Thursday, December 17, 2009

That Giant Sucking Sound ...

is New York City inhaling another finance blogger. That's right, first it was Mike over at Rortybomb, and now I've got a semi-full U-Haul truck parked in the frigid cold, waiting for the trip tomorrow morning. All day I've been playing that moving game of Tetris, slotting in boxes, furniture and odds and ends (guitars, keyboard, studio photography light poles) in available spaces in a cavernous truck.

For my readership of 10 to 15 -- you know who you are -- my blogging may be a bit less frequent after I start this new job. It's not that I lack ideas; the rub is simply that blogs suck up time. Maybe I'll try blogging shorter (a la Greg Mankiw, who sometimes just links to stuff he finds interesting, with no comment). I dunno; that's not really my style. But ...

I really, really wanted to do a long entry this week on the maddening futility of regulating banks using capital ratios. The problem is that Basel-type thinking (capital weightings for certain classes of assets) is just so, I don't know, 19th century. Modern financiers will always be a step ahead, using new products to innovate around the rules, so that you have to wonder, "Is this just a failed approach?"

But what in its place? Do we just let banks gamble recklessly, with even less supervision? That seems foolish since the fact that regulators were asleep at the switch during this financial crisis was a huge problem.

I think there may be a better way. I would consider ditching capital ratio requirements altogether (radical idea), but in return, make it easier to prosecute and strip of their wealth Wall Street CEOs and traders who end up running an institution into the ground. What if there were no capital requirements, but someone said, "You bankrupt this company through reckless behavior or negligent oversight and we'll take every penny you have, possibly throw you in jail, cut off your pinky and thumb (okay, I'm exaggerating to make the point), and ensure you never work in the finance industry ever again."

How high do you think the capital ratios would be in that scenario? Say 15, 20 percent, as opposed to the current 8 percent minimum today? Hard to say, but when there are aggressive clawbacks and serious prosecutions, I'm not sure you need a lot of rules about needing this much capital for this kind of asset and this much for the other. What we have now unfortunately is a broken system -- a dense framework of rules that encourages the banks to go diving for loopholes, following the advice of a platoon of securities lawyers.

Tuesday, December 15, 2009

Dimon, in the Giving Xmas Spirit, Gives Obama the Bird?

Just had to link to this naked capitalism post by Tim Duncan:
Bankers Support Regulation? Au Contraire?

Only hours after Obama met with Wall Street "fat cat" CEO bankers (about half of whom opted to be patched in by conference call -- how's that for signaling?), JPMorgan put out this media release on its Web site.

The JPMorgan statement of Dec. 14 appears to be guarded support for financial regulation. In other words "yes, let's have some of course, but slowly, slowly ... carefully, carefully."
The details matter, and the stakes are simply too high and the consequences too far-reaching to do this hastily and poorly. While we agree with many of the proposals, we share concerns with others that some regulatory proposals could restrict lending by banks, which will hinder economic growth and job creation.
Duncan's analysis:
This press release so quickly after the meeting at the White House today would seem to have no apparent purpose other than to make it clear to the other bankers and lobbyists that nothing has changed with regard to the industry’s passive-aggressive battle against the CFPA. It also appears to be a rather harsh metaphoric middle-finger to the White House given that it is posted less than 24 hours after the President personally asked for Mr. Dimon’s support.
Why did I find this amusing? Well, because of my April blog post, JPMorgan Flips Geithner the Bird. At that time, Dimon was saying basically, "Hell no, we're not going to offer up any assets for PPIP (Geithner's plan to relieve banks of toxic assets)."

Since the Geithner Plan was rolled out with all due fanfare, and awaited with baited breath, the Dimon comment was actually pretty explosive, though it got scant coverage. The subtext of Dimon's remarks was clear: "Screw you. Take your PPIP and stick it up your nether regions." And PPIP has been dying a slow death all year long, as other banks decided to shy away from the program as well.

So has JPMorgan (or Dimon, more specifically) now metaphorically flipped off Geithner and Obama too? If so, that would be arrogance seasoned with plenty of chutzpah.

Joe Lieberman, Mighty Force of Nature

It looks like uber-nebbish Joe Lieberman gets to exact his will on the nation on health-care reform. Amazing. So this is democracy. One guy can hold hostage the most important health care legislation in decades.

I was listening to Lieberman on TV last night. He sounds like a Jewish Steven Wright. I keep waiting for the punchline. ("I'd kill for a Nobel Peace Prize ... but seriously folks, about health care ...") Lieberman has a flat, uninflected, depressive aspect that apparently the people of Connecticut find irresistible.

Hell hath no fury like a former Democrat scorned.

Saturday, December 12, 2009

Is the SIV Accounting Fraud Nearing an End?

Anyone who's read this blog for a while will know that one thing I absolutely can't wrap my head around is the Great SIV Loophole, and why it was never addressed until the "structured investment vehicles" exploded messily.

Here's how everything worked before the financial crisis/meltdown/blowup: A bank -- let's call it "Smitigroup" -- creates an off-balance sheet vehicle; let's give it a sexy name like "Xena." Here's what lil ol' Xena does: it borrows money by issuing short-term securities, then in effect lends money by buying longer-term securities. Now, if you're a Joe Blow reader who's wondering, "Exactly why does, ahem, Smitigroup, want to do this?," let's look at what's going on.

You make the short-term borrowing at say 2.8 percent, then you buy longer-term products at say 3.5 percent. Notice the "spread" between the two. Borrow a million for $28,000, buy a longer-dated asset (like, say, a security backed by mortgages from some fast-appreciating neighborhood of homes in south Florida) that pays $35,000 a year, and you're pocketing a cool $7,000 annually from the difference.

Rinse. Wash. Repeat. (As they say.)

Now, if you're financially savvy, you may be thinking, "Hey, that sounds kind of like what my bank does." And bingo -- you'd be right. Your bank basically "borrows" short term from its depositors (paying them a small amount for their funds) then lends long term (home and business loans). But there is a difference: the structured investment vehicle is more like an invisible bank; it doesn't show up on regulatory radar.

So let's return to that riveting question: Why does Smitigroup want to create an SIV? Well, one reason obviously: the potential profit. But why create the SIV off-balance sheet?

Yes, why oh why? Because Smitigroup operates under capital constraints and other regulations. It must have a certain amount of underlying capital to be able to expand its traditional banking operations. But here's the neat thing about its SIV: Smitigroup waves a magic wand and Xena takes shape and starts operating at arm's length from its creator, so that the business doesn't eat into Smitigroup's capital base. Meanwhile Xena funnels profits back to Smitigroup.

Hey! What's not to like?

But then, you have a liquidity seize up -- those long-term assets Xena is holding become worth less, no one wants to buy its short-term securities, and Xena begins to circle the bathtub drain at an increasingly frenetic clip. So, no problem for Smitigroup right? Smiti won't be on the hook.

Wrong. Suddenly you see the tractor beams appear. Smiti hoovers up Xena, moving the vehicle's operations onto its own books. So much for the fiction that Xena was "independent"!

This is the absurd crap -- sorry, crap is the most polite term I can think of -- that was allowed to persist in the financial industry. Now though, that may be changing, Floyd Norris of the NYT reports in a meandering column:
The issue is a couple of new accounting rules that are forcing banks to put back on their balance sheets some strange creations that bad accounting rules had allowed them to shunt aside in the past.
Strange creations indeed! But as weird as these SIVs were, there was an even odder beast out there:
Bank holding companies have been allowed to issue something called “trust preferred securities.” The beauty of those securities was that they were really debt that the holding companies could call capital. Having that “capital” meant the bank could take on more debt. A system that lets a bank borrow more money because it has already borrowed money — rather than because it has sold stock — is hardly a wise one.
Got that? As a bank, I'm supposed to hold capital against my assets (mostly loans). The more loans I make, the more the capital ratio shrinks toward my regulatory minimum. But a "trust preferred security" turns that equation upside down. As I make more loans, my capital ratio grows. Ain't bank accounting grand!

Broadly, such tricks fall under the rubric of "capital arbitrage." Ah, if only we could have seen these capital arbitrage tricks at the time. But zee banks, zey are so clever! It would take a man of almost unimaginable perspicacity and intelligence, a man possessing perhaps clairvoyance even, to divine the gravity of the game that was afoot ...

Or maybe not:
In Spain, some smaller banks are in trouble from real estate loans, but the big banks seem to have emerged in good shape. One reason is that Spanish regulators were not fooled by things like SIVs, and insisted that if any bank wanted to create one, it could, but would have to hold reserves anyway. Since there was no business reason — other than capital arbitrage — for a SIV, those banks shied away.
Oh well. But at least the Financial Accounting Standards Board is finally getting around to sewing this loophole shut:
The FASB, in an attempt to save face and a degree of integrity, has pushed back on Wall Street by passing FAS 166 and 167 which would require investments in off-balance sheet vehicles to be brought on-balance sheet. The implementation of FAS 166 and 167 is imminent and would require financial institutions to set aside increased capital against selected assets.
This seems like a no brainer, a slam dunk. But the banks are squealing, predictably, because they have been hiding operations off balance sheet for a while and are worried about the impact of bringing them back onto the books.

The fact that we're even having this discussion is ridiculous. We need a better regulatory regime. I think capital-based requirements in a rule-based system (See Basel, incarnations I and II, e.g.) may be an obsolete approach, especially in an information-rich age of high-speed computers and financial innovation galore. The banks, with an army of lawyers in tow, will always twist and limbo their way around the requirements.

There is a better way. I'll look at that later this week.

Friday, December 11, 2009

Matt Taibbi's Latest Must-Read: Obama's Big Sellout

The Rolling Stone writer takes on President Obama in his latest Wall Street slamdown. Everyone should read it, whether or not you agree with him, or care for his freewheeling, expletive-heavy, cynical style. I think Taibbi does channel well the pissed-off liberal-intellectual zeitgeist of disgust with Wall Street excesses.

His main points are:

1. Everyone who's senior level on Obama's economic/Treasury team once worked for Robert Rubin, came from Citigroup, came from Goldman Sachs, or some combination of all three. It's rather sobering as he ticks off the names, one by one -- and ties them back to Rubin/Citi/Goldman. And we wonder why we get so much Samethink out of this White House on economic issues?

2. Banking lobbyists right now are busily gutting legislation that would add consumer protections for financial products and force stricter regulation and transparency for derivatives trading. They are of course abetted by our "elected" representatives, who probably should be required to wear logo-plastered jumpsuits, a la racecar drivers, to show which special interests (which major insurers, banks etc.) they really take their marching orders from.

3. Americans on the whole are too dumb to care that the financial sector is hardly being reformed at all, despite the fact financier misdeeds brought us last fall to the brink of Credit Armageddon.

What disappointed me about Taibbi's article was that he catalogs a familiar litany of crimes but doesn't try to answer the underlying question of his piece: Why did Obama sell out? What happened to "Change We Can Believe In?" Is Obama really just another empty suit politician? Did we, American voters, just get duped again?

Here are the possible explanations I have for why Obama sold out. Pick the one, or ones, you like or feel free to add your own in the comments section:

Obama really was a fraud, just like so many other politicians, willing to say whatever he had to to get elected. He has no principles.

Obama talks a good game -- he is a master rhetorician -- but his cojones are about the size of sesame seeds. He does believe in change, but in practice, he all too quickly defaults to dull compromise.

Obama remains very aware of his "blackness," and is so worried about seeming radical to White America that he tacked hard the other way, to the safety of the Wall Street moguls.

Obama to this day doesn't really understand how badly his team screwed up and how much they gave away to the banking interests; economics is his weak suit and he simply isn't very interested in it, preferring on that long flight to Pakistan to read the Urdu poets instead. And he really thinks that, over the long view of history, his team will be lauded for its courage and wisdom in how it tackled the financial mess, and not disparaged for failing to deal directly with so many problems that caused it.

The banking lobby basically does own our capital: they own the Senate, the House, and the White House too. Of course that includes owning Obama, who felt the sting when Wall Street moneybaggers began to tighten their pocketbooks and said they weren't going to donate as much funds to Democrats because of his constant bashing of their industry.

Wednesday, December 9, 2009

More Proof that "IBG" Thinking Motivated Bankers

Well, the electronic ink was barely dry on my previous entry when I noticed, somewhat belatedly, this piece by Lucian Bebchuk et al in the Financial Times: Bankers Had Cashed in Before the Music Stopped.

Yesterday I blogged that OPM ("Other People's Money") and IBG ("I'll Be Gone") were meta-reasons for the financial crisis. Of course that didn't quite square with part of the accepted storyline of the collapse: namely, as Bebchuk notes, "according to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives."

In which case, IBG thinking ("I'll Be Gone when this stinker of a product/strategy blows sky high") would have afflicted the junior traders, but not the senior leaders, it would appear. And, accordingly, one would expect a furious flurry of pay reform taking place now as angry CEOs, their wallets and their stock portfolios scorched once, vow to never let such an orgy of risk-taking ever occur again.

Except ... except ... the top brass apparently made out like bandits too. They were IBG beneficiaries, if not quite direct practitioners. From Bebchuk:
In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively (adjusted to 2009 dollars). Although the financial results on which bonus payments were based were sharply reversed in 2008, pay arrangements allowed executives to keep past bonuses.
So you have those traders practicing IBG, and those supervising them who are incentivized to turn a blind eye to IBG.

Which leads us to the number of the day.

Chances of Wall Street spontaneously reforming compensation practices: approximately 0.

Tuesday, December 8, 2009

The Two Abbreviations that Explain the Financial Collapse

I was traveling this weekend -- back! -- and last night it occurred to me that if you want to understand why this financial crisis occurred, you can look hard at two often bandied-about abbreviations. Forget about low interest rates, regulatory lapses, securitizations, risky derivatives etc. etc. Those are reasons, but these are meta-reasons. These are the reasons that create the environment for the reasons. These abbreviations are easy to understand, but have deep, wide-ranging implications.

1. OPM ("Other People's Money)
What does it mean to make bets with other people's money? I think the answer is obvious. When I'm betting my house on an outcome, you can be assured that my thinking moves down a different decision tree than when I'm betting your house.

How was Wall Street betting with "Other People's Money"? Largely, this came about because of a shift in ownership models. The old wingtipped investment bankers worked at firms owned by partners. The oft-repeated joke about partners is that they live poor, but die rich. Their wealth is tied up in the worth of the firm. Under this type of model, you can bet that Wall Street CEOs over the past decade would have known exactly what types of risky wagers their traders were making each day. But they didn't.

Because they were using "Other People's Money."

"Other People's Money" is what you get from the new ownership model: becoming a public company. You sell shares to a vast swathe of investors, everyone from Aunt Edna to Fireman Joe's Pension Fund, to raise capital. And so when your company starts trading for itself in credit default swaps or liquidity puts, you as CEO don't risk losing your house if the bets go bad. You risk losing Aunt Edna's house. (Note: even with CEO "incentives" that try to align your pay with performance, you still tend to capture the upside of your company's gains and escape most of the pain of the losses.)

Big difference. And a slew of Wall Street banks went public in the 1980s and 1990s (Goldman was late to the party, making the jump in 1999).

Yves Smith at naked capitalism and the always incisive (and often acerbic) business journalist Michael Lewis have noted repeatedly the significance of changed ownership models, re: this financial crisis. And they're right: This constitutes a huge meta-reason for the meltdown. On top of all this, once you really start to leverage up other people's money, the danger of excessive risk-taking compounds fast.

2. IBG (I'll Be Gone)
If you were to use this in a sentence, it would sound something like: "IBG (I'll Be Gone) by the time that trading strategy blows up." The prevalence of short-term thinking -- trying to make the numbers for quarterly earnings reports to satisfy investors and analysts (that's a consequence of playing with "OPM;" you're always performing for the stockholders), trying to hit yearly targets for that fat bonus -- it all tends to focus the mind on the end of the money-seeking nose, and not much farther out.

"I'll Be Gone" actually represents the convergence of two bad trends: one, this short-term thinking that reflects in part the stunting of our attention spans, and two, the abdication of personal responsibility ("Hey, my trades went south? So they went south ... that's life, seeya.").

So think about it: if you've got a financial industry with a belief system centered around "get mine, get out, and use other people's money to do it" ... well, why are you surprised that a lot of big reckless bets were made and everyone got out with their bags of gold and no one's being prosecuted?

Tuesday, December 1, 2009

The Fed: Ivory Tower Economists or Just Clueless Bagholders?

The Fed as bagholder ... it hadn't occurred to me until I read this piece on naked capitalism called "The Fed, Treasury and AIG" (the title has the disarming ring of a child's nursery rhyme). Author: Richard Alford, former Fed economist. He defends the Fed's behavior related to the AIG rescue -- he sounds a bit querulous at times, but it's a thankless mission he's on -- and then he hooks a sharp left turn toward the end of his essay and launches a flurry of pointed and interesting questions:
Why didn’t Treasury announce a more detailed proposal including a Fed role limited to bridge financing? Why didn’t the Fed require it as a condition for supplying “liquidity” to the capital-impaired AIG? Why didn’t the Fed require a commitment from Treasury to assume AIG assets it acquired subject to legislation being enacted? Why didn’t the Fed leave the responsibility for management of AIG with Treasury? Why did the Fed permit itself to be used as an off-balance sheet slush fund by Treasury? Why did the Fed permit itself to be put in a position wherein it would have to pay out public monies on behalf of a capital impaired-institution? Why did the Fed turn itself in to a political punching bag?
Indeed. Why, why, why? Perhaps Bernanke's a leading academic economist, but he certainly lacks a Phd. in "cover your ass"-ology. He's the Gomer you get to sign all the room service bills during one of those crazy guys-go-wild weekends at some luxury hotel. He's the kid you hand the freshly lit stink bomb to, then say, "Listen, Ben, we have to duck outside for just a minute, but you just hold this thing, don't let it go, and we'll be right back. Promise." And earnest Ben says, "Sure, Hank. Sure, Tim."

Yup, Ben Bernanke's confirmation as Fed chairman is now in danger because it looks like he got played as a patsy. Bernanke let the Fed be drawn outside of its proper sphere of influence. It appears he got pushed and he didn't bother to push back.

If there's a lesson to be abstracted from this I'd say: any agency clueless enough to be duped by a bunch of Treasury bureaucrats, who were in turn duped by the Wall Street pros, shouldn't be christened "super regulator" of our entire financial system.

Monday, November 30, 2009

Obama's Two Biggest Blunders: What do They Have in Common?

I'll go out on a limb -- actually, I don't think I have to go very far out -- and wager that wise historians of the future will chronicle two big blunders of President Obama's first year in office. They will be:

1. His kid-glove handling of the banks that caused the financial crisis. There was too much "please" and "if you don't mind" and mucho foot-dragging on reforming a broken system and rooting out wrongdoers. The president expressed a little outrage, maybe once or twice, then drew back into his shell. Meanwhile the government has handed over billions to the banking industry, very few strings attached, as unemployment soars. The perception on Main Street: the Obama administration is beholden to a plutocracy that really runs the U.S. of A.

There is much anger about the bailouts that's on a steady simmer right below the surface, I think. It will cripple Obama's future ability to be effective. Paul Krugman really nailed it with his recent op-ed piece pointing out the great tragedy in how the White House played patty cake with the bankers: our leaders have blown a load of credibility with the American public. Obama an agent for change? Yeah, right.

2. His ramping up of the war in Afghanistan. Public sentiment is already turning hard against this war. We're tired of wars in distant lands that half of us can't locate on a globe; we're tired of the burden they place on our groaning budget deficits; we're tired of the open-endedness of these conflicts.

Obama will buck popular opinion, it appears, by sending 30,000 more troops to Afghanistan. And we should all recognize that poker play: I call you and raise you 30,000 troops. This puts him 30,000 soldiers farther from extricating America from what will probably turn into a quagmire. I think it's a very dumb move from a very smart man. His decision puts me in mind of Hannah Arendt's wonderful book, "The March of Folly." Why do wise men persist in hopeless courses of action?

Anyway, before I get sidetracked too much, the central point: What do both of these blunders share? What's the common element? What weakness do they expose of Barack Obama -- by all accounts a highly intelligent man of a reflective nature, someone who can appreciate nuance, who has the native smarts to master any issue out there, no matter its complexity?

I would submit it's this: Obama has a weakness when it comes to bucking the system. He eagerly seeks compromise, tends to be conflict averse, and falls short on courage of conviction. With Wall Street, he didn't dare face down the banking industry. He expressed a little indignation and backed off. With the war in Afghanistan, he didn't dare to face down the military brass, who have sold him a bill of goods on what's achievable over there. He didn't want to be the guy who lost Afghanistan.

Someone might rebut: Well, what about health care? Someone who's wedded to the status quo wouldn't be trying to overhaul the health care system. That's true, and I think Obama dreams big. But look at how he's behaved with health care: He's introduced reform and made the soaring rhetorical speeches, then backed off to let Congress thrash out the actual bills. Public option? No public option? He's easy. Whatever.

Lyndon Johnson, by all accounts, was an arm twister. Barack Obama appears to be more a speechmaker -- and the words are starting to ring hollow.

Saturday, November 28, 2009

PPIP Deathwatch, November Edition

The Geithner plan (PPIP), for public-private partnerships to buy up toxic assets saddling banks in the U.S. financial system, has been roundly attacked from the start. For my part, early on, I predicted PPIP would fail for a simple reason: the banks wouldn't offer up any toxic assets for sale (for fear of revealing themselves insolvent) and the U.S. government wouldn't have the stomach (or balls) to compel them to.

So I offer up this article in US Banker (a little late, but it's been a hectic month): PPIP Finally Ready, But Who's Selling?

For me, the impact paragraph comes at the very end (bold mine):
Ron Glancz, a partner at Venable LLP who has clients with toxic assets, agreed. "It's not created a lot of stir," he says. "We have banks that have a lot of toxic assets, and they are not selling to PPIP. It doesn't deal with the fundamental problem that banks can't book these losses, because that's a depletion of capital."
The official storyline is something rather different though. The Treasury Department claims that PPIP is no longer needed, as the economy has improved and major banks have been posting profits. But what's the truth? Here's a quick and dirty rundown:

1. Bank profitability: Well, duh. Banks were given much greater leeway in valuing their assets, back in April. If you can claim multiple pieces of junk worth 40 cents on the dollar are actually worth 80, that's going to boost profits considerably. That, and if you're a major bank, you get to borrow super-cheap from the Fed through an alphabet soup of lending facilities.

2. The economy has improved: The meaningful indicators, such as the rates for unemployment and foreclosures, as well as gauges of consumer sentiment, still look pretty grim. A less meaningful indicator -- the stock market -- of course shows an impressive little runup. Quarterly GDP made an expansionary spurt, but how much of that is temporary stimulus (Cash for Clunkers etc.)?

Which brings us to ...

3. Have the Fed's "cash for trash" emergency backstop programs sopped up a lot of the toxic securities: To me this is a really intriguing question. We know that "Helicopter Ben" is eager to flood the financial system with easy money. The Fed takes collateral from the major banks, and in exchange hands out good ol' dollar bills, usable anywhere. Talk about a jolt of liquidity!

Of course the Fed won't take any ol' piece of crap as collateral. It has to be rated AAA. But ... oops ... weren't Moody's et al rating practically everything AAA, even if it stunk to high heaven? Well, yeah. So one might wonder: how much "AAA" collateral is at the Federal Reserve, and what kind of assets does it represent, and who is it from? The answer: we don't know. The reason: the Fed refuses to tell us. We know that because Bloomberg is chasing the agency through the U.S. court system right now, seeking some details. And the Fed is stonewalling like crazy.

But here's an interesting question: How does the bank that has posted collateral at the Fed account for the value of that security on its books? Because, when you come right down to it, if "A" (the value of that security, as parked at the Fed and exchanged for good hard cash) exceeds "B" (what the bank can get for that security through a PPIP auction, even assuming there will be a little overpaying by the PPIP buyer), the bank will prefer to stick the money with the Fed. And PPIP will fail.

Of course the irony -- which one can spot from a good ways off -- is that the Fed, eager to restore liquidity and restart markets, is actually hampering the necessary clearing activity and proper restarting of the securities markets for dodgy assets, thanks to all its meddling. But then again, what's a good financial crisis without an abundance of irony?

Update: To be fair, I should note that lesser quality securities (below AAA) can be submitted for the PPIP auctions. So, obviously, a bank holding these lower-rated assets can't weigh "what is their value as collateral through the Fed vs. what is their value sold through PPIP"? The Fed, after all, only takes triple A (well, for what that's worth, and it would be interesting to know how much AAA the Fed has scooped up that has then been downgraded). But dodgier securities may not be great candidates for PPIP either, because they can be harder to value, and a bank may want to exploit this uncertainty by carrying them at inflated prices on its books (and conversely, because of the problem of adverse selection, PPIP bidders may penalize such securities, so it's a lose-lose for the bank). That may convince the bank to hold onto these assets and not risk having to do a writedown.

Thursday, November 26, 2009

Phew! Just Flew Back from China and Boy My Arms Are Tired

Or however that joke goes. Right now I'm de-jetlagging after a seemingly endless flight from Hong Kong and trying to catch up on what I missed. I spent a week in China. For today, just a short odds-and-ends entry...

(1) When did passengers turn into "customers"? I noticed this on the Continental flights I took. Had it been only one flight, I would have just written off the incident as someone on the flight crew remembering some half-digested bit of marketing political correctness. But this practice was apparently part of some memo because the "customers" references came up on different legs of my journey. "Customers, please be seated." "We thank our customers for flying with us." That sort of thing.

One thing you gotta understand about me: I love the English language. I love it on a number of levels, right down to the sound of words knocking together. Further, I believe in simple, direct, effective communication. I grit my teeth when corporate America keeps trying to put lip gloss on the fact that they're terminating workers. We have gone from "firings" to "layoffs" to "downsizing" to -- a particularly odiously bland term -- "rightsizing."

Who the hell came up with "rightsizing"? It sounds so laudable. As in: "We were wrongsized before, and when we realized this, we rightsized, and now as a company we feel soooo much better." Compare that to: "We just fired 200 workers." The trouble is, "rightsize," besides having that fuzzy feel-goodness of Newspeak, is maddeningly imprecise. "Rightsize" could mean that you added 200 workers, if your company felt it was too small. Or it could mean you opened another plant, or acquired a rival. I think there should be Useless Euphemism jars, like swear jars, for awful euphemisms. Every time a flack tells you his company "rightsized," he should have to put a buck in the Useless Euphemism jar.

But back to the customers sitting on the airplane, waiting an hour on the tarmac twice on delayed Continental flights (whoops, wrong peeve) ... why not just ditch the marketing PC and call us what we are, most accurately, in our current role? Maybe when we're buying the ticket at the counter, we deserve to be referred to as "customers." But once we're on the plane, we become passengers. There's no shame in that. And the word best reflects our role at that moment.

Say the plane smacks into the side of the mountain, killing 230 people aboard. When Continental holds a media conference on the disaster, are they going to say, "We lost 6 members of the flight crew and 224 customers."

Of course not.

(2) China, tear down this wall! By "this wall," I am referring to the Chinese firewall of censorship on the Internet. While on vacation, I looked forward to keeping current on my favorite blogs only to find the large blogging communities -- WordPress, blogger -- blocked.

Why? Because China, despite its emergence as a global power to be reckoned with, is still a politically immature country, its leaders fearful of independent thought, criticism and debate. As far as they are concerned, the state news service (Xinhua) tells its citizens what they need to know, with an appropriate viewpoint. "Question Authority" is not a fashionable slogan over there.

I'm not trying to China-bash here. Often the Chinese look at Westerners and protest, "You don't understand our country." And I respect that point of view. There is much that we don't understand. I think the U.S. makes its worst blunders abroad when it assumes that the yearnings in the hearts of our citizens are exactly the yearnings of men and women everywhere, and that what is good for our country must be good for any country. It is hubris bordering on madness to think that we can neatly and simply transplant a Jeffersonian democracy to the harsh sands of Iraq for example or to the desolate strife-torn mountainous region of Afghanistan. America would do better with a little more humility.

Yet -- yet -- at some kind of baseline, there should be principles that reasonable men can agree on that make for a better society. One is the open, independent, vigorous sharing of ideas and opinions, I strongly believe. In America, I think we have open and independent sharing, though its vigor has somewhat been sapped by a culture narcotized by entertainment. In China, they have none of the above. I wonder sometimes if they realize the cost.

There is a real cost in lost innovation, across so many spheres: not only economic, but social and cultural too. There is a cost as well in human development of one's citizens (I am sometimes surprised at the number of very smart Chinese I have met who are not particularly nuanced thinkers or debaters; they have never been taught to question and examine things). Then there is the most ludicrous of costs -- the tangible cost of repression: of maintaining the spy networks, of paying the censors' salaries, of having to constantly screen what is acceptable and not -- a cost akin to buying the bullet that you then use to shoot yourself in the foot.

I think China contains the seeds of greatness, but first must have the courage to let a thousand flowers bloom ... from within.

Wednesday, November 11, 2009

Tin Ear of the Year Nominee: AIG's CEO

Man, this guy is -- how to put this gently? -- aw, the hell with it -- the very embodiment of chutzpah. Early in this financial crisis, I noted the curious lack of contrition on the part of Wall Street bankers. There was nothing in the way of an apology, just a lot of hustling out the back door with the bags of TARP money. There wasn't even that mumbled, eyes downcast, insincere "I'm sorry" that you get from your four-year-old who was caught smearing peanut butter on his sister's ponytail. At the time I wondered about the deafening silence of Wall Street's public relations machines.

Lately, Wall Street's head honchos have opened up a bit more, even going on "charm" offensives. And now, you understand why they were silent before. Because these guys radiate arrogance, even when they think they're striking a humble pose. You have Lord Blankfein over at Goldman Sachs, telling us the firm is doing God's work (shades of noblesse oblige) and that a certain amount of income inequality just has to be tolerated.

And then you have AIG's Robert Benmosche, who's threatening to walk off the job after only three months. I love the brutal Huffington Post headline and subhead:
AIG Chief Threatening to Jump Yacht
New CEO Benmosche Spent First Two Weeks on Job Vacationing on the Adriatic ... Now Claims He's Done, Angry About Pay Restrictions

(Note: the pictured yacht is not his, I suspect -- it appears far too small.)

Okay, Benmosche -- who I have yet to see a photograph of, but I imagine most images portray him with foot lodged firmly in mouth, as that's where it appears to have been since his hiring -- is fuming about pay restrictions on AIG executives. Remember, AIG was on the brink of self-immolation last fall when the U.S. government discovered that the company was actually a hedge fund grafted atop a sedate-looking insurer, and was about to go up in flames in a very messy way. And so the government (using our taxpayer dollars) interceded.

So now the U.S. government has the audacity to make rules about how the top executives are compensated, which has a funny sort of logic about it because we own the damn company. AIG is a ward of the state: we purchased four-fifths of this wrong-way bet colossus. Of course we have a say. Don't sell me a hair-covered lollipop then tell me I can't clean it up.

And the top 25 executives at AIG are being forced to work at starvation wages. Anyone want to guess what their annual salary is capped at? $100,000 a year? Well, no -- not that starvation. Any self-respecting AIG top executive is still going to have golf club dues and such. We can't airbrush all that away. Okay, then $200,000 a year? Nah, not that bad. $300,000 a year? Oops, not that low. Not even what the U.S. president makes: $400,000 a year.

Here's the answer: Benmosche is bitching because he can't pay them more than $500,000. By the way, how rich are you if you make a cool half a million? Check this out: you happen to be the richest 107,565th person on the planet. No, actually, you're even richer than that, because the Global Rich List calculator tops out at 107,565 at $201,000 of income. So let's just say you're pretty stinkin' well off.

Benmosche, by throwing a hissy fit about the inability to lavishly compensate his key executives, is displaying a level of Tin Ear-edness that may just win him top honors this year. Since he has no clue about how to run a company without a fat-salaried caste of big bosses, I hereby offer up a few bits of advice (free, because I know he's on a, ahem, budget these days).

1. Grow your own executives, dammit. Surely there are people -- strivers; check the backs of their co-workers for claw marks -- within the relevant divisions, at lower levels, who dream of running the world someday. They're probably not happy with their pittance salaries of $250,000 to $300,000. $500,000 would be a big salary bump. Find them. Mentor them. Put them in place.

2. Split job responsibilities. Okay, if you can't find one guy to run your fire insurance or whatever division for $500,000, find two guys. Better yet, find two women. And a couple of minorities to boot. Use this as an opportunity to introduce a few new faces and spread duties a bit more widely. Checks and balances, right? Maybe, next time, Betty will say to Financial Products co-head Flo Bassano, "Hey, do you really think we ought to be loaded up with so many of these darn CDS things? They look sort of volatile."

In short, be creative. And for God's sake, talk to your PR department. They may, in so many words, tell you what the rest of the world wants to: Stop yer bitchin'.

Tuesday, November 10, 2009

Blankfein Makes the Argument for Heavily Regulating Banks

Imagine a world in which the air that we breathe -- that's right, that air all around you -- wasn't freely available. Let's say it's held in "air reservoirs" and pumped into our airtight houses. Whenever we go outside, we have to take compressed air in tanks because the normal atmosphere can't support life. And we all get used to living this way -- okay, it's a bit inconvenient, but everyone gradually adjusts and life goes on.

How do you think, in such a world, air would be "regulated"? With the same light hand we would use for regulating the sale of frivolous items, such as lawn gnomes and chia pets? Ah, dumb question. Of course not. Air would be the most regulated commodity mankind has ever known. There would be frequent quality checks for air contamination, strict rules about pipes that carried the critical air supply, regulations about every aspect of the portable air tanks that we depended on.

Why? Simple. Without air, we die. This is a life and death matter.

Abstractable principle: the amount of regulation appropriate for an activity (or commodity, or whatever) should be in some direct proportion to how vital it is. Without breathable air, the entire human race perishes. So clearly, there will arise a lot of rules surrounding the proper reserves of air, how it will be supplied to the population at large, what quality is acceptable, and so on.

By this same argument, Goldman Sachs CEO Lloyd Blankfein believes that the financial industry should be heavily regulated. Because, well, it is the vital lifeblood for our economy. Credit is the "air" that businesses, large and small, need to survive. If you don't believe me, here he is, hotly telling a reporter that you can't compare bonus-seeking bankers to coal miners striking for better wages in the 1970s. Because the bankers happen to be involved in something much, much more important:
"I’ve got news for you," he shoots back, eyes narrowing. "If the financial system goes down, our business is going down and, trust me, yours and everyone else’s is going down, too."
Sounds pretty grim. Sounds like an industry that's really, really vital to our economic health. Sounds like a pretty convincing argument for a new, much more intrusive, regulatory regime. U.S. Congress, all you guys have to do is connect the dots for Mr. Blankfein now. He's made the argument for you.

Saturday, November 7, 2009

Must Read of the Day: Kill Credit Default Swaps

At first, my leading "must read" candidate was Roger Ehrenberg's Barking up the Wrong Tree. Roger identifies an ongoing problem with Washington's attempt to knuckle down on the financial industry: legislators get distracted by pander-ready sideshows. Example: dark pools and high-frequency trading in the stock market (note: I'm not saying either is necessarily harmless, but I agree that they're not doing the harm of the big elephants in the room -- unregulated derivatives trading and corrupted credit-rating agencies). Why is this? As Ehrenberg observes, plenty of little investors are in the stock market, so Congress takes on related issues with a lusty sense of outrage. But derivatives and credit raters are willfully ignored because the subjects aren't as sexy and grandma doesn't spend any time checking out, say, how Moody's grades "SocGen CMBS Non-Conforming Pool XII."

Still, that blog entry dropped to second place on my "must read" list after I found this, over at naked capitalism: First, Let's Kill all the Credit Default Swaps. Yves Smith, who has gotten pretty smart about CDS products while researching and writing her soon-to-be-released book related to the financial crisis, says:
Credit default swaps have no redeeming social value. They are a fee machine for Wall Street and their supposed value is considerably overstated (the world pre credit default swaps functioned perfectly well) and their costs, which are considerable, are not given the attention they warrant.
She lists their sins, including their "anti-social" nature. A credit default swap, remember, is basically insurance in case bad stuff happens to a company and renders its bonds worthless or impaired. When you buy this protection though, the only way to cash in is for the bad stuff (a so-called "credit event") to occur. So, like cash-strapped homeowners who have a tendency to play with flames around heavily insured items, a holder of say an IBM credit default swap might prefer that the computer maker declare bankruptcy (a triggering credit event) rather than restructure its debt -- even if restructuring the debt is a smarter move for the company that in the end does more economic good.

Yves also notes that simply moving credit default swaps onto an exchange may simply create a "too big to fail" exchange -- and not extricate us from this mess at all. It's a good point and indicates that the CDS may be too neutron-bomblike to allow in the financial arsenal of weapons.

A casual observer might wonder about this. After all, a CDS is basically insurance, and we have well-capitalized insurers that do just fine. Well, first the insurance industry is well-regulated, unlike the CDS market, but even if the swaps were highly regulated they differ from standard insurance in two big, troubling ways:

1. Unlike with, say, home insurance, you can buy a CDS repeatedly for the same bond. This would be the equivalent of being able to insure someone's house, say, 50 times over -- or even more. Further, you don't have to have any underlying ownership interest whatsoever in the insured bond. So this is a perfect tool for highly leveraged, out-of-control speculation.

2. You can set aside a stockpile of reserves for insurance more effectively, because correlations are weaker. A national insurer may suffer losses from a hurricane in Florida, but chances are good that its claims elsewhere in the country will run at about the same pace as usual (the probabilities of damage events occurring at separate locations, over a wide enough area, are uncorrelated). That makes it easier to absorb the loss from the hurricane. Unfortunately, when the economy tanks, bankruptcies rise in all sectors. It's like a hurricane that sweeps the length and breadth of the U.S. What's worse, with a credit default swap, the hurricane can strengthen off its own destruction, like some evil black hole that becomes more powerful as it draws in more matter. Namely: as we saw in this last crisis, collateral requirements against credit default swaps start to suck liquidity out of the system as the credit markets spiral downward, which in turn exacerbates the plunge.

I don't think our lawmakers are brave enough to try to get rid of credit default swaps, but I find it interesting that a fair number of smart people who know how these products work, in an intricate way, are suggesting such a thing.

Thursday, November 5, 2009

How Much Crappy Collateral is the Fed Warehousing?

The possibly scary answer to this question periodically gets my stomach churning. When the definitive works are written on this financial crisis, in another decade or so, I think the authors will pass judgment not so much on the overt bailout -- TARP is small potatoes, folks -- but on the "invisible bailout" that no one ever voted on, but that the Fed orchestrated behind the scenes. We can't write these definitive books yet, because the outcome of the invisible bailout isn't clear.

What put me in mind of this subject: this paper over at Zero Hedge, allegedly by a "Nathan Jerome Burchfield," that claims the Fed may have accepted crappy CMBS (commercial mortgage-backed security) collateral against loans it made. This occurred through the TALF, or the Term Asset-Backed Securities Facility. And then, after the Fed accepted this stuff as top notch collateral (AAA rated, creme de la creme), the ratings agencies -- interestingly enough -- turned around and downgraded the products.

I'll get to that oddity in a second, but first, let's pause for a moment to look at where we are in this financial mess. Ostensibly, things are going pretty well -- the troubled credit markets seem to have taken a magic calming pill -- but if you whisk back the curtain (which few Americans are inclined to do), you are treated to a crutch-like monstrosity of money-rigged supports that brings to mind that old poster "Building a Rainbow." It's hard to tell what asset prices for securities are really worth, because the Fed is swallowing them up at an astonishing rate, as long as they're bearing a AAA rating from one or two of our not-very-trustworthy credit raters. The securities (most likely generously graded) are accepted by the Fed as collateral, giving them value that they ordinarily would not have. So you give the Fed these "AAA" securities, it gives you dollar bills in exchange -- yee hah! -- then sits on your collateral.

But what's this collateral really worth? And what happens when the Fed takes collateral that then is downgraded to something less desirable -- to a rating that the Fed wouldn't have accepted in the first place?

If the Fed were smart, like say Goldman Sachs -- believe you me, it would start hoovering up more collateral, or insist on $x dollars to compensate for the downgrade. But remember: the Fed's agenda is less about protecting the taxpayer than about invisibly bailing out Wall Street. In fact, a critic might even wonder if the Fed, the credit agencies and the holders of the CMBS have in some way colluded so that the ratings hit occurs only AFTER the Fed accepts the securities. That way, the CMBS owner has already got his cash -- bye bye, so long sucker.

Certainly, at the very least, the Fed seems like the "mark" in the "market" these days. Consider: the Fed announces that, starting in July, it will accept CMBS as collateral ... meanwhile, everyone has been predicting all year that commercial real estate will be the next market to fall flat on its face. So the Fed has accumulated billions in CMBS collateral -- I think the latest figure is $6 billion -- in a sector that's prime for collapse. Dumb or really dumb?

A true-blue capitalist might argue that this is precisely the kind of sector the Fed should avoid -- let the upheaval come, the prices drop, the readjustment occur. Let the free market sort out things. But the Fed, gently intervening through its invisible bailout, helps keep asset prices artificially high.

Outraged about this example? Save some outrage. The Fed is rife with lending programs like TALF. The organization's balance sheet has become an alphabet soup of crutch-supports. And these programs have gotten pretty darn fat. Anyone recall this Yves Smith blog entry, Term Auction Facility: Confirmation of Financial Stress?, from Feb. 19, 2008 (the bold is mine)? God, seems like a lifetime ago huh?
To give a quick overview of the TAF: it was launched December 17, with two $20 billion actions, one for 28 days (the one conducted on the 17th) and a second for the 20th for 35 days. The reason for the program was that the gap between the Fed funds rate and interbank rates had become very large, suggesting that banks were reluctant to lend to each other. That was even more acute in December, since banks customarily curtail their short term lending then so they can tidy up their books for year end.

We’ve called the TAF a discount window without stigma (and in fact, the Fed implemented the TAF because banks weren’t using the discount window even when they should have). Banks can post a wide range of collateral, borrow on a non-disclosed basis, and can hold on to the cash for a while (by contrast, the discount window is overnight)

And what would you expect when you allow "a wide range of collateral"? Probably a rapidly expanding program, as banks shovel in all sorts of junk and get dollars in return. And sure enough:

The Financial Times today raises some concerns, noting that banks are indeed using the TAF to use crappy collateral for borrowing.

And note that, with no announcement I can recall, the facility has been increased to $50 billion even though the year end crunch has passed. That too is not a good sign.

So whatever happened to good 'ol TAF? By the end of June of this year, the Fed said that the value of collateral pledged through TAF was $1,570 billion (edit: actually, to be fair, only $899 billion of that was against current loans). Big, bad and bloated.

And so, the larger questions: where does all this massive intervention end? Does the Fed really think there's an easy way to just quietly and painlessly withdraw such huge levels of support? And what if that collateral turns out to be worth not very much? Who's stuck with the tab?

Sunday, November 1, 2009

Settling the "Was it Lehman?" Dust-up

Was the U.S. government's decision to let Lehman Brothers tumble into bankruptcy last fall a fatal miscalculation? By letting Lehman go, did we precipitate the brutal freeze-up in the credit markets?

Answering that question has become a hot niche topic for debate. The latest contribution by William Sterling is here: Looking Back at Lehman. It's a rather tedious read, so I'll just cut to the chase:
In contrast to the analysis of Lehman skeptics such as John Taylor (2008, 2009) and John Cochrane and Luigi Zingales (2009), the evidence we present supports the view of many practitioners that the decision not to rescue Lehman represented an immediate and massive shock to the financial system that was larger by an order of magnitude than anything seen over nearly two decades.
First, if you examine the day-by-day, blow-by-blow data, I think it's obvious that the Lehman bankruptcy did matter hugely. But if you look at the larger picture, I don't think Lehman mattered much at all. The long historical view: we were poised on the tip of a teetering Seussian-type credit edifice, creaking with hidden risk and towering with high leverage. It was bound to collapse in an ugly way sooner or later.

The "micro" analyses that focus on how the credit markets reacted in the immediate aftermath of Lehman's collapse largely miss the point. Which is: Lehman's failure revealed the Seussian-type credit edifice in all its terrifying precariousness for the first time. There were at least two big problems that came to the forefront with Lehman:

1. The shadow banking system was shown to be extremely fragile.

First, check out this primer on shadow banking; it's what I consider a great introduction to the subject. It's an interview between Mike Konczal (the creator of the always-smart Rortybomb blog) and a Barnard College professor, Perry Mehrling.

Shadow banking was (still is, I imagine) HUGE. This MarketWatch story claims that the shadow banking system had $10 TRILLION in assets in early 2007, making it the same size as the traditional banking system. Just ponder that for a second. That's a tremendous amount of money sloshing about that's meeting demand for funds in the economy, while doing so outside of the reach of regulators.

Big brokers such as -- ta da -- Lehman Brothers were supposedly the largest players in the shadow bank network. How does shadow banking work? An investment bank such as Lehman arranges to sell some securities to what we'll call a "pseudo-bank", then buy them back say a day later for more money (that extra bit of money providing an interest rate on funds, if you will, for the lender). James Kwak at Baseline Scenario breaks it down well here.

Those securities may be AAA-rated, making them appear pretty safe. That's important because the pseudo-bank has to juggle two risks here: (1) That it will get stuck with the securities (2) That, if it is stuck with them, it will have to make enough money selling them to be made whole. Who are the pseudo-banks? Largely, it appears, money market mutual funds swimming in cash, looking for better yields.

So Lehman gets to de facto borrow against high-rated securities (that serve as collateral). Once this collateral looks suspect, or Lehman begins to falter financially, the mutual fund may refuse to "roll over" the buy-resell contract. Then, since these are very short-term agreements, Lehman can very quickly find itself pretty much screwed, unable to raise money that it desperately needs.

Which is what happened when Lehman stumbled. Its financial footing was rapidly whisked away and, because this is a "shadow" banking system, there was nowhere to turn for emergency liquidity (see Mike at Rortybomb for a longer discussion of this gaping weakness).

Now, if you're a pseudo-bank providing funds to this shadow banking system, and you observe Lehman staggering about, badly wounded, what do you think? It's not, "Well, that must be a problem isolated to Lehman." No, it's more like, "Holy crap, almost any of these investment banks could be in similarly rough shape, and how do I know these 'AAA' securities are really worth as much as anyone says."

Meanwhile, the U.S. government begins to realize that it can't let all the investment banks go belly up, en masse, because the Lehmans and Morgan Stanleys have got a million tentacles reaching into many corners of the global financial system, such as through their derivative operations. These guys have been at ground zero in the efforts to launder risk.

So Lehman's failure was about more than Lehman. I think we could've rushed in and bailed out Lehman, sure, but eventually the sprawling, frail shadow banking system would have blown up somewhere else.

2. Lehman was shown to be worth a lot less than it claimed, further scaring the hell out of everyone. Everyone starts to wonder, "How solid are the counterparties I'm doing business with?"; nervousness sets in; credit flow ices over.

September 15, Lehman Brothers Holdings says it will file for bankruptcy. It cites bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. Doesn't sound too bad huh? Assets of $639 billion, liabilities of $768 billion?

Now take a guess how much Lehman's bondholders recovered on the dollar. 50 cents? 40 cents?

Recovery rates for defaulted bonds have declined in the U.S., true. Moody's said they fell, on average, from 61.8 percent on senior unsecured bonds in 2007 to 33 percent in 2008. But Lehman bonds crapped out spectacularly. They fetched less than 10 cents on the dollar. That's pretty awful.

So there you have it.

Here's my takeaway point: Lehman's bankruptcy was a proximate cause of the credit freeze, but that doesn't necessarily mean rescuing Lehman would have been the wise thing to do. Perhaps if we had saved Lehman, that would have only delayed the breakdown of the financial markets to the fall of 2009, and it would have been twice as bad.

I worry about the "No More Lehmans" crowd because they're the ideological heirs of "Bailout Nation," the hopeless model of propping up Too Big To Fail banks. And I'm concerned they don't even seem to realize it.

Thursday, October 29, 2009

Selected Readings for a Thursday Morning

1. Under Attack, Credit Raters Turn to the First Amendment

First, a disclaimer on my recommendation for this Huffington Post investigation: a version of this story has been done before; it's not exactly anything new. To wit: Moody's and friends like to scurry behind the First Amendment when outraged investors seek recompense for losses after believing their inflated ratings.

I know the argument the credit raters are trying to make, but it always has offended me somewhat. You think of the great figures of American history who have invoked the First Amendment, and how it has been this core, unassailable principle that makes our democracy so powerful. And then Moody's ... well, subverts it to this end. I suppose my reaction is akin to the reaction you'd expect from a Fox commentator who discovered footage of a beatnik casually wiping his butt with the American flag.

For now the lesson we must learn is to treat the credit-rating agencies as untrustworthy, unfortunately, as they consider their ratings to be basically on par with an opinion column in a NAMBLA newsletter. It's all just free speech, right? But remember what motivates their "free speech." They can in effect "sell" good ratings, as they are paid by the company that issues the product they're rating.

Even if prostitution is deemed legal (as it is in some places), a whore is a whore is a whore. To some degree, credit-rating agencies will continue to be whores (or have pronounced whore-like tendencies, at the least) as long as they are paid by the people whose products they're judging. So investors, caveat emptor.

2. Naming Systemically Dangerous Firms

This guest post by David Moss at The Baseline Scenario left me clutching my head and moaning. Apparently the systemic risk legislation for the financial industry that's beginning to wend its way through Congress would identify "Too Big to Fail" institutions and then NOT make their names public. The stated reason: identifying them would encourage "moral hazard."

No. No. No. No. No. (Draw picture of me here, repeatedly banging my head against a brick wall.)

Sometimes I wonder what kind of chowderheads we have drafting laws in this country (actually, I should know by now: they're not the men and women we elected; they're the lobbyists that paid for their campaigns). Assuming that we decide to allow "Too Big to Fail" institutions to exist (believe me, there are many Americans who question the wisdom of this), why the hell should we keep their identities in the closet? Remember, one big pillar on which regulatory reform needs to be built:


One more time:


The truth is, there will be enough leaking of this "Too Big to Fail" list that plenty of people will know who's on it. The market will make adjustments; you'll get your damn moral hazard anyway. What you may not get is the open and vigorous debate that we need about the TBTF's that appear on the list. Any bank that merits a Too Big to Fail should be regulated within an inch of its life, like a common utility. And it should be watched really, really closely, because when it blows up, it can blow a gaping hole in the side of the good ship the U.S. Economy.

And for all of us to be super-vigilant about these Too Big to Fails, we all need to know who they are.

"Too Big to Fail" shouldn't be some neat little merit badge you get at a moonlit ceremony in the heart of the dark woods. It needs to be a stamp, hopefully more akin to a scarlet letter, that gets planted on your forehead in full view of the public (which has to pay for your Too Big to Fail-ness, if you do screw up, so believe me, there's plenty of justice here).

Wednesday, October 28, 2009

Nobody Rides for Free? Think again, Jackson Browne

Lately I've been thinking about the "free rider" problem in economics, partly because free riders are so easy to find once you start looking for them. It's an unbelievably easy Easter egg hunt.

The free rider of course is someone who partakes of a benefit but doesn't help pay the associated cost. If you live in a village of 1,000 people, and there's one dirt road in, absent a local government structure someone might try to collect funds to have the road paved. If 999 people contribute $1,000, but you don't deem the project worthy and decline to pay anything, then you "free ride" on that nice smooth road when it's finally covered with a shiny black layer of pavement.

This winter, I may be a swine flu free rider. How? I'm leaning against getting a protective shot. Part of my reasoning is: Because of the general feeling of panic, and the constant media drumbeat about the dangers of swine flu, millions will get vaccinated. They will help form a protective buffer around me, damping the spread of the flu. Thus, I benefit from the precautions they take.

You can also appreciate this on a mathematical level. Possible infection rates for swine flu have been predicted to be around 30 percent (which strikes me as very high -- but as a free rider, that's okay, because it just means that this figure will scare more people into getting vaccinations, and so give me an even better free ride). But the more people who get the vaccine, the lower that infection rate will be. Now, if 299,999,999 people out of a population of 300 million get a swine flu shot (or nasal injection), and I'm the only one who doesn't, then my chances of getting the virus are practically zero. Because, obviously, where am I going to get it from? An airborne petri dish?

If you feel annoyed at me for free riding, don't be. Everyone's free riding somewhere. Just look around.

Take Afghanistan. It's a justifiable war, I think, unlike Iraq. Yet it still looks like a hopeless quagmire. The legitimacy of the Afghan government has been hollowed out by incompetence and corruption. I would find a way to get troops out of there, fast. This conflict will only end badly. General McChrystal is right: he does need more troops, but even then he may only be able to fight the enemy to a standstill.

But back to the free rider part: There are apparently plenty of other nations that want the U.S. to stay in Afghanistan, to try to sort out this opium-growing and strife-torn mess of a country that is an all-too-convenient hatching ground for future terrorists. The whole world reaps the benefits of fewer Al Qaeda cells operating within Afghanistan's mountainous borders. But other countries are reluctant to commit their troops or their funds to support our combat operation. They would rather sit back and free ride. And so the U.S., still thinking it's the superpower with the mostest, takes this burden on its shoulders.

One more free rider example to complete the set of three today:

I'm about to move to New York City. I was doing comparisons to see how a given salary stacks up in different metro areas. Zounds! New York is frightfully expensive (as if I really needed to be told that, but once you see the numbers in black and white, it is pretty sobering).

I'll be forking over a big chunk of my paycheck to the federal government for taxes. In fact, New Yorkers most certainly contribute a big slice of the federal taxes collected in this country. The irony is that the people who complain the most bitterly about taxes and big government live in the conservative red states, in the heart of America, where salaries are lower. So they get to gripe while free-riding, to some degree, off the liberals.

Example (go here for the cost-of-living calculator): $100,000 in Manhattan salary would buy the same as $40,384 in wages in that reddest of red capitals (and believe me, I know, having lived there once), Oklahoma City. So here's the picture: Oklahoma residents are fuming about government being too large, taxes too high, and meanwhile the typical worker in the state capital probably pays a good deal less to support our troops abroad than the liberal president of the Sierra Club in New York City.

(For those who say it all balances out, because New Yorkers get proportionately higher salaries, two things: (1) If you're making $40,384 in Oklahoma City, good luck transplanting to Manhattan and getting $100,000 just because, you know, you deserve more because of the cost-of-living differential. (2) Our income tax scale is progressive, so $100,000 puts you in a much steeper tax bracket than $40,384.)

Nobody rides for free, Jackson? Au contraire ...

Tuesday, October 27, 2009

The Inanity of the Home Buyer Tax Credit Laid Bare

For anyone who missed it, Nemo at self-evident had a good post on why the tax credit for newbie home buyers is a really dumb idea (The First-time Home Buyer Tax Credit is Idiotic; he doesn't mince a lot of words). He had a follow-up here to explain it all in (brace yourself) the economic parlance of supply and demand curves.

I'll just cherry-pick a few reasons why the tax credit is stupid:
1. It forestalls the setttling out of home prices at their natural bottom, which is what we desperately need before the U.S. housing market can begin a sustained recovery.
2. It encourages first-time homebuyers to leverage up too much to buy a home (and what's more, they won't be buying at the natural bottom -- see point #1 -- so they stand a greater chance of winding up underwater on their mortgage).
3. Once you start shifting around the supply and demand curves, you find that the tax credit, if anything, induces developers to boost the supply of homes in the market. But the housing market, if anything, is suffering from a glut of units right now.

So why do we have an idiotic tax credit gumming things up? To throw a crutch under the housing market to help the banks and beleaguered homeowners, even though we could do more with the money by just writing everyone a bunch of checks and save all the paperwork and economic distortion? Yeah, that's part of it.

The other part is what Washington has become: a giant pork pull. Politicians know that their policies don't need to make any economic sense as long as they're shoveling enough free money out the door to keep enough Joe Averages in the constituency happy enough to re-elect them.

Health Care Reform? I'm Busy Counting My Gold, You Dark-skinned Whippersnapper!

The title says it all:
U.S. Health Care Reform Mainly Opposed by Rich Old White Men

Sunday, October 25, 2009

That Time of Year: WSJ Op-Ed Defends Insider Trading

I say "that time of year" because periodically (okay, maybe not every year, but as sure as the swallows land at Capistrano), the WSJ runs an op-ed piece that defends the practice of insider trading.

This year's version is written by Donald J. Boudreaux and, owing to its sort of porky length, I am betting that it appears only online and not in the print Journal. Boudreaux makes enough sense that, if you want to see the real fright gallery for this Halloween-timed piece, check out the comments section afterwards. You'll find a lot of people -- they smell like traders to me; they have that sort of smart knowingness about the markets on a very micro level -- cheering him on. Clearly Boudreaux managed to quickly assemble his own amen corner.

So what is wrong with insider trading? Boudreaux offers many reasons why it's actually a good thing. But does his exuberant defense capture the whole picture?

First, what is insider trading? It's pretty much what it sounds like: insiders buying and selling stocks of publicly traded companies based on knowledge that they have that others don't. Obvious example: You know, as a director on the board of Cisco, that the company will be bought out by the Chinese at a 30 percent premium. The formal announcement will come in two weeks. So in the meantime you buy every share you can lay your hands on. When Cisco pops say $15 a share, you cash in.

That's illegal. In Boudreaux's world, it wouldn't be (though, as he proposes, Cisco would be left to define its own narrow or broad version of "insider trading" -- for example, it could mandate that no insiders can trade on information related to takeovers/mergers. The company then would be free to sue any violators itself; federal regulators wouldn't get involved).

Let's look at what Boudreaux is saying, bit by bit. First, he points out that regulating insider trading is a messy, imperfect business to begin with. The application of the enforcement rules is unavoidably biased. Here he makes an interesting (and valid) point:
These prohibitions are meant to prevent all insiders with non-public information from profiting from the use of such information before it becomes public. It follows that unbiased application of these prohibitions should target not only traders whose inside information prompts them to actively buy or sell assets, but also traders whose inside information prompts them not to make asset purchases or sales that they would have made were it not for their inside information.
Okay, here's what he's saying, in easier-to-parse English: Insider trading catches only sins of commission, not sins of omission. It catches people who are buying and selling (they leave a paper trail, alas), but not those who would have bought and sold, if not for their privileged information.

So picture Fred, who's working for King Kazoo. He's a mid-level manager who happens to glimpse a copy of King Kazoo's sales for August, on the desk of his boss. At lunch, Fred was planning to place an order to sell 5,000 shares of King Kazoo. But he sees kazoo sales rocketed higher in August. The stock is going to soar. Fred thinks to himself, "Ah, maybe better not call my broker after all." And when the stock subsequently jumps 20 percent, Fred is sitting pretty.

That's not insider trading. Fred never made a trade. But it is insider knowledge that leads to a profitable advantage. And it's undetectable. We can't hook up Thought Monitors to everyone who works at, or deals with, a public company to see what they would have done had they not seen Document X or heard Y.

It's a problem for sure. But I think it's a problem of a different order of magnitude that we might just have to swallow hard and live with. It's a different order of magnitude because out-of-the-blue or less-motivated decisions to buy or sell stock (as with Fred above) are going to be smaller than motivated decisions to buy or sell based on a clear advantage. Okay, that's confusing, so here's what I mean more plainly: Fred was going to sell 5,000 shares and decides not to, seeing the great August sales figures. Now if insider trading were allowed and Fred was thus encouraged to profit off any information he had, he'd certainly be motivated to go out and buy a bunch of shares. But I think he would try to buy a much larger chunk of shares -- maybe 50,000 -- knowing he can make a bucketload of money.

So here's the contrast: the action he doesn't take is more likely based on a weak-motivation decision (he's going to sell the shares to generate a little cash, he has a vague feeling the stock will drop, he had a bad burrito last night and just doesn't feel like owning as much stock). But the action he does take -- buying or selling -- is based on a strong-motivation decision (he's almost certain the shares are heading higher). And when he acts on strong motivation, many more shares are likely to be involved.

The upshot is that I don't think the "sins of omission" are excusable, just that they tend to be less bad, so it's not worth getting too overexercised on that point.

Moving on: the core of Boudreaux's argument would warm the cockles of the heart of any efficient market theorist. Remember, that theory holds that the price of any stock, in an efficient manner, adjusts to reflect all relevant, available information. So, in this ideal world, the price of Kazoo stock is exactly what it should be.

But, of course, this overlooks something (actually a big something, in that it doesn't account for bubbles, momentum movements and the myriad irrationalities of human nature, but we'll let that part go for now). Kazoo stock can't be perfectly priced (even disregarding the irrational stuff), because the market doesn't have all the relevant information. Insiders do possess much of this information. And so, by allowing them to add their "information" to the market's understanding of the stock, this gives us a better approximation of its true value. And this is good, Boudreaux points out, for many reasons:
Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme's managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme's share price will be too high. Investors will buy Acme shares at prices that conceal the company's imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme's employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.
In economist speak, capital (human and otherwise), is being misallocated in this scenario. Acme may receive too much credit, on too generous terms, because its stock price shows a healthy company that does not indeed exist. Talented managers at Acme -- who could be launching profitable startups or using their expertise to propel other firms to greatness -- are instead pouring their valuable time into a black hole of a company that's about to declare bankruptcy.

The argument appears compelling. Where does it break down? I think it's on the shareholder side, with the help of a feedback loop. Because while I think Boudreaux is on the cusp of a valid point with his "economic inefficiency argument," I think he misses badly on the share-price analysis, and this flaw then turns around and undercuts his efficiency point.

So let's look at this more closely, using the Acme example that Boudreaux himself has provided. Imagine Acme is a paragon of insider trading -- by this I mean that everybody has free rein to trade on whatever insider information they can obtain. A Boudreaux-ian would say, "Great, the stock price is really accurate and very efficient. The markets must love that!"

But do they? What are the two bedrock principles most often cited when discussing ideal markets? Free and fair. Certainly the Boudreaux world qualifies on number one. But it falls far short on number two. So what are the implications?

Let's go back to what a fluidly functioning market is all about. There are buyers. There are sellers. Shares change hands, and a moment later the stock ticks higher or lower. For that transaction, at that instant in time, there is a winner. And there is a loser. I personally think this is a more useful paradigm for understanding stock trades, especially shorter term, than that of "mispricing."

So let's imagine there are two investors in Boudreaux's world, Joe Insider and Ted Outsider. Acme is at $30 a share. Joe Insider sees evidence of the company's shakiness. Ted is unfortunately oblivious. Joe starts to sell. Ted sees a buying opportunity and scoops up cheap shares of Acme. Meanwhile Acme falls all the way to $10 a share.

Now, you can argue that a certain amount of mispricing was eliminated during this process. Acme now trades at a "truer" price. But let's examine what happened in the market. Ted realizes he's been had. He took the wrong side of the trade; Joe took the right side because he knew what was really going on.

Okay, Acme now trades at $10. That's good because the price is now more accurate, right? So now Ted should feel more comfortable about buying up more Acme shares because it's settled at this fair $10 price. So he snatches up Acme at $10 each. At the same time, Joe sees inside evidence that the price is going to drop even further. He dumps his holdings, does some short-selling, and makes a profit when the stock hits $3. Ted, meanwhile, takes a bath again.

Now Ted is irked. He's still got some shares, which slowly climb back to $10. At this price, he figures, "That's it. I'm out of this turkey." But at the same time, on the inside Joe sees that Acme is on the verge of acquiring a patent that will turn the company around. And so Joe grabs a whole bunch of shares, Ted divests his, and Acme has a super run up to $20 a share.

What does it mean when you have a situation like this? Ted, who is an active trader and contributing to making the market more liquid, is probably going to steer away from companies with heavy levels of insider trading. Why? This one doesn't take a rocket scientist folks: for every trade, there's a winner and a loser, and going up against insiders on his trades more often than not, Ted's going to turn out to be the loser.

Acme's stock then becomes more illiquid. Not good.

Boudreaux does claim that firms such as Acme will enjoy a lower cost of capital because their stock prices reflect a truer value of the company. But is that really so? Could their cost of capital actually be higher?

How so? On the equity side, the broader investment community will be more reluctant to put money in a company where insiders have the advantage in stock trades, by virtue of the information only they possess. More and more investors may take a pass in trading these shares, as it becomes clear that in any trade, you are increasingly likely to be across from an insider who has an edge. The stock price will naturally fall when a smaller pool of investment dollars is chasing a given set of shares. And so the company may, paradoxically, appear to be weaker than it actually is.

This is the feedback loop part.

What else will happen at Acme, if it becomes a haven for insider trading? Well, other unpleasant possibilities: there could be information hoarding, because information is clearly money, and if you have it and others don't, then that money is all yours to make. Also, insiders at Acme might form links to big money hedge funds, selling them information (which would appear to be legal in this brave new world -- if you can profit on insider information, why can't you then take partners or sell that information for others to profit on), as these large funds would be able to leverage the insiders' information more effectively.

Is this really the world we want? Insider trading occurs unfortunately all too frequently right now. It is hard to police; that's undeniably true. But once you take the "fair" out of "fair" market, what do you have left?

Thursday, October 22, 2009

Are the American People Really the American Sheeple?

Have we turned into a nation of sheep? Are we really so tractable and fleece-able as an outsider might think, considering the rather feeble response of the average American to the outrages of the financial crisis?

Everyone basically agrees on where we are now, one year after last fall's implosion. The Too Big to Fail banks are even bigger than before (and thus even more immune to failure). Wall Street bonuses and pay are rocketing higher again, even as 500 desperate people (including a master's degree holder and a seasoned business analyst) compete for a single lousy admin spot at a trucking school that barely pays $27,000 a year. The financial industry is battling the small elements of reform tooth and nail; God knows what resistance we'll get when we try to introduce big, meaningful reform.

What prompts my musing is this story in the Huffington Post showing the large, yawning gap -- chasm really, if you will -- that has opened up between Wall Street bonuses and the average American's yearly paycheck. Once again, to be clear: this isn't a straight-up comparison of salaries; this is a comparison of dessert (bonus) to meat and potatoes (living wage). And, to continue with the metaphor, Wall Street is not just getting a much better main course than the rest of us, their dessert alone makes our meat and potatoes look like scraps of rat tails and moldy French fries.

The gap has been widening for years. And yet -- even now, after the Wall Street's whole edifice of debt and derivatives just about toppled a year ago -- we seem to be uttering a collective "baaaaaaa" and going about our grass-grazing with nary an eyeblink. What explains such quiescence? That's what really puzzles me. Here are some of the theories, though I'm not saying I completely agree with all of them. Pick the one you like.

1. Americans are just too fat and content to be bothered: we are the expected products of an affluent society that offers up lots of cheap, high-fat food, easy-to-digest entertainment -- and not enough to chew on when it comes to intellectual stimulation. Despite the high unemployment, even now we find enough ways to get by. As long as we can scrape up the funds to pay the cable bill, don't go looking for a revolution. We get mad, then we realize that The Amazing Raze is on in ten minutes, and pretty soon we've forgotton why we were so pissed in the first place.

2. Americans are, on the whole, just not that smart, and the financial mess requires the ability to understand very complex topics. Ask an American to locate Afghanistan on a world globe, and chances are decent his finger will land somewhere east of Tibet or south of Sumatra. And even the smarter among us are much challenged to understand this complicated financial engineering that creates "credit default swaps" and "synthetic CDOs," and how everything interrelates.

3. Americans tend to have a simple worldview and are easily led astray by clever charlatans who twist our fundamental ideological beliefs. What American would oppose the noble principle of freedom? So then why would anyone oppose free markets? Isn't that the bedrock of our capitalist system? If something goes wrong, it can't be the fault of free markets; the meddling hand of government regulators must be involved. This theme has emerged on the right (and to be fair, there is an element of truth, because regulation has distorted markets). And so then the clever demagogue sells the great themes of America -- freedom! innovation! the self-made man! -- back to the wage slaves who might be jealous of Wall Street. And, cowed, they slink back into the herd of sheeple.

4. Maybe we really aren't sheeple; we just haven't reached a critical mass of fury yet. A cynicism about the big bank bailouts and the White House's kid glove treatment of Wall Street is deepening across the land, hollowing out the legitimacy of our public institutions. There actually is a lot of anger, even among those who complain nothing can be done. These people aren't marching in the streets yet, but they're getting closer to. And if politicians continue to be tone deaf to the masses, the sheeple will cast off their woolly-headed subservience and make their voices heard, in a big way.

Tuesday, October 20, 2009

Is Naked Shorting Really as Benign as Mom and Apple Pie?

I found myself pondering this after reading Matt Taibbi's latest screed called Wall Street's Naked Swindle. Taibbi comes down hard on the practice, but then I wandered over to Clusterstock where John Carney says, in so many words, "Wrong, wrong, wrong, Taibbi -- naked shorting isn't a villain."

There are several comments I was going to make on Taibbi's piece, but I'll keep this entry manageable by looking only at naked short-selling of shares. For those already shaking their heads -- the phrase does sound indecent, on the very face of it -- this refers to a variation on the practice of short selling.

Short-selling stock is what you do when you think the price is going to drop. Let's say IBM is at $30 a share. You borrow 100 shares, sell them, wait until IBM falls to $10, then buy 100 shares on the market to replace those that you borrowed. Sweet payday: $30 x 100 - $10 x 100 = $2,000 in your pocket, ignoring transaction and borrowing costs.

Naked short selling is all of the above except -- you don't borrow the shares in the first place for whatever reason. Say trading in the stock is relatively illiquid and the shares are simply hard to find. Or you just can't be bothered. Or ... (there could be a nefarious reason, as we'll soon see).

Now, if you tried to sell a car you didn't own -- and that you hadn't even bothered to contractually borrow from someone else -- the outcome would be rather predictable. Some guy in a blue uniform would show up on your doorstep and put a pair of hard-metal bracelets around your wrists and take you for a little ride to the county courthouse. But let's let that go for the moment. Because, after all, just the act of buying a stock is a pretty complex transaction, once you get behind the scenes, as Carney does in his glibly titled Everything You Always Wanted to Know About Naked Shorting but Were Afraid to Ask. (On another day, when the winds of time are favorably at my back, I'd like to deconstruct his little 23-part lesson, as I think he loses the forest for the trees in his explanation in a way that sheds light on why we're in such a financial mess.)

So, for the moment, let's ignore the felonious-seeming nature of naked shorting (and the racy naughtiness suggested by its very name). Let's get right down to mathematical brass tacks and see what there might be to worry about.

Okay, this is an extreme case I'll paint below, but it's an extension of the principles, and sometimes when you extend the principles, you can get a sense of what's right or wrong to begin with. Let's imagine a world where naked shorting is embraced with the same vigor that say a naked Jessica Alba would be (Naked Shorts Gone Very Wild?).

In this world Fusty's Freezers is an oh-so-small public company. It has 100 shares that trade at $100 each. That gives it a "market capitalization" of $10,000.

In this world the naked shorts decide that tiny Fusty's is ripe for some manipulation. Now, if they had to sell shares short the regular way, they'd have to borrow them. So, for instance, if they sold short 100 shares, they'd have to borrow those 100 first. Supply wise, nothing would change in trading of Fusty's Freezers stock. Even though there are new owners of the 100 shares, the existing owners (who have lent their stock to the short sellers), can't go ahead and lend their stock again or sell it. It's already spoken for, tied up, frozen. (Theoretically anyway.)

Now suppose the naked shorts decide to sell shares they don't own ... and that they haven't borrowed either. A LOT of shares. Let's take an extreme case and say that they sell another 900 shares of Fusty's Freezers into the market.

What would you expect with 1,000 shares of a $10,000 market cap company in circulation? Easy: the price would fall to $10 (actually it wouldn't be quite $10, but that's a complicated tangent that we don't need to chase here). So in other words, the act of naked shorting would drive the stock's price down about 90 percent. (One other note: I'm disregarding momentum effects too, which arguably would drive the price down even more.)

Wow. Even though this is an extreme example, I think a skeptical reader's sniffers should activate. Hmm, something doesn't smell right here. And a couple of interesting questions pop up: (1) Those short sellers made a lot of money. Was it deserved? They made it simply because of the math of what occurred and the laws of supply and demand; there was no underlying weakness in the company that would prompt the share price drop, in my example. (2) Now the SEC, in this rather longish document (just do a search at the top of the page on "counterfeit" and you'll find the relevant section), says naked shorting doesn't actually produce "counterfeit" shares (as Taibbi mistakenly says). But that raises a second question: So could an acquirer swoop in now and grab a $10,000 company (remember Fusty's Freezers is still worth $10,000) for $1,000, as its 100 shares now sell for $10 each?

So imagine Joe Naked Short working in tandem with Vulture Vic. Joe Naked drives down the share price, then Vulture Vic swoops in and snatches up the company for a song. Cool! ... unless you're one of the poor shareholders who got screwed. Remember, no value is being added anywhere here. What Joe Naked and Vulture Vic make, some other shmuck loses.

Now this is an extreme example, granted. Carney does protest that "the overwhelming amount of naked shorting takes place when companies announce abnormally positive results and contrarian traders scramble to fight the tape." In other words, the naked shorters are just really smart, motivated short sellers who can't get their fingers on the shares they need, at that very second, and every second counts.

Okay, maybe true (I haven't researched it). Still, if naked shorting has the potential for massive manipulation, and even if it's done for that purpose only 1 percent of the time, that could be the life or death of a particular small company. So the rare outlier events here could be pretty darn big.

Anyone care to defend naked shorting? I admit to not knowing a whole lot about it. But from what I've seen, I'm pretty skeptical. Instead of trying to preserve naked shorting, I think we'd be better off trying to shore up the legitimate and quite valuable practice of regular short selling. Why not just spend our energy on trying to make ordinary shorting work better so that it's more responsive to a rapidly changing market?