Like many US Presidents, Barack Obama often takes to the golf course for relaxation. As one who has long ago consigned his remaining undamaged clubs to the back of the garden shed, I would not begrudge him the chance to wander aimlessly in the great outdoors for a few hours. The President's handicap (that is golf not Congress) is rumored to be between 16 and 24, though a (probably unauthorized) blogpost of his card at a recent game showed some 30 over Par. Suffice to say that he would be overjoyed to be at Par most of the time?
Of course Par is relative. While the President may be overjoyed at reaching Par from above, Tiger Woods would be distraught if he did not break (annihilate) Par nine times out of ten. Like many things in golf, where you stand is important.
In Finance too, Par is relative. If an investor buys a Treasury bond at Par and interest rates fall causing market prices to rise, he/she is happy since the bond can sold above Par and make a profit. Unfortunately, if rates rise the bond is now priced below Par and whoops, the investor is in the red (or in a bunker at least). If he/she 'shorts' the bond of course the reverse is true. For securities not dependent on interest rates, such as Collateralized Debt Obligations (CDO) or Credit Default Swaps (CDS), the price achievable is the market price, which may, depending on the quality of the underlying credits, be trading above or below PAR.
Apologies for repeating Bond Valuation 101, but it appears that some regulators may have missed that particular lecture (on the golf course maybe?)
On October 27, Bloomberg published a wonderful article on the last days of AIG and the attempts of the company to stay alive by liquidating its portfolio of, almost worthless, CDO backed by, equally worthless, CDS. For those who have come late to the story, AIG had managed, through a UK subsidiary, to acquire billions worth of sub-prime CDOs and CDS and was frantically going back to the banks from which they were purchased and offering them at deeply discounted (but market) prices. The banks demurred to sell at a loss and AIG ended up 'out of bounds', eventually being rescued by the taxpayer.
The story does not end there, however. The major Wall Street banks still held billions of dollars of derivatives written by AIG and hence were, in golfing parlance, deep in the 'rough'. In theory, the now taxpayer owned, AIG should have bought back the derivatives at current market prices, to 'retire' the debt. But there was another problem. If the banks accepted the AIG offer then they would have to sell back the derivatives at a huge loss, since the market price was well below Par. This, in turn, might lead to a 'run' on these bastions of American banking.
The lead banking regulator at the time, the New York Fed, is nothing if not exceedingly generous and agreed (in a series of back door deals) to take back the debt not at the lower market price but at the higher Par value. This meant that the banks lost not a cent but the taxpayer took the full hit, estimated at some $13 billion. The Foligopoly won again!
Golf is an ancient and gentlemanly game (though as Robin Williams points out one where gentlemen can quite respectably dress like pimps). Courtesy and generosity is valued by players. For example, in match play, it is customary to recognize that an opponent is likely to make a winning putt and concede the hole, even though one would dearly love the SOB to have to take the shot and miss. This is called a 'gimme'.
The AIG settlement is one of the greatest 'gimmes' ever. It is as if two duffer golfers teed off on a very long hole, both ending up in the water but mutually agreeing that (though not playing particularly well) both would be able to complete the hole in regular Par - so onto the next hole. In golf, as in life, this is called a 'bad lie'.
The moral here is not only to be scrupulous about marking your golfing scorecard but also never to let regulators look after taxpayers' money. They are too generous and courteous by half.
Bloomberg is to be commended. It is currently seeking, through a Freedom Of Information request, details of the 'secret' agreements between the big banks and the New York Fed. If/when the FOI request is successful, quite senior heads may roll. For the regulator and banks, however, it is as if some cad has questioned the golf club captain on his scorecard for the club four-ball championship - just not within the spirit of the game!
So don't expect information about the dodgy deals to be forthcoming anytime soon - this match may yet go to extra holes.
Writing about golf, Alistair Cooke, the great journalist and commentator on America, could just as easily have been talking about banking regulation- 'an open exhibition of overweening ambition, courage deflated by stupidity, skill scoured by a whiff of arrogance'.
