The Ant and the Grasshopper, 2008

Once upon a time there was an ant and a grasshopper. All through the summer the ant worked hard, storing up food for the winter. The grasshopper, meanwhile, lay about doing nothing.

When the winter came, the grasshopper was hungry. The ants had stored a lot of food, and were carefully measuring it out, day by day, eating only as much as they could afford, so that it would last until next summer.

The grasshopper then decided upon a plan of action. He bought a 51% share of the ants stock, then evicted the queen and 90% of the worker ants from the ant hive. He then split the hive into condos, and sold mortgages on those condos.

Then he securitized the mortgages into residential mortgage backed securities, which he got a tax break on since they were structured as real estate mortgage investment conduits. He then went to his broker-dealer at an investment bank and participated in the creation of a hybrid collateralized debt obligation, with 20% cash securities based upon his ant-hive RMBS, and 80% synthetic securities based on reference obligations of other ants in nearby fields.

He had his bank sell off most of the CDO to investors. He put the super senior tranche, which he kept, off balance-sheet in a structured investment vehicle, headquartered in the Cayman Islands. Then he got it insured with Pasture Insurance Group. Now, since the grashopper no longer had to worry about the CDO as a capital drain, he was now ahead of his regulatory capital requirements under the Basel II accord (and the Fed as well), and he had extra money to spend. So, he used the extra money to make a leveraged warehouse loan to a private equity firm that specialized in leveraged buyouts.

Grasshopper had also read in a trade journal that housing was about to blow up, so he quietly had a friend at a hedge fund buy credit default swaps against a bunch of CDO tranches, including some he had sold to investors as highly-rated securities. IE, he was betting that the investments he just sold to the field mice as AAA-rated safe investments, would crash. He also bought credit default swaps against the ant-hill he had just purchased.

With his credit rating, good reputation, and business contacts, he was now able to start his own private equity firm. He borrowed money in the overnight repo market and used it to buyout other ant hills. Some of them he merged, and some of them he just liquidated by evicting the ants and selling off the parts of the hill that could be sold, like the big stores of food the ants had built up all summer. He payed himself massive amounts of food as 'brokering fees', 'advisory fees', 'management fees', and so on.

The market eventually crashed, and the ant hills all went bankrupt, and massive numbers of homeless ants were wandering the winter landscape without any food. The grasshopper had a liquidity crisis, which became a solvency crisis. The Old Brown Dog, chairman of the Pasture Economic Committee, decided this presented a systemic risk, and bailed out the grasshopper's shell corporation. He fired the grasshopper and put him on P-Span, the Pasture TV network. The Dog berated the grasshopper for his lackadasical attitude towards regulation and fiscal prudence. The grasshopper apologized. Then after the TV show was over, the grasshopper and Dog met, laughed, shook each others hands, and slapped each others backs. The Grasshopper promised to keep giving money to the various political campaigns in the pastrue, and the Old Dog promised to do more bailouts of the grasshopper and his friends if they were needed.

The ants all moved in with their relatives and neighbors, like the dung beetles and earthworms. It was kind of annoying, because the earthworms had been housing speculators, buying up tracts with borrowed money and 'flipping' it for a profit. The ants found it a little peculiar that they would now have to be paying rent to the earthworms, but they were happy just to have a roof over their heads.

The ants new life was a little different from the old life. When they gathered food now, instead of storing it, they had to sell a bunch of it to pay the rent. But it turned out that prices they could sell for were much lower than they had been in the old days. This was because the next pasture over was using slave ants (which the grasshopper had invested in as well). Thus, the ants had a hard time making ends meet. During some parts of the year, they ran out of money and had to put their ant-food on an ant-credit card with a 30% interest rate. This drained even more money out of their accounts and made it even harder for them to save, as they had done in the old thrifty days of the past.

The grasshopper lost 80% of his wealth in the crash, but since he had gained about 1000% before the crash through short-selling and credit-default-swaps, he was able to still live a pretty good life. Still, it ate at him. He could have been a billionaire, but now, instead, he was only a millionaire. He gave up on his dream of having 4 yachs, and settled for just one.

The next season, the ants, back at work, met the grasshopper on the road.

'Hail fellows, well met!' said the grasshopper.

'Fuck you' said the ants.

The grasshopper then complained to his colleagues about the hostile atmosphere of 'class warfare' that had come to the pasture.

Bear Trap - review

Bear Trap, by Bill Bamberg and Andrew Spencer, is quite possibly the single strangest book on the financial crisis of 2008.

First, is the timing. It was written between March 2008, when Bear Stearns died, and September 2008, when Fannie, Freddie, Lehman, Merrill Lynch, and AIG all ceased to exist as independent corporations. When you read parts of the book that say '[hopefully the system is safe now and this will never happen again]', or "[Bear wasn't any worse off than Lehman, why didn't Lehman fail?]", it is a strange, strange feeling.

Second, is the author. He was a senior managing director at Bear Stearns, but he is definitely not a journalist or an author-type who was interested in a "just the facts ma'am" kind of narrative.

Instead, we are treated to a massive string of analogies and conspiracy theories backed up by the authors personal experience. It is almost like a 'stream of consciousness' work, full of conflicted statements and conflicting emotions, rationalizations and flailing attempts to make sense of the crumbling world around him. Digressions, connections of disparate pieces of information that you may find unconvincing, meanderings and mental wanderings that may leave you scratching your head.

You may find it helpful to read the other crisis books written by traders, namely A Colossal Failure of Common Sense, Lawrence McDonald and Patrick (Lehman) Diary of a Very Bad Year, Anonymous hedge fund manager and Keith Gessen (hedge fund). There is a certain sort of 'traderish' world view that these folks seem to share, even though they are extremely different individuals. It is hard to put a finger on it. But there is a vast gulf between these books and books written by journalist outsiders trying to give us objective, rational views of the events.

It may also prepare you for the sometimes rather disturbing world view that some traders have. The analogies in this book are particularly bizarre to the uninitiated. Bear is compared to Jesus, being sacrificed for the 'sins' of Wall Street. Bear is "just like" a man killed by Charles Manson's group, bleeding to death. Trading is like being at war, and managers of a table full of computer terminals are somehow leading troops into battle. Bear was like the Titanic. etc etc. The author does draw the line, though, when one of his fellow Bearies describes Bear as having been 'raped' by JP Morgan Chase. He describes that as unprofessional.

The reader is also treated to a multi-page breakdown of how 9/11 was linked to short-sellers. He does not go so far as to say it is 'an inside job'. But the markets, in this authors view, would appear to be mysterious, nebulous, full of dangerous conspiracies and unseen actors, whose identities are unknowable but whose intentions are full of malice.

As for the story about Bear itself, almost everything the author asserts is diametrically opposed to just about every other book written about Bear. This is part of what makes the book so fascinating. The author believes there was nothing wrong with Bear, that it was simply a rumor wave that destroyed it. He does not mention it's high leverage, which most other books do. He does not mention it's extremely high dependence on overnight repo funding, which many other books do. He does not mention the management problems, such as the demise of the risk-committee under Jimmy Cayne, which many other books do. He doesn't mention that Bear was one of the smaller investment banks, which other books do. He doesn't mention Bear's huge business in mortgage bonds, which other books do. He blames the media, and the government, and other banks, and etc, especially the rumor about Goldman Sachs refusing a $2 billion trade with Bear in March. He asserts the US Federal Reserve Bank should have bailed Bear out directly, without mentioning the fact that this would have been illegal under US law.

He also points out that Lehman and other investment banks weren't much different from Bear, and since they were all sound, then Bear was sound. For the reader in the post-2008 world, where Lehman failed, and Merrill, Goldman, and Morgan came close to failing, this is fascinating reading. You find yourself wondering, if you had read this book in mid 2008, would you have been able to see that these banks were all going down the drain just like Bear? Or would you have believed that Bear had been unfairly killed for no apparent reason?

The book tells you a lot more about the personalities of the author than it does about the crisis itself. This, in fact, is incredibly helpful to understand the way Wall Street worked. Most journalists seem to plug the traders and bankers into some kind of logical, human shaped mold where their thoughts are rational and their emotions are sensible. This misses the emotional and human nature of trading; namely, that a lot of it is based on uncertainty.

This is maybe the most valuable thing about this book. Reading the crisis books, one might get the sense that anyone could have seen the crash of late 2008 coming. And yet, here we have a man with a great deal of financial derivatives experience, and a voraciously curious intellect, who was, even in mid-2008, completely missing what was about to happen to the world in late 2008. And in his descriptions of that time, which include confusion, discombobulation, and all the other human weaknesses, maybe we can remember that things weren't as simple back then as they seem now.

The Great American Stickup - review

The Great American Stickup by Robert Scheer is a long winded rant about the financial crisis of 2008.

It is full of interesting information, if you can get past the name calling, endless diatribe-laden digressions, and pointless repetition. IE, at one point, an entire paragraph has been re-quoted, ver-batim, that had just appeared a few chapters previously.

It might remind you of Glenn Beck (You know who else deregulated derivatives?) or Keith Olbermann (This, sir, shall not stand!). The work is more like Matt Taibi, and less like the financial journalists that the author continuously insults. Of course, the author cites those same financial journalists article's on every other page of his book.

Don't get me wrong. It's an interesting and unique book about the crisis of 2008. You will probably learn something that has not been covered in the other crisis books. For example, the book has a fascinating description of Phil and Wendy Gramm's place in CFMA and FSMA. He was in Congress, she was in the Executive branch at the CFTC.

There is also a lot of interesting information about Robert 'Bob' Rubin, and how he moved from Goldman Sachs to the Clinton Whitehouse, and then on to Citigroup, which only formed because it was given a pass on the Glass-Steagall law of the 1930s.

So, if you are interested in the crisis, you will probably like this book. Just don't forget your salt shaker.

Weird Fact:

Robert Rubin called up the Secretary of the Treasury to try to get him to tell a ratings agency to not downgrade a company, which would save Citigroup a large amount of money. Then he tries to explain that he didn't make the call in order to save Citigroup, he did it for the good of the financial system.

Complicit - review

Complicit, by Mark Gilbert, is a nice short book on the crisis of 2008, with a European perspective. It clocks in under 200 pages, a welcome relief from the ordinary massive crisis tome.

It covers topics that are usually skipped over in the American crisis books. For example, the first CDO problems in the early 2000s, the UK mortgage crisis of the 90s, Northern Rock, CPDOs, the British central bank, the European commercial 'high yield' bond market, etc.

The main shortcoming is that it has no citations or references, other than if the author cites something specifically in the text. Also, no acknowledgments page! How can I feel that this is a proper book, if the author doesn't thank their dog and cat, their gradeschool teacher, etc?

Weird facts:

The UK had a mortgage boom/bust in the 90s, with many of the same characteristics as the US boom/bust.

Karl Marx predicted (in Das Kapital) that consumer debt would overwhelm banks, which would have to be nationalized, and he viewed this as an important step on the 'road' to communism.

google autocomplete game - celebrity edition

Google fills in search terms for you, before you complete typing them. How does it choose what to fill with? It uses the most common phrases that others have searched for.

Example:

Type in 'Sean Penn is'

Here are the results.

Sean Penn is
a douchebag
a traitor
a communist
an idiot
a homophobe

Oh, also,
Sean Penn is dating.


ha ha i guess eomeone out there still likes him.

Now for the president of France.

Sarkozy is a
jew
idiot
pirate
fool
clown
socialist
douche
-wesome

Wow, just wow.

Google makes me weep for humanity.