Friday, March 06, 2009

Word Association

What do The New York Times, the Apocalypse, Banks, and Starbucks all have in common, besides the fact that they all appear, in unrelated comments, in this post? Probably lots of things, none of them of any concern to me at this moment. All I needed was a way to tie them together in the same paragraph.

I rarely read the Times, for the same reason, I suppose, that I don't read the Enquirer: I don't trust it. But I do concede that the Times has a bunch excellent craftsman churning out really delightful, if dubious, pieces.

However, I spied a headline in the neighbor's Times this morning as it lay on the stoop, and made a mental note to look into it later. The story is about how HSBC took a hugh-mongous beating on its 2002 acquisition of Household Finance and Beneficial, America's big subprime lenders. That's no news flash, but the angle of the piece was that this acquisition was The Deal That Fueled Subprime; and while it may be, the story won't convince you. (I don't know how long that link will be good; you may have to hunt the NYT site if you want to actually read it, in the event it expires.)

It's really "Business Lite," but that's not why I'm writing about it here. I'm doing that because the piece makes the following assertion:

Securitization was based on the fiction that financial engineering could turn risky loans into risk-free securities.

Bosh! This is itself a fiction. I can't recall ever seeing, in any official document or any commentary, the claim that any securitized assets were "risk-free." That's probably because claiming they are would be like claiming cars could be made to run on seawater. All "financial engineering" (a term I've never, ever agreed with, even when I was studying it), did, with the aid of computer power that wasn't available a few short years ago, was allow financial instruments to be created from pools of assets, and enable the clever attribution of the characteristics of such aggregates.

The characteristics of the loans -- their terms, risk profiles and cash flows -- are aggregated (it is a pool, after all) and then re-arranged and divvied-up again in a way that is entirely customizable, within the parameters of the pooled characteristics. Like all things designed to appeal to the "sophisticated," the sliced-up assets were given a french name: "tranche," meaning, of all things, "slice." In this, at least two notable things occured: Wall Street prefigured Starbucks by at least a decade, and a high-water-mark in truth in advertising was reached.

Some of the slices were first in line to receive their prorated cut of the cash flows from the underlying loans. Some were last, and some were in-between. Where the slice fell on this hierarchy determined it riskiness with regard to the rest of the slices, and hence, its debt rating. This isn't engineering so much as it is high-powered, labor intensive accounting. But the computers make the intensiveness of labor a moot point. And computers do things mathematically. And engineers speak "math." So high-powered accounting became known as "financial engineering." This can be likened to the pencil and ledger opening up accounting possibilities that were simply too labor-intensive in a world dominated by the abacus. Nothing new under the sun, indeed.

To some extent, all accounting is "fiction," but it's very useful fiction. The accounting one does doesn't affect reality, it only does bold things to one's perception of it, semantically. The loans that are pooled didn't change, but their characteristics are micro-managed.

Nobody would ever say such pools were "riskless," but the pro's and con's of this micro-management are perhaps both misunderstood and misrepresented, at various times, willfully and not so willfully.

In that environment, with the help of a little grease to the skids, bond insurers found they could do a pretty good business by selling insurance on these asset pools. Insurance is a business of averages -- statistics -- and we all know what they say you can do with statistics. In any event, the purchase of a misguided rating -- Triple-A, for example -- from a government-sanctioned rating agency might go along way to overcoming, in the mind of the manager of large pools of investment capital, any visceral trepidations regarding such newfangled instruments. It might, in other words, fog one's judgment. In any case, a rating ensured that someone was on the hook financially in the event that one of these nifty financial robots went berserk and started killing the pilots of the great spaceship that Wall Street had become.

And, of course, the transformation of a pool of loans into a synthetic "bond" can, by commoditization, encourage a new flow of capital to wash into the asset class (which it did, even if it can be argued by supply-side logic that the availability of all that capital spawned the creation of something else for it to flow into, after all known rivers and tributaries had been submerged); and it did replace bankers with pensioners as risk takers on ever-more ill-conceived mortgages. The move of a giant like HSBC into that market would certainly increase the volume of such transactions. This much of what the article floats makes some sense.

The term "riskless" is a theoretical, financial-math term (referring to government agency debt issues) that is roughly analogous to the term "frictionless" in physics. In high-school you learn that "frictionless" is a convenient myth, that it's factually, but not relatively, untrue. Nobody builds buildings by making any assumptions about frictionlessness being a fact. And nobody -- n.o.b.o.d.y, especially Wall Street sharpies -- takes the term "riskless" literally.

Now, about this Times piece. Admittedly, there's a great deal of misconception (willful and otherwise) surrounding all things finance, and the volume of misconception is proportional, surely, to the area of newsprint (or airtime, or book titles, or Internet links, etc) that is devoted to any particular topic. Considering how many column-inches have been spent on reporting the "financial crisis," this indicates the presence of a great deal of misconception, indeed.

We humbly admit to a small amount of this here. The comments on how CDS's sink protection-sellers still need some fleshing-out. But the operative word here is "admit," and, by the way, in case you haven't noticed, this is not the New York Times. I don't get paid six figures for writing this, I don't get invited to posh parties in Manhattan, and I don't have a cool business card. The upside of this is at least twofold: I can maintain a clean conscience when I write and nobody will ever call this blog the "Gray Lady."

Mojo Nixon wasn't a fan of banks. And I'm not a fan of Mojo Nixon or banks, but I'm glad he wrote a song called "I Hate Banks." Parenthetically, I wonder what it says about us culturally that it takes (what used to be) a character from the outer fringes of the edges of mainstream to say what we all feel: banks are probably really just fronts for little satanic outposts.

I say this as one who has worked for, interestingly, a bank that was concurrently the world's largest (by assets) and its smallest (by market capitalization). Continuing the theme of opposites, banks have been, for most of my lifetime, places of arrogance (on their part) and humiliation (on the customer's part). How many times has the teller smirked at you while refusing to cash the check you brought in, because you don't look like the person on your license, or some such inanity? Banks are the roach-motels of finance: money comes in, but it doesn't go out.
How many times have you been late making a deposit (even if you weren't stalling) and gone to the ATM to get a few bucks for a date and found out that you bounced twenty checks and are now in the hole $510 ($500 in NSF fees, and ten bucks for the lousy check you wrote at the grocery store). Chastened, you enter the bank on Monday, to find the manager has installed a limbo-pole in his office that he expects you to grovel under, while the staff watches with glee, doing shots of tequila and placing bets on "how low you can go."

Yeah, banks are not often associated with happy memories for most of us. Yet I've discovered something so rare -- a bank lobby that has really nice people working there -- that I had to comment on it. Sure, it's Wachovia, the same bank that surprised (and temporarily bankrupted) an acquaintance by illegally seizing and freezing his account, just because some bill-collecting lawyer sent an official looking (and fraudulent) fax to them. But when the pickings are slim, you take the bad with the good. It's Wachovia on 42nd and 1st, and the usual lobby staff is beyond stellar. They act like real people. Not all of them, of course, but enough, and often enough, that it's noteworthy.

If you had to start the apocalypse, how would you do it? Here's one suggestion: start refashioning your administration, if you're president of the United States, as anti-Israel. It's that simple. You don't come out and say that, of course, but if you start appointing in strategic roles the sorts of people who espouse that particular insanity that expresses itself as an irrational hatred of Israel, you'll get the ball rolling. Because what that does is it shows all those countries that have institutionalized the hatred of Israel into law and policy that the US is no longer going to stand behind the tiny, eternal hotspot at all costs, like a great, big brother staring down bullies.

The deterrent to bullies, once removed, invites all manner of mischief. Bullies push, and test, and torment, and they never stop, until and unless they're stopped. And if the bullies have stated perennially, repeatedly, and unequivocally, their longing for the complete and utter destruction of your little sibling, there's no reason to expect them to stop, until....

If you're Israel, a) you're not stupid and b) you're not weak and c) you're gonna prepare to kick some serious ass because your tormentors are emboldened by the absence of meaningful reality-checks to their insanity.

Now, if you manage to do this in a time when one particularly loony regime is known to have the ability to make nuclear weapons, you just might get your Apocalypse.

It's easy, really.

Finally, in solidarity with the multitudes who have recently "downsized" their lives (especially myself) I have not only moved to more reasonably priced digs, but I didn't bother to subscribe to an Internet provider there. Sure, my inner sloth reasoned that I'd find a wireless network in the building that wasn't password-protected (it was wrong; they're getting harder to find than solid-silver quarters); but the better part of me relished the idea of having to discipline and organize my Internet access, planning for outings to some public access point.

As it turns out, there's a Starbucks right around the corner, and since I was recently gifted with a Starbucks gift card, the decision about where and how to do things online was pretty much made for me.

I'm a Dunkin' Donuts man all the way, at least pre-corporate Dunkin' Donuts. But I'm also open to having my horizons expanded, and accordingly I've actually imbibed in that caustic brew known as Starbucks coffee. One mid-morning I went crazy and had a refill, and I did not get to sleep that night. They do, however, sell a great Plain bagel.

I may say more on the Starbucks culture, later, but just now I'm overdosing on the caffeine. I would like to observe, in closing, that the place is frequently jammed with online jobseekers, and that can't be bad for coffee sales.

I guess that's a good thing for all those poor farmers in Brazil, eh?
[this piece is a work in progress, which means I'm my own editor. This ain't the Times, remember?]


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