A Linked-In group to which I belong is discussing the not-very-burning question: what are you favorite hedge fund books?
Among those mentioned, in no particular order:
The Gathering Storm, ed.by Lee Robinson & Patrick Young (2010).
More Money than God, by Sebastian Mallaby (2011).
When Genius Failed, by Roger Lowenstein (2001).
Inventing Money, by Nicholas Dunbar (2000).
The Big Short, by Michael Lewis (2011).
Hedge Hunters by Katherine Burton (2007).
Julian Robertson: A Tiger in the land of Bulls and Bears by Daniel A. Strachman (2004).
Showing posts with label Michael Lewis. Show all posts
Showing posts with label Michael Lewis. Show all posts
13 August 2011
12 March 2011
The Crisis of 2008
Finally, I return to the task of filling out my book. You'll remember that my January 27 blog entry consisted of a brief passage from what may become the third chapter of my proposed book as represented in the table of contents I provided on December 10, 2010. Now I move to the fourth chapter, about the financial crisis that precipitated these reflections. Instead of any passage, I'll just offer the following reflections on it.
The mechanisms behind the real estate bubble of 2003-07 were much less novel or mysterious than they are sometimes made out to be.
There has been a good deal of talk about how the doomsday machinery involved a 'shadow banking' system on one hand, and new-fangled off-balance-sheet entities on the other. Michael Lewis' book, by focusing on entities like Harding Advisory (which has since filed a defamation lawsuit against him) contributes to this to some degree.
But the fact is that the key failures were at the old-fashioned broker-dealers, and for that matter their failures were to a very great degree hidden in plain sight -- on the balance sheets.
The focus on the supposed shadows is an error, or at any rate an imbalance in perceptions, because in outline that crisis was created by very familiar mechanisms. The following ingredients were key:
1) Absurd easy-money policies at the Fed
2) Rest of the world (notably China) continues to treat U.S. dollar as the pseudo-gold standard, enabling those absurd easy money policy, and
3) Easy money makes the big investment banks sloppy about the risks they take — risk managers get re-assigned to closets, etc.
4) Complicity of bond raters, bond insurers, accounting standard boards, and all the usual suspects.
The truth about ingredient (3) was right there on the balance sheets. Nor did Bear Stearns, Merrill Lynch, and the others need fronting by Chau and Harding Advisory to dig themselves (and Main Street) into this hole. If you believe that the price of a certain type of asset can only go up, you too are likely to dig yourself a hole.
Although some marginal operators may have helped bring a shovel or two to the construction site.
Some dates. On January 3-4, 2001, Greenspan's Fed cut both the federal funds rate and the discount rate. One important point about this, it did NOT happen at a regularly scheduled meeting of the Fed Open Market Committee (FOMC). Greenspan thought this important enough to arrange it between regular meetings.
Why? Because the dot-com boom, fueled in part by the rescue of LTCM's counterparties arranged under Fed auspices and its "Greenspan put," had burst in early 2000, creating a (mild) recession, and like an alcoholic in the pangs of a hangover AG reached for the dog with which he had bit us.
On the last day of that month, the FOMC did meet, and cut both rates again.
It again lowered both the discount and the fed funds rate in March 2001, and then again in April, and then again in May....
When the year began, the federal funds rate was 6.5%. In early September of that year, BEFORE the US was attacked, that rate was down to 3.5%. Down nearly to the half-way mark. In reaction to the attacks, they cut some more. At the end of the year, the funds rate was 1.25%.
Given this environment of easy credit, tjhere was going to be a bubble in some assets, real estate or commodities or CDOs or tulip bulbs or something, and concomitantly it was going to find its way to people who didn't know what they were doing with it. That is what easy credit does. This would have happened had there been no GSEs. Though of course there were, and the shape the crisis took had something to do with the pro-housing ideology of many on Capitol Hill, which Greenspan did his own little bit to encourage -- but we might as well give him a bye on that one. His part in the pro-housing ideology was probably fairly small.
Quote in this context the words of a Jacksonian Democrat in 1837. Newspaper editor William Leggett, denouncing Nicholas Biddle and the bankers who had followed his lead, writing: “[They] have used every art of cajolery and allurement to entice men to accept their proffered aid” which in turn led their borrowers to rush “upon all sorts of desperate adventures. They dug canals, where no commerce asked for the means of transportation; they opened roads, where no travelers desired to penetrate; and they built cities where there were none to inhabit.”
The result was that, inevitably, the bubble burst. The panic of 1837 that occasioned Leggett’s analysis led to a depression that continued until 1843. Leggett would not have been surprised by the opening years of the 21st century. He might have been surprised, though, that in the long period between his time and our own an ideology of home-ownership-for-all had developed that compounded the extent of such artificial booms and the damage that the inevitable bust then works.
The mechanisms behind the real estate bubble of 2003-07 were much less novel or mysterious than they are sometimes made out to be.
There has been a good deal of talk about how the doomsday machinery involved a 'shadow banking' system on one hand, and new-fangled off-balance-sheet entities on the other. Michael Lewis' book, by focusing on entities like Harding Advisory (which has since filed a defamation lawsuit against him) contributes to this to some degree.
But the fact is that the key failures were at the old-fashioned broker-dealers, and for that matter their failures were to a very great degree hidden in plain sight -- on the balance sheets.
The focus on the supposed shadows is an error, or at any rate an imbalance in perceptions, because in outline that crisis was created by very familiar mechanisms. The following ingredients were key:
1) Absurd easy-money policies at the Fed
2) Rest of the world (notably China) continues to treat U.S. dollar as the pseudo-gold standard, enabling those absurd easy money policy, and
3) Easy money makes the big investment banks sloppy about the risks they take — risk managers get re-assigned to closets, etc.
4) Complicity of bond raters, bond insurers, accounting standard boards, and all the usual suspects.
The truth about ingredient (3) was right there on the balance sheets. Nor did Bear Stearns, Merrill Lynch, and the others need fronting by Chau and Harding Advisory to dig themselves (and Main Street) into this hole. If you believe that the price of a certain type of asset can only go up, you too are likely to dig yourself a hole.
Although some marginal operators may have helped bring a shovel or two to the construction site.
Some dates. On January 3-4, 2001, Greenspan's Fed cut both the federal funds rate and the discount rate. One important point about this, it did NOT happen at a regularly scheduled meeting of the Fed Open Market Committee (FOMC). Greenspan thought this important enough to arrange it between regular meetings.
Why? Because the dot-com boom, fueled in part by the rescue of LTCM's counterparties arranged under Fed auspices and its "Greenspan put," had burst in early 2000, creating a (mild) recession, and like an alcoholic in the pangs of a hangover AG reached for the dog with which he had bit us.
On the last day of that month, the FOMC did meet, and cut both rates again.
It again lowered both the discount and the fed funds rate in March 2001, and then again in April, and then again in May....
When the year began, the federal funds rate was 6.5%. In early September of that year, BEFORE the US was attacked, that rate was down to 3.5%. Down nearly to the half-way mark. In reaction to the attacks, they cut some more. At the end of the year, the funds rate was 1.25%.
Given this environment of easy credit, tjhere was going to be a bubble in some assets, real estate or commodities or CDOs or tulip bulbs or something, and concomitantly it was going to find its way to people who didn't know what they were doing with it. That is what easy credit does. This would have happened had there been no GSEs. Though of course there were, and the shape the crisis took had something to do with the pro-housing ideology of many on Capitol Hill, which Greenspan did his own little bit to encourage -- but we might as well give him a bye on that one. His part in the pro-housing ideology was probably fairly small.
Quote in this context the words of a Jacksonian Democrat in 1837. Newspaper editor William Leggett, denouncing Nicholas Biddle and the bankers who had followed his lead, writing: “[They] have used every art of cajolery and allurement to entice men to accept their proffered aid” which in turn led their borrowers to rush “upon all sorts of desperate adventures. They dug canals, where no commerce asked for the means of transportation; they opened roads, where no travelers desired to penetrate; and they built cities where there were none to inhabit.”
The result was that, inevitably, the bubble burst. The panic of 1837 that occasioned Leggett’s analysis led to a depression that continued until 1843. Leggett would not have been surprised by the opening years of the 21st century. He might have been surprised, though, that in the long period between his time and our own an ideology of home-ownership-for-all had developed that compounded the extent of such artificial booms and the damage that the inevitable bust then works.
01 August 2010
Capital One
A passgae from Michael Lewis' book, The Big Short:
"Suddenly [in mid 2002] the market feared that Capital One wasn't actually smarter than anyone else in the industry about making loans but simply better at hiding losses. The regulators had discovered fraud, the market suspected, and were about to punish Capital One. Circumstantial evidence organized itself into what seemed like a damning circumstantial case, the SEC announced that it was investiogating the company's CFO, who had just resigned, for selling his shares in the company two months before the company announced its dispute with regulators and its share price collapsed."
Lewis cites this as a good example of the sort of situation in which a creative options play can flourish. A large move in stock price, one way or the other, seemed inevitable to Lewis' protagonists. With options, one can in essence bet against stasis, or against the minor incremental moves that cluster near the top of the Bell curve. One can bet in favor of one or the other tail of the curve, indifferent to which. This is precisely what Jamie Mai and Charlie Ledley did, quite successfully, in their alter ego as Cornwall Capital.
"Soon after Cornwall Capital laid their chips [pedantic editor -- "its chips"] on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 options position was worth $526,000. 'We were pretty fired up,' says Charlie."
This is a small point within the big picture of Lewis' book, but one I thought worth preserving here.
"Suddenly [in mid 2002] the market feared that Capital One wasn't actually smarter than anyone else in the industry about making loans but simply better at hiding losses. The regulators had discovered fraud, the market suspected, and were about to punish Capital One. Circumstantial evidence organized itself into what seemed like a damning circumstantial case, the SEC announced that it was investiogating the company's CFO, who had just resigned, for selling his shares in the company two months before the company announced its dispute with regulators and its share price collapsed."
Lewis cites this as a good example of the sort of situation in which a creative options play can flourish. A large move in stock price, one way or the other, seemed inevitable to Lewis' protagonists. With options, one can in essence bet against stasis, or against the minor incremental moves that cluster near the top of the Bell curve. One can bet in favor of one or the other tail of the curve, indifferent to which. This is precisely what Jamie Mai and Charlie Ledley did, quite successfully, in their alter ego as Cornwall Capital.
"Soon after Cornwall Capital laid their chips [pedantic editor -- "its chips"] on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 options position was worth $526,000. 'We were pretty fired up,' says Charlie."
This is a small point within the big picture of Lewis' book, but one I thought worth preserving here.
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