Two fine finance reporters, Bethany McLean and Joe Nocera, collaborated on a Merrill Lynch-centric re-working of the story of the financial crisis of 2008, and the result appears in the November issue of Vanity Fair.
McLean has previously distinguished herself by getting the Enron story right before anyone else. She wrote "Is Enron Overpriced," which ran in FORTUNE on March 2001.
That story began with a meditation on the term "it," as in the It Girl in Hollywood talk, or "the It Stock" for Enron at the turn of the millennium. The story proceeded to this:
And the numbers that Enron does present are often extremely complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. "If you figure it out, let me know," laughs credit analyst Todd Shipman at S&P. "Do you have a year?" asks Ralph Pellecchia, Fitch's credit analyst, in response to the same question.
Nocera? Well, I wrote of him in this very space quite recently and before I knew anything of his collaboration with McLean.
Anyway, you can use the first link above to click on their Vanity Fair article. Please do.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
06 November 2010
24 August 2008
The Monty Hall Puzzle, continued
Most people, when confronted with the story in yesterday's entry, will answer that there is no reason to change, that the contestant might as well stick with curtain A. After all, there are two unopened curtains. The big prize is behind one of them. The odds that it is behind curtain number one are, then, 0.50, or 1:2, so the rational contestant is indifferent as between one curtain and the other.
Conditional probability theory, though, looks carefully at what Monty Hall's own actions have already told us. When the contestant made her first choice her odds of having picked the right curtain were: one out of three. The chance that she had made the wrong choice then, was: two out of three. What Mr. Hall has told us hasn't changed the chance that her initial choice was wrong at all—it has concentrated that chance—which is now embodied, so to speak, by curtain B. Why? Because Mr. Hall knows where the $1 million is, and surely wouldn't have opened curtain three if he knew it was there. So his choice to open the one that he did was non-random.
At any rate, conditional probability theory says that given the fact that Monty now has eliminated curtain C the rational contestant will pick curtain B, giving herself a two-thirds chance of winning. Don't be surprised if this is counter-intuitive and even disorienting. It has that effect on a lot of people. As a psychological matter, if she picked curtain A, and Monty opened curtain C, she might well take that as a confirming event ("so far, what has happened is consistent with my initial guess") which would make her likely to dig in her heels and stick with it, theory be damned!
I mention it because conditional probability theory has important consequences in the world of finance and may have something to tell us about last year's credit crunch. But I'll give the connection some thought before pontificating further,
Conditional probability theory, though, looks carefully at what Monty Hall's own actions have already told us. When the contestant made her first choice her odds of having picked the right curtain were: one out of three. The chance that she had made the wrong choice then, was: two out of three. What Mr. Hall has told us hasn't changed the chance that her initial choice was wrong at all—it has concentrated that chance—which is now embodied, so to speak, by curtain B. Why? Because Mr. Hall knows where the $1 million is, and surely wouldn't have opened curtain three if he knew it was there. So his choice to open the one that he did was non-random.
At any rate, conditional probability theory says that given the fact that Monty now has eliminated curtain C the rational contestant will pick curtain B, giving herself a two-thirds chance of winning. Don't be surprised if this is counter-intuitive and even disorienting. It has that effect on a lot of people. As a psychological matter, if she picked curtain A, and Monty opened curtain C, she might well take that as a confirming event ("so far, what has happened is consistent with my initial guess") which would make her likely to dig in her heels and stick with it, theory be damned!
I mention it because conditional probability theory has important consequences in the world of finance and may have something to tell us about last year's credit crunch. But I'll give the connection some thought before pontificating further,
18 April 2008
Wikipedian Puppets
More on wikipedia and and on yours truly.
One regular source of dispute on the wikipedia talk pages is the urgent question, "who is a sock puppet of whom?"
When editors (anyone with an internet connection and an interest in a question under discussion is an 'editor') dispute issues on the Talk pages, it frequently happens that one will try to gang up on the others by pretending to be two or more different people. When Joe says, "we should change the opening sentence of this article," but Moe replies, "No, we should leave that sentence as it is," then Joe creates Larry who says, "Joe is right, the sentence needs more work."
Ideally, that fools Moe into thinking, "gee, if Joe and this other fellow agree, maybe I'm wrong."
That's the simple version, there are endless variants. But in the case I've posited, Larry is a "sock puppet" of Joe.
The accusation "Joe uses sock puppetry" can be a devastating one, and the Joes of wikipedia resist, causing endless brouhahas.
In one endless, or just endless-seeming, debate over alleged socks, somebody wrote that two or more regular posters frequently use the otherwise uncommon phrase "putting lipstick on a pig," which sounds so idiosyncratic that they just must be the same person in reality.
Wiser heads prevailed on that proposed test, though. "Yes, the sampling problem will exist for any sort of style analysis. For example ... the expression 'lipstick on a pig' is not all that uncommon, and it would be hard (maybe impossible) to determine what percentage of editors at large use that expression."
Indeed. It was to prove this point that one of the warring editors cited the work of one Christopher Faille, specifically a book review I wrote in July 2006.
The review was of a book written by finance journalist Gary Weiss, called WALL STREET VERSUS AMERICA. My review, as it happens, was titled Lipstick Brands Change, the Pig's the Same.
As it happens, Gary Weiss himself (the biographical wiki article about him, as well as references to him in various other articles on matters discussed in that book) is the center of much wikipedia controversy. Controversies over what the articles should say quickly become controversies over who is using socks and who is falsely accusing who else of using socks. So the fact that my review was a review of that particular book seems to have made it especially valuable in spreading recognition that "pig/lipstick" is a fairly common trope among those of us who follow and write about financial matters. Putting the idea that sharing this trope makes one editor the puppet of another ... back in the sty where it belongs.
I'm glad to help. Cash will be accepted in lieu of more symbolic expressions of gratitude.
Those of you to whom this is all Greek -- you're missing nothing. Those who think I'm making it all up in the desperate need to create a bogus entry for my blog, your suspicions are easily put to rest.
One regular source of dispute on the wikipedia talk pages is the urgent question, "who is a sock puppet of whom?"
When editors (anyone with an internet connection and an interest in a question under discussion is an 'editor') dispute issues on the Talk pages, it frequently happens that one will try to gang up on the others by pretending to be two or more different people. When Joe says, "we should change the opening sentence of this article," but Moe replies, "No, we should leave that sentence as it is," then Joe creates Larry who says, "Joe is right, the sentence needs more work."
Ideally, that fools Moe into thinking, "gee, if Joe and this other fellow agree, maybe I'm wrong."
That's the simple version, there are endless variants. But in the case I've posited, Larry is a "sock puppet" of Joe.
The accusation "Joe uses sock puppetry" can be a devastating one, and the Joes of wikipedia resist, causing endless brouhahas.
In one endless, or just endless-seeming, debate over alleged socks, somebody wrote that two or more regular posters frequently use the otherwise uncommon phrase "putting lipstick on a pig," which sounds so idiosyncratic that they just must be the same person in reality.
Wiser heads prevailed on that proposed test, though. "Yes, the sampling problem will exist for any sort of style analysis. For example ... the expression 'lipstick on a pig' is not all that uncommon, and it would be hard (maybe impossible) to determine what percentage of editors at large use that expression."
Indeed. It was to prove this point that one of the warring editors cited the work of one Christopher Faille, specifically a book review I wrote in July 2006.
The review was of a book written by finance journalist Gary Weiss, called WALL STREET VERSUS AMERICA. My review, as it happens, was titled Lipstick Brands Change, the Pig's the Same.
As it happens, Gary Weiss himself (the biographical wiki article about him, as well as references to him in various other articles on matters discussed in that book) is the center of much wikipedia controversy. Controversies over what the articles should say quickly become controversies over who is using socks and who is falsely accusing who else of using socks. So the fact that my review was a review of that particular book seems to have made it especially valuable in spreading recognition that "pig/lipstick" is a fairly common trope among those of us who follow and write about financial matters. Putting the idea that sharing this trope makes one editor the puppet of another ... back in the sty where it belongs.
I'm glad to help. Cash will be accepted in lieu of more symbolic expressions of gratitude.
Those of you to whom this is all Greek -- you're missing nothing. Those who think I'm making it all up in the desperate need to create a bogus entry for my blog, your suspicions are easily put to rest.
27 March 2008
FOB and the accountants
There's nothing my readers love more than a good accounting question, eh? Sex, drugs, and accountancy -- the three crucial ingredients of a party.
Oh, and somebody should put on some music too.
Anyway, here's a simple one. If a company accepts prepayment for some service, can it immediately book the cash as "revenue"?
Answer: no. From the point of view of financial accounting, the cash is just cash. It becomes "revenue" only when and as it's earned.
Suppose company X gets its money in September for work it will do in October then? When does it receive the revenue for the purpose of its books? Answer: in the fourth quarter, not in the third.
Suppose the work consists of delivering a product to a customer? Suppose that the customer is far away, and the product can be delivered there only by a truck that will take more than a day to get from company X's warehouse to the customer? And suppose this delivery takes place right on the cusp of a new quarter?
Then we might have to interpret contracts between company X and its trucker to know our answer. If our company loaded the goods onto the truck on September 30, and they received their destination on October 2: third quarter or fourth?
What do the initials "FOB" stand for anyway, and what does that have to do with the above?
Some few cognoscenti will recognize the real-life story I've just stylized. But for most of you, this just sounds like a rather random train of thought. And there I will leave it. My mind just keeps on trucking, whatever fiscal quarter we're in, and whether it ever makes a point, or a delivery, is best left to the judgment of the medical profession.
Oh, and somebody should put on some music too.
Anyway, here's a simple one. If a company accepts prepayment for some service, can it immediately book the cash as "revenue"?
Answer: no. From the point of view of financial accounting, the cash is just cash. It becomes "revenue" only when and as it's earned.
Suppose company X gets its money in September for work it will do in October then? When does it receive the revenue for the purpose of its books? Answer: in the fourth quarter, not in the third.
Suppose the work consists of delivering a product to a customer? Suppose that the customer is far away, and the product can be delivered there only by a truck that will take more than a day to get from company X's warehouse to the customer? And suppose this delivery takes place right on the cusp of a new quarter?
Then we might have to interpret contracts between company X and its trucker to know our answer. If our company loaded the goods onto the truck on September 30, and they received their destination on October 2: third quarter or fourth?
What do the initials "FOB" stand for anyway, and what does that have to do with the above?
Some few cognoscenti will recognize the real-life story I've just stylized. But for most of you, this just sounds like a rather random train of thought. And there I will leave it. My mind just keeps on trucking, whatever fiscal quarter we're in, and whether it ever makes a point, or a delivery, is best left to the judgment of the medical profession.
30 January 2008
Chapter Five
This will conclude my reading of the Nicky Marsh book. Her final chapter involves the portrayal of women within the financial world in contemporary Brit fiction.
One of the novels featured here is Allison Pearson's I Don't Know How She Does It (2002). A footnote tells us that Miramax bought the rights to this novel, in the hope it would prve the next Bridget Jones' Diary.
Bridget Jones, though, was an assistant at a book publisher. Pearson's protagonist Kate Reddy, is a hedge fund manager. She has a rather grandiose view of what it means for a woman at the start of the 21st century to manage a hedge fund, thinking: "We are the foundation stones and the females who come after us will scarcely give us a second thought but they will walk on our bones."
The book doesn't have a lot of the detailed accounts of particular trades that get into the sort of "financial thrillers" Marsh discussed in her fourth chapter. Not only doesn't it contain many such passages but, as Marsh puts it, the book "resists" such passages.
"The real dramas in the novel occur not around the fluctuations of currencies or stocks but around the blurry definitions of care and responsibility that economics place upon the people who drive Reddy's car, wash Reddy's clothes, and, most crucially, look after her children."
So (to wrap this up) a bankers life, or a hedge fund managers life, can give rise to drama and literature, just so long as one takes it as a life. And not just as a matter of staring at a screen, or supervising people who stare at screens.
One of the novels featured here is Allison Pearson's I Don't Know How She Does It (2002). A footnote tells us that Miramax bought the rights to this novel, in the hope it would prve the next Bridget Jones' Diary.
Bridget Jones, though, was an assistant at a book publisher. Pearson's protagonist Kate Reddy, is a hedge fund manager. She has a rather grandiose view of what it means for a woman at the start of the 21st century to manage a hedge fund, thinking: "We are the foundation stones and the females who come after us will scarcely give us a second thought but they will walk on our bones."
The book doesn't have a lot of the detailed accounts of particular trades that get into the sort of "financial thrillers" Marsh discussed in her fourth chapter. Not only doesn't it contain many such passages but, as Marsh puts it, the book "resists" such passages.
"The real dramas in the novel occur not around the fluctuations of currencies or stocks but around the blurry definitions of care and responsibility that economics place upon the people who drive Reddy's car, wash Reddy's clothes, and, most crucially, look after her children."
So (to wrap this up) a bankers life, or a hedge fund managers life, can give rise to drama and literature, just so long as one takes it as a life. And not just as a matter of staring at a screen, or supervising people who stare at screens.
25 January 2008
Nobody Knows Nuttin' : Latest Proof
Now, with the benefit of hindsight, we can understand some of the volatility of the world's stock exchanges in recent days.
The US markets were closed for M.L. King's birthday on Monday, but the rest of the world's exchanges took steep dives. Then when the markets in the US re-opened on Tuesday morning, they started sharply lower, regaining some of the lost ground as the day went on. On Tuesday, again, sharp loss in the morning, this time with a firm rally in the afternoon -- regaining more than had been lost -- ending the day above Friday's close.
What was going on? There was no dearth of explanations. It involved bond insurers, liquidity problems, jobs statistics, reactions to developments in the US presidential campaign. Phases of the moon and the death of Heath Ledger were only rarely invoked as explanations, but were on standby.
Meanwhile, though, in Paris, officials of that country's second largest bank, an institution that has been around since the era when Paris was briefly run by the communards, were desperately trying to close out the positions of a rogue trader who had lost about 5 billion euros of their money.
The timing and the scale both look right for this to be cause and effect. The Société Générale employee, Jerome Kerviel, had been making huge unauthorized and very speculative trades, and had evaded the bank's risk-management controls by hacking its computer system. Its an old story, though it seldom happens on this scale. Trader hopes to cover his initial losses by doubling down. Heck, if I just lost $100 on a coin toss, I should bet $200 next time, shouldn't I? I could win my money back and still book a gain. If I lose again, so my losses are $300, I can always bet $400 on the third try. Lose again, bet $800. Sooner or later, I've got to win.
Well, no. There is no law of probability that guarantees that even a talented hacker can dig himself out of such a [w]hole. The losing streak can continue until your bankroll is gone.
In this case, it continued until he tried something fancier than usual in his hacking, and raised red flags. Bank officials questioned him throughout the day Saturday.
Monday ... well, you know the rest. Extreme volatility on all those non-US markets. The bank made no official statement on the matter until yesterday, Thursday.
Still, the incident proves that markets are hard to fool. You can fool some of the traders some of the time, and your bank bosses for a long time, but world markets figure it out and start to mark prices down accordingly.
This is why nobody knows nuttin. Even the brightest of us is just a single neuron within the brain which is the world financial market as a whole.
The US markets were closed for M.L. King's birthday on Monday, but the rest of the world's exchanges took steep dives. Then when the markets in the US re-opened on Tuesday morning, they started sharply lower, regaining some of the lost ground as the day went on. On Tuesday, again, sharp loss in the morning, this time with a firm rally in the afternoon -- regaining more than had been lost -- ending the day above Friday's close.
What was going on? There was no dearth of explanations. It involved bond insurers, liquidity problems, jobs statistics, reactions to developments in the US presidential campaign. Phases of the moon and the death of Heath Ledger were only rarely invoked as explanations, but were on standby.
Meanwhile, though, in Paris, officials of that country's second largest bank, an institution that has been around since the era when Paris was briefly run by the communards, were desperately trying to close out the positions of a rogue trader who had lost about 5 billion euros of their money.
The timing and the scale both look right for this to be cause and effect. The Société Générale employee, Jerome Kerviel, had been making huge unauthorized and very speculative trades, and had evaded the bank's risk-management controls by hacking its computer system. Its an old story, though it seldom happens on this scale. Trader hopes to cover his initial losses by doubling down. Heck, if I just lost $100 on a coin toss, I should bet $200 next time, shouldn't I? I could win my money back and still book a gain. If I lose again, so my losses are $300, I can always bet $400 on the third try. Lose again, bet $800. Sooner or later, I've got to win.
Well, no. There is no law of probability that guarantees that even a talented hacker can dig himself out of such a [w]hole. The losing streak can continue until your bankroll is gone.
In this case, it continued until he tried something fancier than usual in his hacking, and raised red flags. Bank officials questioned him throughout the day Saturday.
Monday ... well, you know the rest. Extreme volatility on all those non-US markets. The bank made no official statement on the matter until yesterday, Thursday.
Still, the incident proves that markets are hard to fool. You can fool some of the traders some of the time, and your bank bosses for a long time, but world markets figure it out and start to mark prices down accordingly.
This is why nobody knows nuttin. Even the brightest of us is just a single neuron within the brain which is the world financial market as a whole.
10 January 2008
Money in Fiction
I've e-mailed a publisher, Continuum, and asked for a copy of a new book, MONEY, SPECULATION AND FINANCE IN RECENT BRITISH FICTION, by Nicky Marsh.
It's a great subject for a book. When you encounter a character in a work of fiction who is identified as a banker, or as the CEO of a company, the identification often serves merely as a lazy tag, a slightly more specific way of saying "rich guy."
Some occupations just seem to naturally give themselves to literary or dramatic treatment better than others. Trial lawyers (barristers, not office-bound solicitors) are an obvious example. They win or they lose. Their client gets the jackpot or is left destitute. On the criminal side, the client walks free, or is locked up.
Journalism, too, lends itself to literature. The 1928 Broadway comedy The Front Page continues to be re-incarnated. All The President's Men doesn't work very well as an explanation of what was going on in the Nixon administration, but it does make for a good yarn about two reporters' efforts to find out what was going on -- a different theme altogether.
Then there's the occupation of soldiering, which is rather too easily dramatized. It has famously been described as days of tedium punctuated by moments of horror. The temptation, in writing about it, is to leave out the days of tedium and write about the moments of horror. The really great authors in this field can make fine prose out of the days-of-tedium aspect of the situation as well.
What about finance? speculation? fictionalizing the nitty-gritty of it while preserving the drama is a challenge, and this I presume is what drew Marsh: the meta-challenge of describing that challenge.
It's a great subject for a book. When you encounter a character in a work of fiction who is identified as a banker, or as the CEO of a company, the identification often serves merely as a lazy tag, a slightly more specific way of saying "rich guy."
Some occupations just seem to naturally give themselves to literary or dramatic treatment better than others. Trial lawyers (barristers, not office-bound solicitors) are an obvious example. They win or they lose. Their client gets the jackpot or is left destitute. On the criminal side, the client walks free, or is locked up.
Journalism, too, lends itself to literature. The 1928 Broadway comedy The Front Page continues to be re-incarnated. All The President's Men doesn't work very well as an explanation of what was going on in the Nixon administration, but it does make for a good yarn about two reporters' efforts to find out what was going on -- a different theme altogether.
Then there's the occupation of soldiering, which is rather too easily dramatized. It has famously been described as days of tedium punctuated by moments of horror. The temptation, in writing about it, is to leave out the days of tedium and write about the moments of horror. The really great authors in this field can make fine prose out of the days-of-tedium aspect of the situation as well.
What about finance? speculation? fictionalizing the nitty-gritty of it while preserving the drama is a challenge, and this I presume is what drew Marsh: the meta-challenge of describing that challenge.
06 January 2008
Never Enough
I'm following up my post of Friday about Joe McGinniss and his new true-crime book, Never Enough.
One of the questions I'm left with here is: so what ever happened to the Bank of China deal? It's a loose end that a more careful author (even one without my job or obsessions) might have tied.
For McGinniss makes a good deal of fuss about it. The victim of the murder at the heart of the book, Rob Kissel, is a distressed-asset expert for Merrill Lynch, posted in Hong Kong.
Distressed assets are what the term suggests. Bonds from bankrupt corporations qualify, for example. Of course, such a bond might become a worthwhile asset over time, as the corporation is restructured. The bonds might be paid off, or might be transformed into equity, in the next incarnation of that corporation. In the immortal words of Kenny Rogers, "you gotta know when to hold 'em, know when to fold 'em."
So it was an important matter for Kissel that, in 2003, the Bank of China -- an institution, I am told, that has one of the most impressive skyscrapers in the Hong Kong skyline -- decided to fold in this game. It announced an auction of its portfolio of distressed assets.
How much to bid? That was the question for Kissell and his team at Merrill. His right hand man in putting the bid together was a fellow named David Noh.
On the very day that Kissel was to have taken part in a crucial conference call about this auction, his wife fed him the infamous drug-laced milkshake and did the rest of the dirty deed. She then hid the body in a rolled-up carpet, and started calling people, telling them that her husband was missing.
So for a short period, this was a missing-person's case. But David Noh was aware early on that Kissel didn't simply take off on a whim. He wouldn't have missed that conference call as the Bank of China deal was coming to a head unless something terrible had happened.
And so it goes. I'll spare you the melodrama, except to come back to the point with which I began. Why doesn't McGinniss tell us what happened to the B of C deal? Did Noh and the rest of the team at Merrill pull themselves together and proceed without him? Which institution ended up getting the B of C's distressed debts?
Nothing more. I'll see if I can contact McGinniss and ask.
One of the questions I'm left with here is: so what ever happened to the Bank of China deal? It's a loose end that a more careful author (even one without my job or obsessions) might have tied.
For McGinniss makes a good deal of fuss about it. The victim of the murder at the heart of the book, Rob Kissel, is a distressed-asset expert for Merrill Lynch, posted in Hong Kong.
Distressed assets are what the term suggests. Bonds from bankrupt corporations qualify, for example. Of course, such a bond might become a worthwhile asset over time, as the corporation is restructured. The bonds might be paid off, or might be transformed into equity, in the next incarnation of that corporation. In the immortal words of Kenny Rogers, "you gotta know when to hold 'em, know when to fold 'em."
So it was an important matter for Kissel that, in 2003, the Bank of China -- an institution, I am told, that has one of the most impressive skyscrapers in the Hong Kong skyline -- decided to fold in this game. It announced an auction of its portfolio of distressed assets.
How much to bid? That was the question for Kissell and his team at Merrill. His right hand man in putting the bid together was a fellow named David Noh.
On the very day that Kissel was to have taken part in a crucial conference call about this auction, his wife fed him the infamous drug-laced milkshake and did the rest of the dirty deed. She then hid the body in a rolled-up carpet, and started calling people, telling them that her husband was missing.
So for a short period, this was a missing-person's case. But David Noh was aware early on that Kissel didn't simply take off on a whim. He wouldn't have missed that conference call as the Bank of China deal was coming to a head unless something terrible had happened.
And so it goes. I'll spare you the melodrama, except to come back to the point with which I began. Why doesn't McGinniss tell us what happened to the B of C deal? Did Noh and the rest of the team at Merrill pull themselves together and proceed without him? Which institution ended up getting the B of C's distressed debts?
Nothing more. I'll see if I can contact McGinniss and ask.
01 January 2008
Janus
Here we are again, and here are the two faces of Janus. It's time to come to terms with my resolutions for 2007, and how I did or didn't do. Then to launch the new ones.
Last year at this time I wrote as follows:
"1. Breakthrough at work (I'll leave the nature of it indefinite here -- but I'll know it if it happens)
"2. Weigh no more than 185 at some point this year
"3. Contact agents/editors who might be interested in my novel on antebellum US. Begin work on revisions.
"4. Be in Dublin for Bloom's Day
"5. Follow-up on Reason publication, place something else there."
I can credit myself with success on points 2 and 4 on that list.
I accomplished 2 in early November, and again in mid-December. I'll make a related resolution, going a bit further, for this year.
As to 3, I did contact some agents, but those who replied said they couldn't help me with the kind of book I'm trying to sell. And I did no work on revision at all. Black ball for me.
I was in Dublin, though, for Bloomsday 2007 and aye, a fun time I was havin'. There was no Bloomsday tour such as I had envisaged. There were various events that day centered on the James Joyce Centre, and I attended the breakfast. The novel has two breakfast scenes -- one at the castle and one at the Bloom household -- ingrediants from both were included. I also saw a play with a Joycean theme that evening, Himself and Joyce, and generally explored the city for myself the rest of my stay.
No follow-through on the Reason publication. Nor can I claim the kind of dramatic "breakthrough" I had in mind for my resolution 1 of last year, although my worklife has been satisfying in general this year. I feel that when a breakthrough comes, it will involve the rise of the far east within global finance and my ability to contribute to coverage of that trend.
So ... where is the new list of resolutions? Here:
2008
1. Set my feet down in some far Eastern city at some point this year
2. Learn some Cantonese and/or Mandarin
3. Weigh no more than 180 at some point this year
4. Forget about agents, pitch my novel outline directly to book editors
5. The Met. In a Tux.
Last year at this time I wrote as follows:
"1. Breakthrough at work (I'll leave the nature of it indefinite here -- but I'll know it if it happens)
"2. Weigh no more than 185 at some point this year
"3. Contact agents/editors who might be interested in my novel on antebellum US. Begin work on revisions.
"4. Be in Dublin for Bloom's Day
"5. Follow-up on Reason publication, place something else there."
I can credit myself with success on points 2 and 4 on that list.
I accomplished 2 in early November, and again in mid-December. I'll make a related resolution, going a bit further, for this year.
As to 3, I did contact some agents, but those who replied said they couldn't help me with the kind of book I'm trying to sell. And I did no work on revision at all. Black ball for me.
I was in Dublin, though, for Bloomsday 2007 and aye, a fun time I was havin'. There was no Bloomsday tour such as I had envisaged. There were various events that day centered on the James Joyce Centre, and I attended the breakfast. The novel has two breakfast scenes -- one at the castle and one at the Bloom household -- ingrediants from both were included. I also saw a play with a Joycean theme that evening, Himself and Joyce, and generally explored the city for myself the rest of my stay.
No follow-through on the Reason publication. Nor can I claim the kind of dramatic "breakthrough" I had in mind for my resolution 1 of last year, although my worklife has been satisfying in general this year. I feel that when a breakthrough comes, it will involve the rise of the far east within global finance and my ability to contribute to coverage of that trend.
So ... where is the new list of resolutions? Here:
2008
1. Set my feet down in some far Eastern city at some point this year
2. Learn some Cantonese and/or Mandarin
3. Weigh no more than 180 at some point this year
4. Forget about agents, pitch my novel outline directly to book editors
5. The Met. In a Tux.
14 December 2007
Transparency
I encountered recently a quotation attributed to J.P. Morgan: the elder of the father-son financiers with that illustrious name. One has to give him credit for a neat turn of phrase here:
"The time is coming when all business will have to be conducted with glass pockets."
Morgan apparently said this in a spirit of weariness or frustration. The whole idea of public scrutiny of what he was doing was repugnant to him, but he was practical enough to make some adjustments in that direction, and to prophecy that his heirs would have to go further.
The idea of business transparency has made some headway in the ninety-six years since the elder Morgan died. But then, by the standards of most earthly projects, that's a long time. Morgan barely lived long enough to see the inauguration of Woodrow Wilson.
These thoughts come to my mind this morning because the world is moving closer toward one prerequisite of transparency -- a single global system of accounting standards. The fact that different countries and regions have long had different standards can itself make balance sheets and income statements confusing or (in terms of our guiding metaphor here) opaque.
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071119/REG/711190318/1016/ECONOMY
"The time is coming when all business will have to be conducted with glass pockets."
Morgan apparently said this in a spirit of weariness or frustration. The whole idea of public scrutiny of what he was doing was repugnant to him, but he was practical enough to make some adjustments in that direction, and to prophecy that his heirs would have to go further.
The idea of business transparency has made some headway in the ninety-six years since the elder Morgan died. But then, by the standards of most earthly projects, that's a long time. Morgan barely lived long enough to see the inauguration of Woodrow Wilson.
These thoughts come to my mind this morning because the world is moving closer toward one prerequisite of transparency -- a single global system of accounting standards. The fact that different countries and regions have long had different standards can itself make balance sheets and income statements confusing or (in terms of our guiding metaphor here) opaque.
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071119/REG/711190318/1016/ECONOMY
22 September 2007
Inside the book
On Wednesday I discussed the dust jacket of Alan Greenspan's new book THE AGE OF TURBULENCE: ADVENTURES IN A NEW WORLD.
It's half memoir and half treatise, and today I'd like to go inside the covers, to discuss a bit of history that Greenspan treats of rather briefly in the memoiristic portion.
As you may remember, the "savings and loan" system, which once upon a time was treated as an entity distinct from actual "banking" for regulatory purposes, blew apart in rather spectacular fashion in the mid 1980s. IMHO, there's a sense in which it all worked out for the best, because there was no logic to that compartmentalization anyway. Still, the blow up was messy, and people got hurt.
Some of them got hurt by virtue of trusting Charles Keating, who ran the Lincoln Savings & Loan association, of California. In a classic bubble-burst scenario, Lincoln's assets under management quintupled in the four years when Keating was in charge of it (1984-88), then evaporated virtually overnight.
Some of that phenomenal increase was the result of making risky investments that, for a time, paid off. But some of it was a result of finangling with the books.
Fairly early on in the expansion of this bubble, in 1985, Alan Greenspan (who was then in the private sector as a consultant, though he had numerous informal ties with the Reagan economic team) had been employed by Keating's lawyers to write a study evaluating whether Lincoln was financially healthy enough to be allowed to invest directly in real estate. The study was to be presented to the Federal Home Loan Bank Board, which had to give its approval for such investments.
In his book, Greenspan writes (p. 115) that he concluded "that with its then highly liquid balance sheet, it could do so safely. This was before Keating undertook dangerous increases in the leveraging of his balance sheet and long before he was exposed as a scoundrel. To this day I don't know whether he'd started committing crimes by the time I began my research."
The FHLBB, unpersuaded, denied the Keating request, but of course Keating found ways to waste his depositors' money anyway.
Greenspan's involvement wasn't central. He helped Keating apply for a permission he didn't get. Still, one would like to know more about this than the brief mention it gets here. He mentions it chiefly to say that it embarrassed him later, after his appointment as Fed chief when the buble finally did burst. It also caused difficulties at work for a woman with whom he was romantically involved, newscaster Andrea Mitchell. They didn't marry until 1997.
At any rate, Greenspan's big regret about the clean bill of health he gave to Lincoln seems to be that Ms Mitchell wasn't allowed to cover the Keating hearings on Capitol Hill as a result.
Personally, I would like to have learned more about this from him. And I would like him to have beenmore curious, too. "To this day I don't know whether...?" So on his own account Keating either (a) went over to the dark side later or (b) was already on the dark side when Greenspan checked him out, but tricked him.
Has Greenspan tried very hard to figure out whether it was (a) or (b)? So far as we can tell here, not at all. Those who do not study the history of bubbles, are doomed to help blow new ones.
It's half memoir and half treatise, and today I'd like to go inside the covers, to discuss a bit of history that Greenspan treats of rather briefly in the memoiristic portion.
As you may remember, the "savings and loan" system, which once upon a time was treated as an entity distinct from actual "banking" for regulatory purposes, blew apart in rather spectacular fashion in the mid 1980s. IMHO, there's a sense in which it all worked out for the best, because there was no logic to that compartmentalization anyway. Still, the blow up was messy, and people got hurt.
Some of them got hurt by virtue of trusting Charles Keating, who ran the Lincoln Savings & Loan association, of California. In a classic bubble-burst scenario, Lincoln's assets under management quintupled in the four years when Keating was in charge of it (1984-88), then evaporated virtually overnight.
Some of that phenomenal increase was the result of making risky investments that, for a time, paid off. But some of it was a result of finangling with the books.
Fairly early on in the expansion of this bubble, in 1985, Alan Greenspan (who was then in the private sector as a consultant, though he had numerous informal ties with the Reagan economic team) had been employed by Keating's lawyers to write a study evaluating whether Lincoln was financially healthy enough to be allowed to invest directly in real estate. The study was to be presented to the Federal Home Loan Bank Board, which had to give its approval for such investments.
In his book, Greenspan writes (p. 115) that he concluded "that with its then highly liquid balance sheet, it could do so safely. This was before Keating undertook dangerous increases in the leveraging of his balance sheet and long before he was exposed as a scoundrel. To this day I don't know whether he'd started committing crimes by the time I began my research."
The FHLBB, unpersuaded, denied the Keating request, but of course Keating found ways to waste his depositors' money anyway.
Greenspan's involvement wasn't central. He helped Keating apply for a permission he didn't get. Still, one would like to know more about this than the brief mention it gets here. He mentions it chiefly to say that it embarrassed him later, after his appointment as Fed chief when the buble finally did burst. It also caused difficulties at work for a woman with whom he was romantically involved, newscaster Andrea Mitchell. They didn't marry until 1997.
At any rate, Greenspan's big regret about the clean bill of health he gave to Lincoln seems to be that Ms Mitchell wasn't allowed to cover the Keating hearings on Capitol Hill as a result.
Personally, I would like to have learned more about this from him. And I would like him to have beenmore curious, too. "To this day I don't know whether...?" So on his own account Keating either (a) went over to the dark side later or (b) was already on the dark side when Greenspan checked him out, but tricked him.
Has Greenspan tried very hard to figure out whether it was (a) or (b)? So far as we can tell here, not at all. Those who do not study the history of bubbles, are doomed to help blow new ones.
01 September 2007
A Smart Guy, But....
There's no doubt Federal Reserve chairman Ben Bernanke is a smart guy. In fact, on the scale of Bush administration appointees he's off the charts.
He was the chairman of the economics department at Princeton University, and the editor of the American Economic Review, to name just two dandy resume brighteners in his bio.
But you have to wonder, in view of recent events, whether this isn't the sort of brightness that can hurt more than it helps in real-world applications.
Jim Cramer was right in a bit of his now-famous televised meltdown. Bernanke doesn't have any idea. But Cramer was right in the wrong way. Cramer was demanding, with veins popping in forehead and all, that the Fed bail out the big Wall Street institutions with a discount rate cut. To prove that he did have a clue. Bernanke agreed with the scary guy and did exactly that, proving the contrary.
The business cycle is always a credit cycle. When credit is too easy, an upswing becomesd an unsustainable bubble. The only rational thing to do about a bubble is to pop it, and accept the consequences. Instead, the easy thing to do is to work to preserve and continue expanding the bubble, which is the course Bernanke has taken.
That always means that the popping will be worse when it does come. And it will.
Bernanke once gave a speech speculating about the use of a helicopter to drop dollar bills and save the economy. He seems to be trying to do that:
http://prudentinvestor.blogspot.com/2005/10/ben-helicopter-bernanke-could-land-at.html
He was the chairman of the economics department at Princeton University, and the editor of the American Economic Review, to name just two dandy resume brighteners in his bio.
But you have to wonder, in view of recent events, whether this isn't the sort of brightness that can hurt more than it helps in real-world applications.
Jim Cramer was right in a bit of his now-famous televised meltdown. Bernanke doesn't have any idea. But Cramer was right in the wrong way. Cramer was demanding, with veins popping in forehead and all, that the Fed bail out the big Wall Street institutions with a discount rate cut. To prove that he did have a clue. Bernanke agreed with the scary guy and did exactly that, proving the contrary.
The business cycle is always a credit cycle. When credit is too easy, an upswing becomesd an unsustainable bubble. The only rational thing to do about a bubble is to pop it, and accept the consequences. Instead, the easy thing to do is to work to preserve and continue expanding the bubble, which is the course Bernanke has taken.
That always means that the popping will be worse when it does come. And it will.
Bernanke once gave a speech speculating about the use of a helicopter to drop dollar bills and save the economy. He seems to be trying to do that:
http://prudentinvestor.blogspot.com/2005/10/ben-helicopter-bernanke-could-land-at.html
28 July 2007
Contagion
In the news this week, the unsurprising discovery that there is an element of social contagion in obesity. If your friends and spouse eat a lot, you likely will too, taking your cue from them. Who wants to be the only one at the table eating just a stick of celery?
There's another common use of the word "contagion" these days. It's financial. The problems in the subprime housing market -- are they contained or are they contagious? Will the rest of the economy (of the US? or the industrialized world?) catch the subprime flu? Has it already?
Bill Gross, a bond guru with Pacific Investment Management Co (Pimco) certainly believes in contagion. In some of his recent writings, he seems almost to welcome it.
"Borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole – Nathan’s Famous Coney Island style – are having a serious bout of indigestion," he wrote in a recent commentary. "Several hundred billion dollars of bank loans and high yield debt wait in the wings to take out the private equity and leveraged buyout deals that have helped propel stocks to Dow 14,000. And lenders…mmmmm, how do we say this…don’t seem to have much of an appetite anymore. Six weeks ago the high yield debt market was humming the Campbell’s soup theme and now, it’s begging for a truckload of Rolaids."
For more, go here: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+August+2007.htm
I certainly don't share Mr. Gross' apparently its-about-time attitude there. But I worry that he may be right, that Dow 14,000 may represent a peak, and that we may be in for a very bumpy road on the way down.
The business cycle has always been, at its heart, a credit cycle. This time around, at this peak, that "heart" is a bit nearer the surface of the skin than is usually the case.
There's another common use of the word "contagion" these days. It's financial. The problems in the subprime housing market -- are they contained or are they contagious? Will the rest of the economy (of the US? or the industrialized world?) catch the subprime flu? Has it already?
Bill Gross, a bond guru with Pacific Investment Management Co (Pimco) certainly believes in contagion. In some of his recent writings, he seems almost to welcome it.
"Borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole – Nathan’s Famous Coney Island style – are having a serious bout of indigestion," he wrote in a recent commentary. "Several hundred billion dollars of bank loans and high yield debt wait in the wings to take out the private equity and leveraged buyout deals that have helped propel stocks to Dow 14,000. And lenders…mmmmm, how do we say this…don’t seem to have much of an appetite anymore. Six weeks ago the high yield debt market was humming the Campbell’s soup theme and now, it’s begging for a truckload of Rolaids."
For more, go here: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+August+2007.htm
I certainly don't share Mr. Gross' apparently its-about-time attitude there. But I worry that he may be right, that Dow 14,000 may represent a peak, and that we may be in for a very bumpy road on the way down.
The business cycle has always been, at its heart, a credit cycle. This time around, at this peak, that "heart" is a bit nearer the surface of the skin than is usually the case.
30 June 2007
How to Deflect an Accurate Accusation
Universal Express is a company that describes itself as "visionary" on its website. It brings "diversity and creativity to the logistics and transportation industries."
It certainly brings some creativity to the business of deflecting accusations.
Between 2001 and 2004, Universal Express issued 500 millions shares of common stock without filing registration statements. Not unsurprisingly, this had a diluting effect. Its stock price lagged. Universal Express, though, in the person of its head honcho (and sole director) Richard Altomare, soon became very ardent in claiming that "naked short sellers" were the problem. Its own stock-distribution policy couldn't be at fault.
The SEC brought a lawsuit against Universal Express for its unregistered issuance, and in due time (February of this year) it won. Part of its complaint involved the noise Altomare had been making about naked short selling -- on the rationale that Altomare used that as part of a smoke screen to explain away the depressive effect on stock price that his own stock issuances were having. The NY federal district court ordered the company to pay $9 million in disgorgement and $9 million in penalties.
On June 21, Thursday, seeing that no effort at disgorgement had been forthcoming, and claiming that the company had become simply a vehicle for fraud whence the investing public required protection, the SEC asked the court to appoint a receiver.
The next day, the New York Times published an article by Floyd Norris, "Resilience of Fraud." His fifth graf read thus: "The case of Universal Express, a small company that loses money even faster than it issues news releases, is not very important on its own merits. But it shows how hard it can be for the SEC to halt what it views as a fraud. The agency filed suit against Universal in 2004, but the company is still funding itself by issuing billions of unregistered shares."
The Times later ran a Norris follow-up, "S.E.C. Seeks Receiver for Universal Express, Calling it a Fraud."
Mr. Norris wrote, "If a receiver is appointed and no more shares are issued, the company might have trouble financing itself. In the first nine months of its fiscal year, through March 31, it reported $2.7 million in revenues and a net loss of $21 million. It took in $11 million by issuing new shares."
On Monday, June 25, Mr. Altomare put out a press release comparing him to Rosa Parks. You read that right. He's decided that the SEC really doesn't like him because he's made the case against "naked short selling," and the offenses it claims he committed are a trivial excuse for this punishment.
"I am sure that Rosa Parks, Susan B. Anthony and others, who questioned previously accepted 'legal' practices, were vilified, criticized and even demonized prior to the truth finally surfacing. When the cause is just, the enemy must be engaged. Naked short selling and the unchecked abuse of power of a governmental agency are such valuable causes worthy of the battle." And so forth in a megalomanaical rush.
At no point in that press release, or so far as I can tell anywhere else over the course of the litigation, does the company or its sole director dispute the crucial facts: the issuance of the unregistered stock. Nor is it entirely obvious why a law requiring registration is entirely on a par with, oh, a city ordinance prohibiting blacks from sitting in the front seats of a bus.
Not entirely, mind you....but if your only real product seems to be your company's own shares, you have business problems that you can't blame (well ... can't accurately blame) on exogenous forces. Your problems, Mr. Altomare, are self-generated. Rosa Parks didn't banish herself to the back seats and then seek to inspire a boycott of the Montgomery bus system.
It certainly brings some creativity to the business of deflecting accusations.
Between 2001 and 2004, Universal Express issued 500 millions shares of common stock without filing registration statements. Not unsurprisingly, this had a diluting effect. Its stock price lagged. Universal Express, though, in the person of its head honcho (and sole director) Richard Altomare, soon became very ardent in claiming that "naked short sellers" were the problem. Its own stock-distribution policy couldn't be at fault.
The SEC brought a lawsuit against Universal Express for its unregistered issuance, and in due time (February of this year) it won. Part of its complaint involved the noise Altomare had been making about naked short selling -- on the rationale that Altomare used that as part of a smoke screen to explain away the depressive effect on stock price that his own stock issuances were having. The NY federal district court ordered the company to pay $9 million in disgorgement and $9 million in penalties.
On June 21, Thursday, seeing that no effort at disgorgement had been forthcoming, and claiming that the company had become simply a vehicle for fraud whence the investing public required protection, the SEC asked the court to appoint a receiver.
The next day, the New York Times published an article by Floyd Norris, "Resilience of Fraud." His fifth graf read thus: "The case of Universal Express, a small company that loses money even faster than it issues news releases, is not very important on its own merits. But it shows how hard it can be for the SEC to halt what it views as a fraud. The agency filed suit against Universal in 2004, but the company is still funding itself by issuing billions of unregistered shares."
The Times later ran a Norris follow-up, "S.E.C. Seeks Receiver for Universal Express, Calling it a Fraud."
Mr. Norris wrote, "If a receiver is appointed and no more shares are issued, the company might have trouble financing itself. In the first nine months of its fiscal year, through March 31, it reported $2.7 million in revenues and a net loss of $21 million. It took in $11 million by issuing new shares."
On Monday, June 25, Mr. Altomare put out a press release comparing him to Rosa Parks. You read that right. He's decided that the SEC really doesn't like him because he's made the case against "naked short selling," and the offenses it claims he committed are a trivial excuse for this punishment.
"I am sure that Rosa Parks, Susan B. Anthony and others, who questioned previously accepted 'legal' practices, were vilified, criticized and even demonized prior to the truth finally surfacing. When the cause is just, the enemy must be engaged. Naked short selling and the unchecked abuse of power of a governmental agency are such valuable causes worthy of the battle." And so forth in a megalomanaical rush.
At no point in that press release, or so far as I can tell anywhere else over the course of the litigation, does the company or its sole director dispute the crucial facts: the issuance of the unregistered stock. Nor is it entirely obvious why a law requiring registration is entirely on a par with, oh, a city ordinance prohibiting blacks from sitting in the front seats of a bus.
Not entirely, mind you....but if your only real product seems to be your company's own shares, you have business problems that you can't blame (well ... can't accurately blame) on exogenous forces. Your problems, Mr. Altomare, are self-generated. Rosa Parks didn't banish herself to the back seats and then seek to inspire a boycott of the Montgomery bus system.
26 June 2007
Crazy Eddie
They weren't really insane. If they had been, they would have pleaded it as a defense.
Anybody of a certain age remembers the ads. The television actor who hopped about as if on speed and shouted "Our prices are innnn-sane" was Jerry Carroll. Since everything can be found somewhere in cyberspace, it probably won't surprise you to know that there's a tribute page for thos ads, at this address:
http://pocketcalculatorshow.com/crazyeddie/
When I moved to Bridgeport in 1984, to open a law office, there was a downtown cheapskate electronics store calling itself "Crazy Freddy." I doubt there was any intellectual-property litigation as a result, the knock-off store seems to have failed quickly simply because the whole downtown area was depressed.
Anyway, the founder of the chain was Eddie Antar. By the middle of 1990, the SEC was investigating him and his associates (including his cousin Sam Antar) on suspicion that they were manipulating their books.
Eddie fled, and showed up in time in Israel. He was extradited to the US in 1992, and after four years of legal manuveuring he pled guilty to conspiracy and racketeering and spent seven years in prison.
Why do I bring all this up now? Because Antar has started showing his face in public again. To some degree, at least, he seems to want to rehabilitate his image. This weekend the Wall Street Journal ran an interview with Reformed Eddie, in which he said that although what he did was wrong, the business wasn't entirely a criminal enterprise. Real products were sold, real money was deposited in bank accounts, etc.
He also said that he sometimes runs into a satisfied customer who'll say something like "I bought my first stereo from you!"
One of the cable TV shows will run a piece on Eddie Antar tomorrow evening, I understand.
In the meantime, if you're interested, you can read an entertaining account of the Antar rise and fall here: http://www.acfe.com/documents/antarsample.pdf
Anybody of a certain age remembers the ads. The television actor who hopped about as if on speed and shouted "Our prices are innnn-sane" was Jerry Carroll. Since everything can be found somewhere in cyberspace, it probably won't surprise you to know that there's a tribute page for thos ads, at this address:
http://pocketcalculatorshow.com/crazyeddie/
When I moved to Bridgeport in 1984, to open a law office, there was a downtown cheapskate electronics store calling itself "Crazy Freddy." I doubt there was any intellectual-property litigation as a result, the knock-off store seems to have failed quickly simply because the whole downtown area was depressed.
Anyway, the founder of the chain was Eddie Antar. By the middle of 1990, the SEC was investigating him and his associates (including his cousin Sam Antar) on suspicion that they were manipulating their books.
Eddie fled, and showed up in time in Israel. He was extradited to the US in 1992, and after four years of legal manuveuring he pled guilty to conspiracy and racketeering and spent seven years in prison.
Why do I bring all this up now? Because Antar has started showing his face in public again. To some degree, at least, he seems to want to rehabilitate his image. This weekend the Wall Street Journal ran an interview with Reformed Eddie, in which he said that although what he did was wrong, the business wasn't entirely a criminal enterprise. Real products were sold, real money was deposited in bank accounts, etc.
He also said that he sometimes runs into a satisfied customer who'll say something like "I bought my first stereo from you!"
One of the cable TV shows will run a piece on Eddie Antar tomorrow evening, I understand.
In the meantime, if you're interested, you can read an entertaining account of the Antar rise and fall here: http://www.acfe.com/documents/antarsample.pdf
26 May 2007
China's Foreign Reserves
The People's Republic of China is sitting on cash. It is holding foreign-exchange reserves of more than $1 trillion (pronounce that "t"!). That is twice the amount of the PRC's reserves just two years ago.
According to The Economist, that $1 trillion is enough money to buy all the gold in all the vaults of the central banks of the world.
Such games-playing with numbers is fun, but there would be operational problems with the gold-buying spree as a policy. Might the money be used for infrastructure projects -- roads, bridges, water treatment plants? The problem is that by employing such money domestically China would inflict upon itself an inflationary spiral (inflation, remember, is too much money chasing too few goods).
China wants to invest its reserves in the rest of the world, and has decided to do something more adventurous than just buying U.S. Treasury bonds. In recent days, it announced that it's buying billions of dollars worth of non-voting equity in a US based private-equity firm, The Blackstone Group LP. Its important to note that this isn't an investment into one of the funds that Blackstone manages, but an investment in the management firm itself. (Its like buying stock in a bank rather than simply opening an account there.)
The easiest observation to make about all this is that a country still formally Communist in doctrine is now investing in a quintessentially capitalist institution. But of course the PRC's devotion to communism has been mostly lip service now for a long time, so this surprises no one.
A more speculative line of thought: what now happens to the market for US Treasuries? It's been my impression that China's enormous appetite for the stuff has been a large part of the market demand, and that this market demand is what has allowed the US government to deficit-spend itself silly in recent years with no real detrimental consequences. But what if China doesn't want the IOUs from Uncle Sam anymore? Who else will?
That's not a very pressing concern, though, because China's foreign reserve is plenty large enough to absorb those IOUs and leave a stray three billion on the side for the Blackstone deal, too. But if its a straw in the wind, then the wind could be troubling.
We should also say that China and Blackstone were both very careful, in the announcement of the deal, to specify that these were non-voting shares. The PRC thereby avoids the diplomatic consequences of appearing to 'take over' an important US based company. It learned this lesson, I'm guessing, from the recent Dubai port-management imbroglio.
It'll be nearly 10% of Blackstone's equity, though. So, whatever the formalities of voting, I suspect that the Chinese agency involved will have a seat at the table when important decisions are made.
This is a fascinating straw, at the intersection of a lot of different winds. The integration of the economy of the PRC into that of the rest of the world might prove to be the big economic/financial story for decades to come.
According to The Economist, that $1 trillion is enough money to buy all the gold in all the vaults of the central banks of the world.
Such games-playing with numbers is fun, but there would be operational problems with the gold-buying spree as a policy. Might the money be used for infrastructure projects -- roads, bridges, water treatment plants? The problem is that by employing such money domestically China would inflict upon itself an inflationary spiral (inflation, remember, is too much money chasing too few goods).
China wants to invest its reserves in the rest of the world, and has decided to do something more adventurous than just buying U.S. Treasury bonds. In recent days, it announced that it's buying billions of dollars worth of non-voting equity in a US based private-equity firm, The Blackstone Group LP. Its important to note that this isn't an investment into one of the funds that Blackstone manages, but an investment in the management firm itself. (Its like buying stock in a bank rather than simply opening an account there.)
The easiest observation to make about all this is that a country still formally Communist in doctrine is now investing in a quintessentially capitalist institution. But of course the PRC's devotion to communism has been mostly lip service now for a long time, so this surprises no one.
A more speculative line of thought: what now happens to the market for US Treasuries? It's been my impression that China's enormous appetite for the stuff has been a large part of the market demand, and that this market demand is what has allowed the US government to deficit-spend itself silly in recent years with no real detrimental consequences. But what if China doesn't want the IOUs from Uncle Sam anymore? Who else will?
That's not a very pressing concern, though, because China's foreign reserve is plenty large enough to absorb those IOUs and leave a stray three billion on the side for the Blackstone deal, too. But if its a straw in the wind, then the wind could be troubling.
We should also say that China and Blackstone were both very careful, in the announcement of the deal, to specify that these were non-voting shares. The PRC thereby avoids the diplomatic consequences of appearing to 'take over' an important US based company. It learned this lesson, I'm guessing, from the recent Dubai port-management imbroglio.
It'll be nearly 10% of Blackstone's equity, though. So, whatever the formalities of voting, I suspect that the Chinese agency involved will have a seat at the table when important decisions are made.
This is a fascinating straw, at the intersection of a lot of different winds. The integration of the economy of the PRC into that of the rest of the world might prove to be the big economic/financial story for decades to come.
18 May 2007
Return of the Trojan Horse
God bless us every one. David Stockman is in the news again. Best remembered as Ronald Reagan's budget director, as the man who said that the Laffer Curve was a "Trojan horse," Stockman is now in trouble private sector budgetary shenanigans.
Collins and Aikman, an auto parts company, has been in chapter 11 since May 2005. Its efforts to re-organize having failed, C/O is now in the process of liquidating. Stockman was the chairman of its board of directors from August 2002 until the time of the bankruptcy filing. He was the company's chief executive, too, for most of that time.
This week, C/O filed a lawsuit (with an 80-page complaint) in a federal court in Delaware in which Stockman is the first-named of several defendants said to have failed in their fiduciary duties.
Stockman was recently indicted on accounting-fraud charges, and the civil complaint echoes those charges, although coached in the language of breach of fiduciary duties. On his own behalf, he has contended that the prosecution is trying to criminalize optimism. There's a grim irony here. It appears that Stockman was once again using an unrealistically optimistic Trojan horse projection to lead a large entity (not as large as the US government this time, thank heavens) deep into the realm of red ink.
Optimism, schmoptimism. Here's a graf from the complaint that gives the gist of the whole.
"By early 2002 [various negative factors] were dramatically depressing the Company's financial results and the Company was increasingly finding itself locked into long-term contracts with little upside earnings potential. Unfortunately for [C/O] ... instead of dealing with the issues facing the Company in an open and legal manner, Defendants concealed the true financial results of operations and condition of the Company, embarking on a fraudulent accounting scheme which hastened the demise of the Company and left it unable to right itself."
Collins and Aikman, an auto parts company, has been in chapter 11 since May 2005. Its efforts to re-organize having failed, C/O is now in the process of liquidating. Stockman was the chairman of its board of directors from August 2002 until the time of the bankruptcy filing. He was the company's chief executive, too, for most of that time.
This week, C/O filed a lawsuit (with an 80-page complaint) in a federal court in Delaware in which Stockman is the first-named of several defendants said to have failed in their fiduciary duties.
Stockman was recently indicted on accounting-fraud charges, and the civil complaint echoes those charges, although coached in the language of breach of fiduciary duties. On his own behalf, he has contended that the prosecution is trying to criminalize optimism. There's a grim irony here. It appears that Stockman was once again using an unrealistically optimistic Trojan horse projection to lead a large entity (not as large as the US government this time, thank heavens) deep into the realm of red ink.
Optimism, schmoptimism. Here's a graf from the complaint that gives the gist of the whole.
"By early 2002 [various negative factors] were dramatically depressing the Company's financial results and the Company was increasingly finding itself locked into long-term contracts with little upside earnings potential. Unfortunately for [C/O] ... instead of dealing with the issues facing the Company in an open and legal manner, Defendants concealed the true financial results of operations and condition of the Company, embarking on a fraudulent accounting scheme which hastened the demise of the Company and left it unable to right itself."
17 May 2007
Plot Summary
I discussed the book, Ugly Americans, in Monday's entry. Today I thought I'd offer a plot summary. In coming days I hope to make inquiries into the history behind it, how true a story it is/isn't.
We're told that in 1992, twenty Ivy League football players visited Japan, to play an exhibition game against Japanese college kids. Of course, American football isn't big in Japan, and the Ivy team (which would have been mincemeat before, say, the Boilermakers or the Sooners on even a bad year for either of the latter) handily defeated the Japanese who lent themselves to the show.
On this trip, Princeton's contribution to that all-star-Ivy team, John Malcolm, encountered a Princeton alum, Dean Carney. (I'll use their names as given in the book here. For their likely real names, see Monday's post.) Carney was a big-wheel at Kidder Peabody's Tokyo office, and he suggested Malcolm contact him about a job if no pro football career panned out.
None did, so Malcolm did, in 1993. Malcolm became one of KP's two Osaka-based traders. This lasted until April 1994, when KP discovered a $350 million "accounting glitch," and assigned responsibility for the glitch to one of its managing directors, Joseph Jett. KP (and its corporate parent, General Electric) made sweeping cutbacks in their trading operations as a result. Both Carney and Malcolm -- neither of whom had anything to do with Jett's accounting trickery -- were out of jobs, and they went their separate ways.
Malcolm took a position with a venerable English bank, Barings. He was again to work out of Osaka, but this time his orders were coming from Singapore, where Barings' star trader, Nick Leeson, held court.
Leeson, though, was making huge unauthorized trades during this period, and he was losing ... big. In January 1995 he made an enormous bet on a rise in the key Japanese stock exchange index, known as the Nikkei ... large enough so that if he won, he would recover all his losses. But of course he didn't win. That huge bet went against him, due to the Kobe earthquake January 17, and its devastating effects on Japan's economy.
After a brief period as a fugitive, Leeson was captured and did prison time. That didn't save Barings, which went into receivership. For the second time in eight months, a superiors malfeasance had cost Malcolm a job.
He called Carney for help. Carney, meanwhile, had founded a hedge fund, and Malcolm was soon trading for it. Mostly index arbitrage. What does that mean? In brief, there were by the 1990s funds in existence tracking most of the world's major stock market indexes. The idea is that someone might want to bet on the direction of, say, the Dow Jones, without having to invest in each of its component stocks. The managers of the index fund, by pooling a lot of investors' money, can of course more easily invest (according to their weight) in each of the components, and all the investors have to watch is the average itself. An "arb play" in this context means that a trader buys the components while selling the index-tracker fund, or vice versa, in order to take advantage of inefficiencies in the tracking process.
Anyway, Carney hired Malcolm again to come to Tokyo and arb the Nikkei and its components.
In 1994, the Hong Kong government created a tracker fund for the Hang Seng -- its equivalent of the Dow Jones or the Nikkei. [BLOGGER CORRECTION. The Mezrich account makes these dates seem plausible by a gross foreshortening of the events. The tracker fund actually came about as a result of actions taken by the government during the currency crisis of 1998.] In 1995, after Malcolm was settled into his Tokyo job, a company named Pacific Century Cyberworks (PCC) merged with Hong Kong Telecom, and under the terms of the tracker funds' charter, its managers had to buy $225 million worth of PCC stock. [AGAIN. MY MISTAKE, though with authorial encouragement. Mezrich is referring here to events of the year 2000].
Everybody knew it was going to have to do this, so a lot of traders tried to get a risk-free profit by front-running this deal, i.e. buying PCC stock ahead of the fund's expected purchases.
Malcolm, though, discovered that the tracker fund wasn't going to buy the PCC stock through the exchanges at all. It made a private off-exchange deal with PCC's founder Richard Li. This meant that, when the day of the expected fund purchases arrived and no purchases took place, there'd be a strong downward pressure on the stock price.
Accordingly, on Malcolm's suggestion, Carney's hedge fund took a "short" position on $100 million of PCC stock. When the big day arrived, and the tracking fund didn't make the expected purchases, the price dropped dramatically, and Malcolm covered the short position, winning his firm more than twenty million dollars.
This one deal made Malcolm a star, known to expat western traders throughout east Asia as their "hot young gunslinger."
The ending of the book turns on another, quite similar, but even larger deal involving the addition of several high-tech firms to the Nikkei index. This is the deal that justifies the book -- Malcolm made Carney's firm five hundred million dollars in cash out of the restructuring of the Nikkei.
Then Malcolm leaves Carney's employ and heads for semi-retirement in Bermuda, although we're told he still does some light trading.
That's not the whole of the story, of course. There are some characters -- including Ivy Leaguers, other than just Carney and Malcolm. In the days leading up to the Hang Seng trade, for example, we're introduced to "Vince Meyer" (another pseudonym, surely), described as "the top trader of one of the biggest American banks in Hong Kong" who gives Malcolm a crucial datum. Meyer is a Harvard grad.
There's also some raw sex, some hinted-at violence, one vividly described auto accident, and some romance to liven up the prose, for those who don't think that index arb traders sitting in front of computer screens throughout the working day is by itself a very exciting spectacle even if it is profitable.
We're told that in 1992, twenty Ivy League football players visited Japan, to play an exhibition game against Japanese college kids. Of course, American football isn't big in Japan, and the Ivy team (which would have been mincemeat before, say, the Boilermakers or the Sooners on even a bad year for either of the latter) handily defeated the Japanese who lent themselves to the show.
On this trip, Princeton's contribution to that all-star-Ivy team, John Malcolm, encountered a Princeton alum, Dean Carney. (I'll use their names as given in the book here. For their likely real names, see Monday's post.) Carney was a big-wheel at Kidder Peabody's Tokyo office, and he suggested Malcolm contact him about a job if no pro football career panned out.
None did, so Malcolm did, in 1993. Malcolm became one of KP's two Osaka-based traders. This lasted until April 1994, when KP discovered a $350 million "accounting glitch," and assigned responsibility for the glitch to one of its managing directors, Joseph Jett. KP (and its corporate parent, General Electric) made sweeping cutbacks in their trading operations as a result. Both Carney and Malcolm -- neither of whom had anything to do with Jett's accounting trickery -- were out of jobs, and they went their separate ways.
Malcolm took a position with a venerable English bank, Barings. He was again to work out of Osaka, but this time his orders were coming from Singapore, where Barings' star trader, Nick Leeson, held court.
Leeson, though, was making huge unauthorized trades during this period, and he was losing ... big. In January 1995 he made an enormous bet on a rise in the key Japanese stock exchange index, known as the Nikkei ... large enough so that if he won, he would recover all his losses. But of course he didn't win. That huge bet went against him, due to the Kobe earthquake January 17, and its devastating effects on Japan's economy.
After a brief period as a fugitive, Leeson was captured and did prison time. That didn't save Barings, which went into receivership. For the second time in eight months, a superiors malfeasance had cost Malcolm a job.
He called Carney for help. Carney, meanwhile, had founded a hedge fund, and Malcolm was soon trading for it. Mostly index arbitrage. What does that mean? In brief, there were by the 1990s funds in existence tracking most of the world's major stock market indexes. The idea is that someone might want to bet on the direction of, say, the Dow Jones, without having to invest in each of its component stocks. The managers of the index fund, by pooling a lot of investors' money, can of course more easily invest (according to their weight) in each of the components, and all the investors have to watch is the average itself. An "arb play" in this context means that a trader buys the components while selling the index-tracker fund, or vice versa, in order to take advantage of inefficiencies in the tracking process.
Anyway, Carney hired Malcolm again to come to Tokyo and arb the Nikkei and its components.
In 1994, the Hong Kong government created a tracker fund for the Hang Seng -- its equivalent of the Dow Jones or the Nikkei. [BLOGGER CORRECTION. The Mezrich account makes these dates seem plausible by a gross foreshortening of the events. The tracker fund actually came about as a result of actions taken by the government during the currency crisis of 1998.] In 1995, after Malcolm was settled into his Tokyo job, a company named Pacific Century Cyberworks (PCC) merged with Hong Kong Telecom, and under the terms of the tracker funds' charter, its managers had to buy $225 million worth of PCC stock. [AGAIN. MY MISTAKE, though with authorial encouragement. Mezrich is referring here to events of the year 2000].
Everybody knew it was going to have to do this, so a lot of traders tried to get a risk-free profit by front-running this deal, i.e. buying PCC stock ahead of the fund's expected purchases.
Malcolm, though, discovered that the tracker fund wasn't going to buy the PCC stock through the exchanges at all. It made a private off-exchange deal with PCC's founder Richard Li. This meant that, when the day of the expected fund purchases arrived and no purchases took place, there'd be a strong downward pressure on the stock price.
Accordingly, on Malcolm's suggestion, Carney's hedge fund took a "short" position on $100 million of PCC stock. When the big day arrived, and the tracking fund didn't make the expected purchases, the price dropped dramatically, and Malcolm covered the short position, winning his firm more than twenty million dollars.
This one deal made Malcolm a star, known to expat western traders throughout east Asia as their "hot young gunslinger."
The ending of the book turns on another, quite similar, but even larger deal involving the addition of several high-tech firms to the Nikkei index. This is the deal that justifies the book -- Malcolm made Carney's firm five hundred million dollars in cash out of the restructuring of the Nikkei.
Then Malcolm leaves Carney's employ and heads for semi-retirement in Bermuda, although we're told he still does some light trading.
That's not the whole of the story, of course. There are some characters -- including Ivy Leaguers, other than just Carney and Malcolm. In the days leading up to the Hang Seng trade, for example, we're introduced to "Vince Meyer" (another pseudonym, surely), described as "the top trader of one of the biggest American banks in Hong Kong" who gives Malcolm a crucial datum. Meyer is a Harvard grad.
There's also some raw sex, some hinted-at violence, one vividly described auto accident, and some romance to liven up the prose, for those who don't think that index arb traders sitting in front of computer screens throughout the working day is by itself a very exciting spectacle even if it is profitable.
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