Friday, November 28, 2008

How We Got Here

Understanding how our economy got where it is today can be analyzed in many different ways, spreading blame and pointing fingers at many different people. But I think the overall analysis, the simplistic themes that resonate whenever anything is written to this analysis, comes back to two factors: Greed & Risk. You can take greed and you can take risk, you can break them down and apply them to the different financial instruments that were created that in the end have proved to be at the crux of the collapse - subprime loans, credit default swaps, Commercial Mortgage Backed Securities, etc.  These instruments were created 20 years ago and exploited throughout the system throughout the years; they are the cliches of blame. 

Michael Lewis wrote Liar's Poker  nearly 20 years ago as a guidebook to understanding how Wall Street was exploiting these themes and how it would set it up for an epic collapse, what he didn't envision was it taking another 18 years to happen. Most recently he wrote the lead story for the December 2008 edition of Conde Nast titled 'The End'.  It is the best written narrative on the perils of our current economic condition, the story behind it. Its not an outline of events and statistics that brought down the boom of Wall Street; its the human story of the people involved, how they saw it coming and reflections to it all in hindsight. 

A snippet:

What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA. But he couldn't figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. "I didn't understand how they were turning all this garbage into gold," he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. "We always asked the same question," says Eisman. "Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk." 

"You have to understand this," he says. "This was the engine of doom." Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a "particularly egregious" C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. 

The cause of the financial crisis was "simple. Greed on both sides—greed of investors and the greed of the bankers." …Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed. 
Michael Lewis was interviewed by the Wall Street Journal recently.

Money Quote:

We have entered a period of risk aversion unlike anything we've seen in our lifetime. Investors will be too wary for a while. You'll read stories about people who got rich betting against subprime mortgages and then about people who combed through the wreckage and found bargains. The next rich wave will be those who figure out where the value is. As for the average American investor, he'll be a deer in the headlights for years. It will be a while until greed gets comfortable again.

Tuesday, November 25, 2008

Quote for the Day/Year/Recession

I have absolutely no idea how the intricacies of the global financial system function. I had previously taken solace in believing that ‘the other guys’ did understand. What we all now realize is that nobody understands and nobody ever understood.
Thomas Barrack Jr., founder and CEO, Colony Capital

Monday, November 17, 2008

Has the GOP Hit Bottom?

A good reason the Democrats won these elections (2006,2008) - Presidential and Congressional - was because they won independents and disenfranchised moderate republicans. That would be because republicans were not republicans anymore, they had no identity. I think Bobby Jindal gets it, and I think he's one to watch over the next four to eight years in the republican party. He was asked on Face The Nation yesterday about the future coarse of the republican party and very simply, nailed it:

As Republicans, we need to do three things to get back on track. Number one, we have got to stop defending the kind of spending and out-of-control spending that we would never tolerate in the other side. You know, when voters tell us that they trust Democrats more to cut their taxes [and] control spending, that tells you something is wrong with the Republican Party. We've got to match our actions with our rhetoric. 

Number two, we've got to stop defending the kinds of corruption we would rightfully criticize in the other party. The week before the election, our most senior senator is convicted on federal charges - and that's only the latest example. 

Number three, we have got to be the party that offers real solutions to the problems that American voters, American families are worried about. We don't need to abandon our conservative principles; we can't just be the 'party of no.' We need to offer real solutions on making health care more affordable, on the economic challenges facing families, on the international threats.

In times like these, I tend to revert back to the cynicism of my favorite comedic scholar, Lewis Black, in his assessment of the America Political Party system, as he eloquently opines:

The Republicans are the party of bad ideas and the Democrats are the party... of no ideas. And the way it works is a Republican stands up in Congress and yells “I got a really bad idea”. And then a Democrat yells “and I can make it even shittier!

Friday, November 14, 2008

Well Done Keith

A Special Comment from Keith Olbermann, on the passing of Proposition 8 in California last week. Proposition 8 overturns the ruling by the Supreme Court that had allowed any couple the right to marry in the state. The fierce campaign to pass the Proposition, that specifically would amend the state constitution to strip same-sex couples of this right passed by a narrow margin. The Morman church largely funded the campaign to pass this proposition donating over $20 million, mostly from the state of Utah, which had no part or voice in this legislation.

Keith relents in trying to understand how anyone, so selfishly, could voice a vote to restrict this freedom, I couldn't have said it any better myself. My hope is that as millennials, as a generation that grew up in an era that saw this issue with a more open mind than generations before, we will take this campaign for social justice seriously. I have no concerns that Proposition 8 and all that it stands for will be overturned in the future. But I struggle to understand how 6 million people could vote in favor of a restriction on other people. I don't understand their motivations and determinations in voicing their opinion with those specific intentions, that they felt so strongly against this sort of freedom to equality. I guess I don't understand their fears...because that is the only way I can see it, that they were afraid. It will be overturned. The right ideology will prevail in the end; it just has to ask for patience. I'm sure that is not easy to ask for, or acceptable to those effected in California, but it’s the conclusion you have to live with sometimes when you adhere to a democracy.

Money Quote:
If you voted for this Proposition or support those who did or the sentiment they expressed, I have some questions, because, truly, I do not... understand. Why does this matter to you? What is it to you? In a time of impermanence and fly-by-night relationships, these people over here want the same chance at permanence and happiness that is your option. They don't want to deny you yours. They don't want to take anything away from you. They want what you want
Please visit Courage Campaign to learn more and sign the "Repeal Prop 8" petition. Its free and it needs more voices.

America The Illiterate

A well crafted argument from Chris Hedges on the dissemination and decline of literacy, narrative and the general culture within American society. 

Money Quote:

The change from a print-based to an image-based society has transformed our nation. 

In our post-literate world, because ideas are inaccessible, there is a need for constant stimulus. News, political debate, theater, art and books are judged not on the power of their ideas but on their ability to entertain.

The core values of our open society, the ability to think for oneself, to draw independent conclusions, to express dissent when judgment and common sense indicate something is wrong, to be self-critical, to challenge authority, to understand historical facts, to separate truth from lies, to advocate for change and to acknowledge that there are other views, different ways of being, that are morally and socially acceptable, are dying. 


A fascinating study here:

The Princeton Review analyzed the transcripts of the Gore-Bush debates, the Clinton-Bush-Perot debates of 1992, the Kennedy-Nixon debates of 1960 and the Lincoln-Douglas debates of 1858. It reviewed these transcripts using a standard vocabulary test that indicates the minimum educational standard needed for a reader to grasp the text. During the 2000 debates, George W. Bush spoke at a sixth-grade level (6.7) and Al Gore at a seventh-grade level (7.6). In the 1992 debates, Bill Clinton spoke at a seventh-grade level (7.6), while George H.W. Bush spoke at a sixth-grade level (6.8), as did H. Ross Perot (6.3). In the debates between John F. Kennedy and Richard Nixon, the candidates spoke in language used by 10th-graders. In the debates of Abraham Lincoln and Stephen A. Douglas the scores were respectively 11.2 and 12.0. In short, today’s political rhetoric is designed to be comprehensible to a 10-year-old child or an adult with a sixth-grade reading level. It is fitted to this level of comprehension because most Americans speak, think and are entertained at this level.

Wednesday, November 12, 2008

Tuesday, November 4, 2008

Hope won, Fear Lost

"The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew." Abraham Lincoln

Monday, November 3, 2008

The Moment

Simple, prudent and spot on...From CNN: