpenters and other working class people.

Behind the plush digs and $600 suits and cottages on The Pond are a bunch of guys with serious gambling addictions.

Sometime back in 2006 as housing prices peaked and started to decline some of them must have started to get a little concerned.  In fact, Michael Lewis, who wrote The Big Short, says that outsiders looking in had the bankers’ number in 2003-2004.  It was March 2007 when the money started to drain away in earnest.

So, when did Wall Street decide to short the presidential election?

Think about it:  Many of the people on Wall Street should be at Gambler’s Anonymous.  in 2007, they were about to lose everything if they couldn’t find suckers to play their games and cover their bets.  Politics could have had a big influence on how much of a hit they actually had to take.  Charlie Ledley, the garage-band head fund guy with a conscience who actually tried to explain the bets to the SEC, was concerned with his own short positions.  He naively thought that if the federal government came to the rescue of homeowners, his CDS’s would be worthless.  As it turned out, the government bailed out the banks instead so Charlie made out big.  The CDO’s are still crap.

But if you are a Wall Street banker, you have to account for all kinds of possibilities.  Picture the following three scenarios:

1.) A Republican wins.  His party saw what happened during the last financial meltdown 80 years ago.  That New Deal thing was a disaster for his party.  He’s not going to make that mistake.  Screw Keynes, enter The Great Depression 2.0.  Oddly, Wall Street is probably not too keen on this idea.  You can’t play the game if you don’t have easy marks on the other side of the bet.  Depressions severely depress the number of easy marks.

2.) Democrat #1 wins.  But she’s too much of a New Dealer type.  She’s got mortgage bailout written all over her.  That would mean regulation and mortgages will be adjusted and bankers will have to take a loss.  That’s too much reality.  She’s like frickin’ rehab.  And besides, there’s always that remote possibility that the people who took out “liar’s loans” will suddenly have stupendous wage increases just in the nick of time when their 2 year teaser rate is up.  It could happen.  So, no, Democrat #1 is out.

3.) Democrat #2 is narcissistic one-trick pony with a pregnant mistress.  Nominating him means the Republican wins.  Moving on.

4.) Democrat #3.  Ooooo, this one is intriguing.  Did Wall Street court him or did he court Wall Street?  Recklessly ambitious type.  Muy simpatico.  He certainly looks like he could fit into Wall Street.  He wants to “form multi-disciplinary task forces to re-engineer our core processes so that we’re a world class organization”.  He speaks their language.  It’s meaningless, of course, and they all know that way down deep inside.  It’s code.  He’ll scratch their backs if they scratch his, to the tune of $900K in campaign contributions from Goldman Sachs employees alone.  With Dem #3, it will be an exciting spin of the wheel.  They’ll get close to the edge, probably a little too close for comfort, but in the end, they’ll be able to walk away with big profits, big bonuses and they can keep on playing.  This guy is an enabler.  Double down.

Obama sure made a lot of campaign money from Wall Street.  His small donors accounted for something like 30% of his campaign stash.  You don’t get a cool billion to run for president without making a lot of banker friends.  It was their biggest short.

In light of that very real possibility, can we on the left finally dispense with the idea that Obama was the Change! agent?  Lots of money will get you a very good PR firm with all of the marketing, astroturfing and social engineering you can eat.  Maybe he’s not the civil rights hero, politically brilliant, 11 dimensional chess playing, post partisan Messiah everyone thought he was.  Maybe he was just the best hedge Wall Street ever made and nothing more than that.  You can stop pinning your hopes and dreams on him.

As Lloyd would say, “the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.””

The Obots bought it and made suckers of us all.

Extra: Michael Lewis has a lengthy piece in Slate where he plays his tiny violin for the bond market traders who are suddenly getting blamed for everything they do.

Simon Johnson at BaselineScenario.com has a piece about how some parts of Europe have slipped into “emerging market” status overnight and how the rest of the world is turning their eyes to Obama for comfort and guidance to stem the ensuing panic.  Good luck with that.

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.