Thursday, July 24, 2008

Not Very Ernest At All

Busy, uninspired, it's pretty much the same to me.

Courtesy of my new favourite blog, Mr. Nice Guy, which I stumbled on while looking for information on the Douglass-Degraw pool. There really should be some forum for sarcastic people working in journalism with Child-Babies. Don't ask me who the hell the rapper is, it's just good.

If you're looking for a little more on the FSA imbroglio, by the way, try Accrued Interest. He's giving wrapped bonds a "sell", and is a little more, um, ernest than me. Heh.

Wednesday, July 23, 2008

Brooklyn Chain Map: We're All Capitalist Playthings Now

I've been meaning to get going on this project for quite a while. I recently read an article in the New York Times on the growth, and occasional retrenchment, of the restaurant and bar empire of Jim Mamary and Alan Harding, with a spread of restaurants in South Brooklyn and parts south, if that makes any sense.

A stroll through Carroll Gardens the other day reminded me of how many businesses open multiple locations in Brooklyn. And after seeing this map at Gowanus Lounge, I decided to plot them all. Google Maps gives me a way to do so, though I have not spent the necessary amount of time to make the relationships between establishments readily apparent. That will wait for another day.

The rules are somewhat arbitrary. I'll tolerate a couple of Staten Island or Queens offshoots, but anything else is bang out of order. Bars, restaurants and the odd boutique predominate. I'm fairly certain I'm missing a few obviously-paired bodegas, and I get much weaker in the more northern parts of Brooklyn such as Prospect Heights, Fort Greene and Williamsburg . Suggestions welcome in the comments, if you can be arsed to go past the spambot protection.

To stress, this is not an exercise designed to hate on gentrifiers, chains, or anything else that flows from capitalism. A second branch is a fairly good indication you're doing something right for your local customers, though whether catering to the whims of the Brooklyn gentrifying set is the foundation for a wildly successful national career I'll leave to your imagination. Still it's a good sign that there are plenty of people in the Borough that do have the smarts to build up a franchise and still keep it local.

Anyhow, here's the Brooklyn chain and stealth-chain map.

View Larger Map

Tuesday, July 22, 2008

Good Money After Bad Datapoint of the Day

Since Felix Salmon is on holiday:

Cost of a FreddieMac/Fannie Mae bailout, according to the congressional budget office: $25 billion

Cost of just one of Aramco's proposed chemical plants in Saudi Arabia: $26 billion.

A Recovering Monoholic Writes

At this rate they're going to be written on my headstone. The words of that banker from years back. "The monolines are basically the creatures of the ratings agencies."

Bill Ackman was right, you see, though for the wrong reasons, and is going to get what he wanted not through his adoring phalanx of reporters but through the efforts of the ratings agencies. You can get a reasonable summary of Ackman's case from the post I linked to above, and some of the links there, but Ackman said that Financial Security Assurance, which did not make anywhere near as many bad calls as its rivals when insuring business, was still going to be in trouble because of the crap it bought for investment purposes.

At the end of the summary, or rant, if you prefer, I then included this awesomely prescient line:

There's always the possibility that Moody's lead monoline analyst, Jack Dorer, or his counterpart at S&P will wake up one morning and decide to unleash financial meltdown before breakfast.

Because Moody's just decided to put FSA on review for downgrade, together with Assured Guaranty, which doesn't have an investment portfolio full of crap. Bet Ackman's wishing he bought credit default swaps on Assured, too, eh, Bill? Bloomberg's Christine Richard, who leans heavily on Ackman as a source, and of whom I've been unfairly critical in the past, focuses on just the right bits here. I'll use her excerpts:

The rating company also cited "a reduction in overall market demand'' for bond insurance in separate reports today..."Today's rating action reflects elevated risks with the financial guaranty insurance market,'' Moody's said in both statements.

The ratings agencies are cutting the monolines loose, make no mistake. They have decided that the current rate at which the monolines produce business will not provide them with large enough claims-paying resources. Because of how crappy Ambac's and MBIA's books were they were able to tell their shareholders to cough up additional equity or else. Here, they're being a little more subtle, though no less lethal.

This is a classic ratings agency death spiral. Agencies raise questions about rated entity's business, which leads to a collapse in confidence, which stops off the flow of cash, which leads to another downgrade. And this one isn't really their fault. The monolines, and the wider market, trusted the agencies to price the risk of their insurance commitments more cheaply than potential uninsured investors in the bonds would.

The agencies, channeling Keynes have now decided to take a different tack. They'll never admit to having so much power over the process, but the whole situation has been a bit of an embarrassment to them. Basing a business on this difference in opinion (or arbitrage, if you must) will always be reliant on a ratings agency methodology much more stable than the ones on offer right now

Looks like they're could make it so expensive to capitalise a monoline that Wilbur Ross (Assured) and Dexia (FSA) will abandon the mess for good. The only one left standing, as Bloomberg's Richard hints, will be the monoline subsidiary of noted Moody's shareholder, and all-round capitalist icon, Berkshire Hathaway.

Actually, it's probably wrong of me to try and imply that the saintly Warren Buffett would be involved in SKULLDUGGERY, since deep down I know that he would avoid a downgrade even if he were not a shareholder. If there's one thing that would seal the tattered fate of the ratings agencies it would be downgrading the Sage of Omaha. There would be mobs running up Church and Water Streets baying for the (pointy) heads.

I'm going to end this stretch of wild-eyed prognostication with a caveat. Fixing FSA and Assured is possible, given enough love, money, and agencies that don't indulge in Cranky Time as much as my young boy (yay child reference!). But I'm well into the acceptance phase now, and ready to contemplate a world without bond insurance. Smells good out there.

Sunday, July 20, 2008

The Snake Bit

I hope that in the last four years or so I've become a marginally better blogger, by which I mean having less of a propensity to shout off without knowing all the facts and generally making an asshat of myself. Now, I'm not free of the trait, as you can read here (I've left it uncorrected, like the spire of that church in Berlin, only without the taste-, gravitas, and purpose of the latter. In fact, the comparison can't help but be invidious, so forget I ever wrote it). In place of ill-informed certainty I occasionally err on the side of mean-spirited, inconclusive pedantry, but by and large I've got better at thinking before writing.

I was reminded about this when I read in the Times about Steve Hindy's difficulties in finding a decent space for his (excellent) brewery. In blog years, it was during the Babylonian Captivity when I urged my reader (sic) to avoid drinking Brooklyn Lager because of owner Steve Hindy's support for the Atlantic Yards project. others chimed in, and soon enough, Freddie's, the local bar after which I named my first-born, was no longer selling it.

I still don't drink the stuff, though I've learned to cope with its absence (skyrocketing hops prices aside, now's not a bad time at all to be a beer drinker). I backed off fairly quickly from my more heated references, mostly because Hindy seemed open-minded and sincere, even if I didn't agree with him, and because of his distinguished service as a reporter at the Associated Press, including, on one occasion, trying to bust into a Bilderberg conference and annoying Henry Kissinger, which is, needless to say, a Very Good Thing. Hindy must have emerged from those heady days of March 2006 with the impression that blog-writers were intemperate, drooling mouth-breathers.

The boycotters struggled, at times, to work out why Hindy had done this, as if we assumed he'd be on the side of small business, the little guy, all that stuff. I thought it might be a simple quid pro quo, for all the free advertising he got from Marty Markowitz (described, by Christpher Ketcham, during an article on the AY EIS as "the inane yet somehow insidious Marty Markowitz, porcine borough president of Brooklyn"). Scott Turner guessed that he'd been offered a beer concession at the arena.

Now, via the Times article I referenced up there, it becomes clear that Hindy's just been trying to find somewhere that he can make something in Brooklyn. Brooklyn, home of more abandoned warehouses than you can shake a fist at, has been unable to provide him with a competitively-priced bit of manufacturing space to make his wonderful (yet to me, forbidden) lager. So, Hindy's tried desperately to hitch is brewery expansion to all sorts of development projects, including Brooklyn Bridge Park by the East River and the Public Place proposal in Gowanus.

Buried in the statistics about Brooklyn's, and the city's, declining manufacturing base, we note that Hindy hooked up with the Economic Development Corporation, one of the authorities expediting the AY project, for the Brooklyn Bridge project. We also note that:

He [Hindy] was a champion of the rezoning of Williamsburg and Greenpoint that Mayor Michael R. Bloomberg pushed through in 2005. But now he contends that the changes went too far by allowing a variety of nonindustrial uses of land in areas that are labeled industrial business zones.

There's not smoking gun here, no proof of anyone saying "gee up the beer drinkers and give us a patina of gentrifier cred and you'll get your expansion." I don't think there needed to be. I think that at that moment in time Hindy needed to be as enmeshed in the city's real estate (de)industrial complex as possible. I don't blame him, it's not like popular beers get developed by sunday-school teachers.

But here's the killer line. "Some landlords are holding onto industrial property with the hope that it will be rezoned for residential buildings." So all Hindy's support has done is dump a windfall in the hands of condo developers with no interest in helping Hindy get what he wants. There's an easy moral to this story. The old lady and the snake.

Friday, July 18, 2008

Wurst Case Scenario

Killmeyer's, Staten Island
Originally uploaded by Gringcorp.
The mad props from Sewell Chan's magisterial City Room (I'm the HATING link, obviously) reminded me that it was time to give you a little report on my recent activities.

I''ve said it before, and I'll say it again, Tottenville Beach is lies, but that's not to say that the lower reaches of Richmond County are utterly without charm. A few months back, Mrs. Cutesome and I, on the way back from the Elizabeth branch of Ikea, stopped at the Nurnberger Bierhaus in West Brighton. That beer hall comes highly recommended, particularly for the food, though I did not have a chance to sample the garden.

Mrs Cutesome has spent the last week in Detroit with the spawn, leaving me to indulge my yen for convoluted exploration and heavy metal. I got a quick fix yesterday, traipsing around Williamsburg with the intention of the checking out the Deathgasm Records showcase at Europa. Unfortunately, I stopped by Dumont beforehand, and a lethal combination of mac n' cheese and muscadet left me unable to face the rigours of a dark and evil hole. Heh.

For what it's worth, I appear to have also missed quite a few Siren Festival warm-up shows, but since the festival line-up was the first in a few years that looked a bit bobbins I'm not that bothered.

But I did make it to Killmeyers. If you like beer then you need to go here soon. It's as simple as that. I don't care if (like me), you needed to get on the Aitrain from dropping off Mrs. Cutesome at the airport, connect to the Long Island Railroad to Penn Station, take the 4, which was running down the 1,2,3 to Bowling Green for some reason, then the Staten Island Ferry to St George, and then the S74 to the intersection of Sharrots and Arthur Kill in the Charleston section of the Borough, or that it took the S74 to the S45 to the R train to get back. You need to go. The beer is top notch, the bartender Rob is a keeper, and the garden is tolerable.

The food may be better at Loreley, another German beer place that, by a strange coincidence, I visited this week. But Killmeyer's manages to simultaneously not care about who shows up and also put on quite an entertaining show. However, in keeping with the tradition that most of what is written about Staten Island is nonsense, I have to point out at the lady in NY Mag claiming that the S74 takes half an hour to get there is off by at least 100%. There was no traffic that afternoon and the ride was well over an hour. Bring a book. Or a car.

Have a nice weekend. Familial responsibilities beckon.

Tuesday, July 15, 2008

Movie News

So, I'm leafing through the office copy of the FT, and chance upon their article about Paramount's inability to close a $450 million film financing with Deutsche Bank. Deutsche, see, has closed its film financing unit in the face of terrible market conditions, and this leaves a slate of Paramount films in trouble. Here's the reporter, Matthew Garrahan:

Under the Deutsche deal, which would have also covered Tropic Thunder, the new Ben Stiller comedy, and The Curious Case of Benjamin Button, which stars Brad Pitt, the syndicate assembled by the bank would have taken a 25 per cent stake in each of the 30 films.

I share the news with some colleagues, partly because Transformers 2 might be in trouble, but also because one fewer Ben Stiller movie making eyeballs bleed would be quite the silver lining. Turns out that not only is the movie already made, it's scheduled for release on August 13. It also looks rather entertaining, from what I can tell of the trailers.

So, obviously, here's by question. Are we just talking about Paramount's ability to sell the movie or part of this to the defunct financing vehicle, in which case I'm guessing $450 million would cover maybe three of them, or is the vehicle taking a minority stake? If a minority stake, then how much can this do to reduce the studio's exposure to a film's performance?

Now Hollywood's finances are opaque as all hell, one of the multitude of barriers to entry to this crazy, crazy town. All I have to go on is TT's website, which lists Dreamworks Pictures as the owner of the film's copyright. Dreamworks is a subsidiary of Viacom, like Paramount, and Paramount distributes its films. So what does the collapse do to the fortunes of a film 29 days away from its release? Leave it on Paramount's balance sheet? Confusingly enough, Dreamworks is apparently looking to raise financing to go independent. It's possible, though not likely, that the Deutsche money would be used to buy the films from Dreamworks.

My guess is the reporter isn't too clear on the arrangement either:

But if the studio fails to revive the deal with another bank it could force Paramount to seek funds from Viacom, the media conglomerate that owns the studio, to produce the titles. This would expose the company to greater financial risk if the films fail to perform as expected.

Could be that "produce" has a slightly more expansive meaning than that normally ascribed to these things. And this looks more like some kind of risk-sharing arrangement with rather vague terms. But I'm inches away from declaring that the FT's man pulled the list of forthcoming films from his derriere.

[UPDATE: Lord bless Journal, which omits both Transformers 2 and Tropic Thunder from its list of affected films, and notes that two other movies that the FT cites, the latest Star Trek and The Curious Case of Benjamin Button, are co-financed with other studios.]

I went to see Hellboy II last night, the first film I've seen in several months (baby, see), and probably the last for several years. And my was it rubbish. A plot lifted from the last Transformers film (old-looking metally object has the power to destroy the world!), dialogue that was merely serviceable (Jeffrey Tambor's lines could have been so much better), and an aesthetic that's essentially an amalgam of Guillermo del Toro's steampunk 'n clockwork ticks.

In these circumstances, it's traditional to note that, well, this is an comic book adaptation for an action movie, and well, what do you expect? The answer, to be honest, is Iron Man. Now that was a well-written, fun action movie. Cronos IX is a little more creaky, though undeniably fine-looking.

Thursday, July 10, 2008

Time To Retire The Cutsie Diminutives

By which I don't mean "put all the dwarves in homes." Well, I do happen to believe that, it's just not the point of this post. Ba-dum-chah.

Carnage reigns on Wall Street. The trading equivalent of a pack of rabid mastodons hit the shares of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Lehman Brothers.

The New York Times can write something alarming and nonsensical like "Lehman Brothers, one of the biggest guarantors of Fannie and Freddie, fell 11 percent in early trading, to $17.46" and no-one cares, because they're already too frightened. That was drive-by snark on the Times' business reporting, by the way, because I've got bigger fish to fry: the entire edifice of naming conventions of government-sponsored enterprises.

Two of the institutions with faltering share prices are GSEs, and are better known as Fannie Mae and Freddie Mac. Wikipedia refers to the shorthands as "creative acronymns", though I think its better to refer to them as diminutives, much as my wife refers to my son Frederick as Fritz. And it gave me a chance to vent my prejudices against short people.

There's no doubt that saying the names of the GSEs in full would be a right pain in the ass, and its pretty difficult to spell out the initials, too. What with the fact that the two made up most of the mortgage bond market until fairly recently, it was quite understandable that some kind of diminutive would emerge.

What's more interesting is that the two GSEs eagerly embraced the diminutives, and therefore licensed any other two-bit financial services company to come up with a nauseating diminutive as a way of aping the (until very recently) reputation of the big GSEs (I should mention the Government National Mortgage Association, or Ginnie Mae, as well here) for stability and security.

Thus, we have to endure the likes of:

  • The College Construction Loan Insurance Corporation, or Connie Lee, a guarantor absorbed in 1997 by Ambac, and Ambac's proposed name for a new, clean, unsullied, less stupid, monoline spin-off (you knew I'd get onto monolines before now).
  • We have IndyMac, founded as a real estate investment trust in 1985 by the luxuriantly orange Angelo Mozilo, before he moved on to, um, greatness with Countrywide Financial, with the origins of its name unclear. What we do know is that after a slightly rash rock-slinging from Chuck Schumer is that its financial health is far from super.
  • Student Loan Marketing Association, or Sallie Mae, focus of a botched leveraged buyout from last year.
  • There's Ellie Mae, a software provider for mortgage servicers, the sole purpose of whose name is to suggest a closeness to Fannie Mae, as far as I can tell.
  • I've had dealings with Municipal Mortgage & Equity, or Muni Mae, a Pink Sheets-traded real estate and energy developer.
  • And bringing us to our proud conclusion is Private National Mortgage Acceptance Company, or Penny Mac, which was founded to buy distressed mortgage securities from desperate banks, and has heavy hedge fund backing.

Let's leave aside the delicious irony of a bottom-feeder taking on such a cutesy name, salute briefly the consultant who came up with it so quickly, and ask ourselves why infantilizing large and precarious financial institutions is such a good idea. With the two big GSEs teetering, now would be as good a time as any to abandon this foolish affectation.

Let's confine the GSEs to large, unwieldy and ominous initials. Whatever body the Feds cook up to fix the mortgage mess should be called the Bureau of Oversight over the Origination of Mortgages, or BOOM. The state level offices could be called the District Offices for the Oversight of Mortgages, or DOOMs. The problem is, if anyone's got a yen for stupid-sounding acronyms, it would be our dear leaders in congress. SAFETEA-LU, anyone?

Tuesday, July 08, 2008

Templeton of the Dog

Sir John Templeton is no more. I never made the connection between the Templeton mutual funds and Oxford's Templeton College while I was there, though my lack of interest in mutual funds, and my consummate interest in strong liquor, explain the oversight amply. Well, that and the fact that Templeton is a small-ish college devoted entirely to graduates. I now feel a little ashamed for screaming "Who the f*** is Templeton", as its boat rushed past that of my own college at some speed, rowed by several large American management students. Note also that Templeton is now merging with the infinitely more attractive, though also founded by an American benefactor, Green College.

(The headline is a reference to a legendary grunge tribute album, if anyone's confused. Or interested)

Sunday, July 06, 2008

Hating On Successful Journalists, And Being Confused About Accounting, Gretchen Morgenson Edition

This Sunday, Gretchen's still getting her head around credit default swaps. In this instance I'm torn between suspecting she's phoning this one in and wondering whether she needs to keep reading up on the subject. Certainly, starting a column with "Everyone knows..." is a frightening omen, not quite up there with inserting "obviously" into a horribly convoluted explanation, but certainly one of those crimes against journalism that even its lowlier denizens learn to avoid early on.

I'm acutely aware of the fact that some of my recent comments might be interpreted as hating on the powerful for hating's sake. For instance, I was all ready to go after this week's column for a few references to credit default swaps as "investments", followed by her description of CDS as a way to "bet" on a company defaulting. Thinking that since their origin lies in their use as a hedge against long positions in a company's debt, I thought this description, while accurate, was a little misleading. And then I thought about how Bill Ackman uses them, and realised that the description was entirely fair.

So, I finish off the article, but my god-Gari-you-have-to-stop-being-such-a-jealous-jackass sentiment entirely dissipates. Gretchen goes through two (internet pages) saying:

1) There's a lot of CDS out there
2) It's not well understood
3) There's a new accounting rule coming
4) This means more disclosure. This is good.

Gretchen's optimism comes from the fact that sellers of credit default swaps will have to account for these as if they were guarantees, rather than as financial instruments, and they'll then have to provide more information on size, counterparties, terms, and so on. Here's the summation:

For now, though, any increase in transparency where C.D.S.’s are concerned is a good thing. Of course, you can count on the usual caterwauling from executives and investors who like to blame accounting rules when the value of the assets they hold doesn’t go their way.

But for anyone interested in reality in financial statements, the new disclosure is a welcome step in the right direction. Let there be light.

Right, here's the standard preface: I'm. Not. An. Accountant.

But I can't work out whether the article's saying that the rule involves sellers of CDS changing from one interpretation to another (or from Statement 133 to Interpretation 45, to be exact, the reason for the rules having different classifications being unclear), or whether Interpretation 45 has also been tweaked as well. Since Morgenson calls it "unextraordinary" I'm tempted to assume it's the former.

Now, while I'm not an accountant, I've spent an unhealthy amount of time reading monoline samizdat, and I've noted how much they hate having to account for their credit default swap exposure as derivatives, because they say that these should be accounted for as guarantees. Why? Because they have to mark the value of the CDS exposures to market, which I'm guessing is the FASB 133 version, and the observable values of these contracts, which they have no desire to sell, are sitting in the toilet.

The monolines have a slightly good excuse for such complaints, since they're not likely to sell their contracts, and the holders of this protection can't accelerate them under ordinary circumstances (see earlier, ad nauseam for details of when they can. Gretchen's involved here too). They can say, with a certain amount of justification "this is what this contract is going to cost us to term; we're an insurance company, see, only not a massively well-run one, I'll grant you".

Is it fair to allow some writers of CDS to use this treatment? I can see the monolines that make it through the summer alive being fairly grateful for this. I'm sure a lot of banks are buyers rather than sellers of credit default protection, though if anyone has some proper figures for the relative volumes I'd love to know what they are.

But what it's likely to do is allow the writers to make predictions of how the instruments will perform to term, with the hope that the details of these exposures will provide enough detail to allow analysts to keep them honest. And for some writers of this protection (*cough* investment banks*cough*), market values may still be the best way to assess these exposures.

So the previous is my massively uneducated take on the subject. What's interesting here is that Morgenson's assumption is that the captains of finance won't like it. She even seems to reference young Andrew Ross Sorkin's pal diminutive library-namer Stephen Schwarzman, whose complaints have already been grist to my mill of envy. Could it be that what we're seeing instead is an end run?

I'm sure Jack Ciesielski, who's quoted by Morgenson and weighed in on Schwarzman, would be able to clear it up. But I'm too poor and shallow to pay for his insight.

Thursday, July 03, 2008

Jeez, Gari, Some More Underinformed Financial Analysis? Why Thank You!

Thanks, Felix, though it turns out I'm not done yet. I finished last night's far-from-polished rant, headed home to the bosom of my family, and was suddenly afflicted with a bout of insomnia that only a ninth-inning Mets choke would allay.

While watching Pedro Martinez morph into 2008's Mo Vaughn, I came across this post at Calculated Risk that suggested I take a look at this story at Fortune.

The article isn't in very good shape, riven with jargon, repeated phrases and hackneyed expressions ("That bummed out investors who bought the common..."). Since the article now indicates it has been updated, it's possible it's been looked at by a grown-up since last night (Update: No it hasn't). I think the attraction of the article to the CR clientele is its rather ghoulish focus on the post-apocalyptic debris from a Lehman Brothers real estate deal gone bad. (CR's commenters are not quite James Howard Kunstler, about whom more hopefully in a later post, but they get close.)

But I'm really not going to spend another couple of hundred words hating on more famous journalists. Instead, the article's authors give me a chance to explore one of the memes that's going to get more airing as we all digest the credit crunch and its implications. I'll call it the Noble Trader Myth. Fortune's Boyd is a former bond-slinger, and so he's likely to be close to these kinds of sources.

Traders are enormous amounts of fun, combining rapid wit, frequently enormous appetites for food and drink, and often an endearing lack of discretion. They're also incredibly adept at manipulating a narrative. What we'll see in the coming months is a concerted attempt, aided by some of financial journalism's finest, to hail the traders for their foresight during the parade of foolishness leading up to the crisis.

We're going to hear them described as canaries in the coal mine, flinty-eyed realists at odds with the make-believe coming from management. They'll dominate the accounts, much as the mortgage traders (warts and all, I'll grant you) dominated the wonderful Liar's Poker. I recall how often Vince Kaminski cropped up in the Enron post mortems, explaining how his team of analysts (formed, you should remember, to support Enron's trading book) tried to flag up problems at Enron.

Whenever you read these paeans to the cold-eyed realists, remember this one thing: the trading floor is the beast that must be fed. Assets, capital, doesn't matter. The firm's money, other people's money, doesn't matter. Remember FIASCO, still Frank Partnoy's only compelling writing on finance, where the Morgan Stanley trading desk sucked in ever more ludicrous products. Remember Lehman Brothers and Merrill Lynch buying mortgage originators, desperate to find some mortgages to stuff into the maw of the trading floors.

A lot of financial products that could have found a home in the accounts of pension funds, life companies and other private investors were often spun a few times through the various interest rate, credit default, maybe even foreign exchange swap desks even while sitting on the books of the banks that originated them, supposedly hedged out so many myriad times that what was left was essentially inert, risk-free, maybe even cash-like.

Traders are not your friend. Traders are sometimes not even their own friends. Traders are ineradicable. Traders can sometimes be tamed, their energies diverted through cross-subsidies without them getting up and leaving en masse. Goldman Sachs' magic has not been its willingness to countenance trading, but its willingness to muzzle its traders at the slightest sign of trouble.

The above might strike you as a tad melodramatic. If so, I'll gladly blame the pulled pork and summer ale-fest I just departed. But if the financial services end up carrying the can for this mess, we'll have learned nothing from this sorry period. Have a lovely Fourth.

Wednesday, July 02, 2008

The Polemic Fashioned From Purest Envy

It's always a good idea not to start a post with "I'm not an accounting expert but...", especially since my digressions into the world of high finance are meant to bolster my skillz as a financial commentator rather than diminish them. Still, after my mixed record on monolines, once more into the breach... and all that. And you know how I do love taking a pop at financial journalists with better gigs than I (90% of them).

It's usually pretty easy to take a more critical look at what Andrew Ross Sorkin's sources are telling him. His fault, and compared to what he's managed to do for the Times' business coverage, it's reasonably minor, is his closeness to his sources on Wall Street.

So, when top wealthy and tiny egomaniac Stephen Schwarzman wants to agitate for some way of making his financial results look better, Sorkin can be relied upon at least to give his point of view an airing. So we get a thousand-odd words on whether banks are being harmed by having their holdings of crappy debt securities marked to market when reporting their financial results, by valuing them according to what these assets would fetch were they to be sold.

We get some of the arguments as to why FAS 157, an accounting rule I'm sure you can google rather than trusting me not to mangle it, was introduced at the wrong time. He brings up somme guy at Citigroup saying that "securities with little or no credit deterioration" are being marked down unfairly during a period of crisis.

Which brings me to the whole "I'm not an accountant" bit. And I'm really not an accountant. Instead I'm going to look back at what happened during my formative financial crisis, the post-Enron collapse. Lots of banks were left holding loans to power companies that started to go horribly wrong in the months following Enron's bankruptcy. Some borrowers defaulted for structural reasons (ratings triggers, problems with their covenants), but others just stopped repaying their debt on time.

In those circumstances, banks took a long look at these deals, saw if there was something they could do to rectify the situation, and if there was likely to be an impairment, took a provision or, alternatively, just sell the damn things. But they were, by-and-large, in the lending business, and sold thee loan because they could, rather than because they should. The ones that didn't sell, as it happen, came out of the period rather well, because the market picked up in about four years.

But its bankers, who are expected to hold on to their terrible loans come what may, who are allowed to talk about credit deterioration, and about how they are expected to get paid back eventually, once everyone's forgotten what the fuss is about. To be honest, monolines are allowed to do this as well, except where derivatives are concerned.

The guys who absolutely not allowed to do this are investment bankers, that troupe of shiny-haired boffins whose main skill is connecting buyers of financial assets to sellers. The gents are absolutely not meant to care about whether they get paid back one day, because by then they'll have landed a sweet gig at a hedge fund, or some charity gig. Maybe get eulogized by Andrew Ross Sorkin.

They mark this crap to market because the entire point of their existence is to sell them to someone else. If they want to talk about credit impairment, and bitch that one day they're going to get paid why are they getting crucified right now, there's a really simple solution. Go and become portfolio at some podunk commercial bank owned by some silvery-haired pair of community pillars (who, ahem, got heavily into condo lending. But that's a stereotype that can get fleshed out another day).

Now, you will point out that several of the banks that are taking hideous write-downs might properly be called mega-banks, strange and loathesome combinations of investment banks and commercial banks, which in the current market are looking a bit like that dog that got caught in the Fly's matter transporter. Some are more convincingly commercial banks than others, and I've got a tad more sympathy for Citigroup, which is taking deposits from fools like myself, than Lehman Brothers or morgan Stanley, which were furiously buying up mortgage originators or sending up token banking operations in lightly-regulated states liken Utah.

If this post is morphing into a paean to the venerable, and now inoperative, Glass-Steagall Act, which separated commercial and investment banking, then so be it. If you want to be in the business of cooking up debt obligations, and you either wish to be bailed out if the process goes wrong, or financial stability demands that you be bailed out if the process goes wrong, then absolutely a horde of regulators should be crawling over your books at all hours. Absolutely some incredibly conservative leverage levels should be applied to your business. Absolutely your masters of the universe should be incredibly boring people in bad ties and spiritual affinities with Germans.

But hey, I'm not accountant.