November 27, 2008
Animal Farm
"All firms are created equal, but some firms are more equal than others" - Animal Farm
Normally when the US Congress House Committee on Agriculture discusses CDs they are talking about Conservation Districts (or Chickens and Ducks) but on November 20th the congresspersons were delving into the murky depths of Credit Default Swaps.
Hello? What has Credit Default to do with agriculture (except maybe that the market is in the fertilizer at the moment)?
It turns out that, in the Byzantine world of US banking regulation, Agriculture is responsible for overseeing the Commodity Futures Exchange Commission (CFTC), which looks after trading in pork bellies, orange juice etc. And with the CTFC which, to quote the Chairman, is a "model of transparent and above-board central clearing process", all we have to do is to get CDs into the (soft rather than hard) commodities futures clearing system and all will be well.
Next they will want to regulate Hedge funds, as forestry assets. Giddy up, rein em in!
Now without wishing to denigrate the good representatives, the committee's members are (very sensibly) from the wheat belts of Kansas and the nut farms of Georgia, but none from Wall Street. While that may not, in itself, be an automatic disqualification (given the history of the current crisis), one would hope that there was some insight on this extremely complex issue from somewhere outside the pork barrel.
In his book "Animal Farm", George Orwell described what happened when the animals literally took over the farm, as occurred around 2004 in Wall Street. Initially all was well, the animals worked hard and the farm prospered, or at least appeared to do so. Orwell wrote that every human being [here read, investors, rating agencies and regulators] "held it as an article of faith that the farm would go bankrupt sooner or later . . . Yet, against their will, they had developed a certain respect for the efficiency with which the animals were managing their own affairs". Sound familiar?
But soon it became obvious that some animals were not pulling their weight and, while the managers were up to their snouts in the trough, the field animals started to go hungry. However, the economist on the farm, appropriately named Squealer, proved from the figures collected that "they had more oats, more hay, more turnips, their drinking water was of better quality, that they lived longer, that a larger proportion of their young ones survived infancy, and that they had more straw in their stalls and suffered less from fleas". Thank heavens for FASB accounting standards.
At the end of Animal Farm, the smartest pigs in the pen rise to the top and decide that humans may not be so bad after all. The book ends with the starving field animals gazing through the window as their leaders wine and dine with their hated enemy, the humans.
As in Animal Farm, Wall Street has abandoned any veneer of equality in the markets and, when push comes to shove, it is more important to bail out insolvent investment banks and busted insurers than companies on Main Street; some firms are definitely more equal, $700 billion more equal.
Watch out then, in the near future, for some bi-partisan commission on the financial crisis where the animals sit down with the farmers to work out how to fix the farm. Of course the manure will have to be cleared away, probably dumped on some pension funds, and new crops will have to be sowed, lots of money for lawyers and salesmen, and new machinery will be acquired, with loans from now fertilizer-free financial institutions. Maybe the Agriculture committee really is the best place to consider this dung heap?
However, we can but hope; but as the Chicago wit, Irv Kupcinet, wrote "an optimist is a person who starts a new diet on Thanksgiving Day". Happy Thanksgiving.
Posted by pjmcconnell at 12:30 AM
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November 19, 2008
Through the Looking Glass
Alice in Wonderland: If you drink much from a bottle marked "poison" it is almost certain to disagree with you, sooner or later.
Investors must feel that they have fallen "down the rabbit-hole", like Alice, when the heads of some of the largest hedge funds in the US front up to the US Congressional Committee on Oversight and Government Reform and plead for "more regulation". What parallel universe has the credit crisis landed us in?
After telling his "mountain boy made good" life story to the Committee, Philip Falcone, the billionaire co-founder of Harbinger Capital Partners, testified that he supported "greater transparency and better reporting in the hedge fund sector". But, Falcone was not alone, Kenneth Griffin, founder of the Citadel Investment hedge fund, waxed lyrical: "Proper regulation is critical. But the best regulation is created with an eye toward unleashing opportunities, not limiting possibilities."
And I was under the mistaken impression that hedge funds were the bad guys, short selling perfectly good companies into oblivion and chucking fellow Richie Richs, such as Lehman's CEO Richard Fuld, out into the bitter cold of the Hamptons in winter. It turns out that hedge fund billionaires were really good guys after all, just - as Falcone put it - living the American Dream (unlike foreclosed mortgagees, who are living the American nightmare)
George Soros, another billionaire eager to give his opinion to the Oversight Committee and the world in general, (sort of) agreed about regulation telling the House that "financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used." And the man in charge of it all, Pushme-Pullyou Paulson, has come around (and around and around), now too believing that regulating hedge funds may be back on the Mad Hatters Tea table.
As Alice remarked: Curiouser and Curiouser?
It turns out that the solution was staring us in the face all along!
What is needed, the hedgies said, is a 'Central Derivatives Clearing House' where decent chaps can exchange contracts over coffee in the company of gentlemen. Where the regulatory Dormouse (Bernanke) can count and count toxic derivatives happily all day until the sacred cows come home. And, where the Tweedledum and Tweedledee of regulation, the Fed and the SEC, can get back to arguing really serious matters, like whose office is closer to the water-cooler?
Some time in the very near future when this new super-duper-super regulatory agency/clearing house/ talking shop moves into its new headquarters [the refurbished Kool-Aid building in Washington], staff and visitors may look up at the Latin inscription over the door - "Venenum in auro bibitur" or as Seneca said "Poison is drunk out of gold!"
Alternatively, people may glance across Pennsylvania Avenue at the Great Seal on the Treasury building, which has been re-chiseled to read "E Pluribus Bunkum".
Posted by pjmcconnell at 11:45 PM
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November 09, 2008
When the Circus left Town
Some say Wall Street is like Las Vegas; it is not - it is like Coney Island.
On balmy summer evenings, amusement parks, like Coney Island, are magical places, with exotic sights, loud music, flashing lights and guaranteed excitement. Families jostle to get through the turnstiles to queue at the fast-food stands; young couples rush towards the Ghost Train, as an excuse to get even closer together; groups of young men and women, circle each other, eager to show how brave (or unconcerned) they are; and brow-beaten grandparents hold onto their grandchildren for fear that something terrible might happen. Everyone knows they will spend more than they planned.
Everyone also knows the games are rigged. Most of the hoops will not fit over the target bottles, only a major league pitcher could chuck a biased ball through a tiny hole; the barrels on the rifles in the shooting gallery are slightly skewed; and, if you cannot beat a chicken at 'tic-tac-toe', what chance understanding a 'super senior subordinated' CDO? Anyone who does win, does so by accident, scoring only a fluorescent cuddly toy that will disintegrate on first wash.
But still we pays our money. Fathers, keen to prove that they are really Formula 1 drivers show off in dodgems, unfortunately ending up in a traffic jam at one corner of the rink until ripped clear by muscular roustabouts, just as the siren goes and the electricity is switched off. Young boys, keen to impress their latest squeeze, get on the scariest rides [which strangely resemble the latest charts of US interest rate spreads] before spewing up their dinner of fizzy beer and frankfurters over the cars in front. And novice Joe Fraziers try their hand at the boxing tent, going three rounds with a gnarly old professional who dodges their feeble punches until a late knockout or points win, sometimes feigning a knock-down to keep the punters happy and the 'winner' a hero for, at least, this evening. We are all suckers, sometimes.
In the first light of morning an amusement park is a very sad place. The ground is littered with empty bottles and popcorn boxes, discarded shoes with broken heels, mislaid (or discarded) engagement rings and lost innocence. The music is silent and the lights have stopped flashing. Scavenging dogs and cats roam the empty stands searching for scraps.
Today, Wall Street is like Coney Island (on a cold wet winter morning).
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But every tout and Sideshow Bob knows that punters have memories shorter than a freak-show midget, and back they will come when the hoopla starts up again and exciting new rides are unveiled. How about shiny new Collateralized Obligations on Net Notional Equity Derivatives (Conned) - Roll Up Roll Up?
It may take some time, but the one thing we know for sure is that when the circus leaves town, it will be back again next year. But unlike the circus, when Wall Street leaves town, only the clowns remain.
Posted by pjmcconnell at 04:12 AM
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