I Just Realized That I'm Smarter Than I Think I Am... Probably You Are, Too

[TygrBright]

I just realized that I'm smarter than I think I am. And those who know me well will have to pick their jaws up off the floor, because they know how smart I think I am. Hell, think? Call it a clear-eyed, cold-steel assessment of things-as-they-are. I KNOW I'm bloody well smart. So... Smarter than THAT, even?

Okay, I'm not mapping any neural pathways, splitting any subatomic particles, explicating string theory or fractal geometry any time soon. I do know my limitations.

But I've just become aware that I am actually smarter than the overwhelmingly vast majority of people who have been running our economy for the past thirty years. I'm smarter than Alan Greenspan, yep. I'm smarter than Hank Paulson and Ben Bernanke put together. I'm smarter than all those suited yoinks who toted up eight-figure salaries on Wall Street. I'm smarter than people who publish quarterly financial newsletters that cost ten grand a subscription. I'm sure as hell smarter than Lou Dobbs. I might even be smarter than Louis Rukeyser was, and I tremble with the thought of that heresy.

I might even be as smart as the team Obama is assembling to try and defibrillate the U.S. economy-- in fact I'm pretty sure I'm smarter than some of them (Robert Rubin comes to mind,) although definitely not all of them. (I know Robert Reich is lurking in the weeds there somewhere.)

What makes me so all-fired fricking smart?

One thing. One little thing. One thing so devastatingly, stunningly simple that it seems to have utterly eluded all of the Financial Powers That Be for upwards of thirty years now. And the lack of that one thing is the very heart of the root of the nub of the reason our economy is now far past the S-bend and heading south with sickening speed:

I know, you see, something they either don't know, or won't allow themselves to know.

I'll share it with you, here it is:

If it seems too good to be true, it FUCKING IS TOO GOOD TO BE TRUE.

Mods, pardon my profanity. Sometimes the situation just demands it.

Let me run some terms by y'all:

Collateralized Debt Obligations

Credit Default Swaps

Specialized Investment Vehicle

Special Purpose Acquisition Company

Equity Multiplier

Derivatives Transaction Execution Facility

Mortgage-Backed Securities

I could go on and on with the arcane terms that define the intricate web of transactions that make up our economic superstructure. Words that, until recently, induced near-orgasmic states among Wall Street geeks and now induce nightmares in people who don't even know what they mean.

Which is pretty much all of us, including those same Wall Street geeks.

Here's another list of terms:

Spanish Prisoners

Pigeon Drop

Nigerian 419

Pedigreed Pooch

Three-card Monte

Block Hustle

Michigan Roll

I bet you know where I'm going with this.

We say it a lot. "Wall Street is just a big hustle. It's crookeder than a mob casino, blahblahblah..." We can't figure out what all those complicated "instruments" and "vehicles" are, so we write them off as complicated versions of the three-card monte. Not really, of course. Because we know that there's a whole structure of organizations like rating companies (Moody's, Standard & Poor's, etc.) Federal agencies (SEC, Treasury and so on,) and even private entities watchdogging all this, writing rules (albeit abstruse and fantastical and, ultimately, ineffective ones) and generally assuring that even though the game is rigged, it's rigged along agreed-upon lines, known to the Inner Circle, and they understand what's going on even if the rest of us feel like mugs. And the balloon can't go up too far, can it? Because after the last big Depression we put all those laws and rules into place to make it, essentially, safe.

Hahahahahahahahahah, Sucker! That's what YOU think.

Remember: If it sounds too good to be true, IT'S TOO FUCKING GOOD TO BE TRUE.

So, no. There is NO WAY to turn a dodgy loan to an unqualified debtor into a no-risk proposition for the lender, or for the lender's investors, or for customers of the lender's credit rating agency, or for buyers of products derived from the dodgy loan, or for the taxpayers who credulously wander along assuming that There Are Grownups In Charge Somewhere.

And there is NO WAY to turn a piece of real estate worth ten thousand dollars based on sound property valuation principles into a hundred thousand dollars' worth of paper.

And there is NO WAY to turn a boiler room full of callers hustling desperately to get suckers to buy dodgy (at best) investments into a valuable "financial services corporation" whose share value will keep going up forever.

And no matter how many "tranches" you split something worth a million dollars into, and how many other "vehicles" you fold it into, and how many other things it gets bundled with, and putatively backed by, and theoretically enhanced by, it is still only worth ONE million dollars, no matter how many suckers believe it is actually accruing additional real value based on the number of other suckers who believe it is accruing additional real value. (Head spinning yet? Of course. That's what they want.)

And here's the kicker: The people selling this crap? Two things about them:

One: They know it's crap. It's just crap that might make them rich. Them, not their customers. Not even the people they supposedly work for. Not even the people who theoretically own the company that pays them. Just them. That's all that matters. And,

Two: They don't understand it either. Seriously. Sit down with one of these yobs sometime, and get very humble. Ask them to explain a "credit default swap" to you in simple terms. Terms you can understand. Keep telling them when you don't understand, which you won't, because it doesn't make sense. Eventually they'll be reduced to spluttering, babbling, frustrated incoherence because they don't understand it well enough to actually explain it to anyone. Not even themselves, if they're honest.

So, here's the problem:

One, virtually the entire economic structure we depend on is, essentially, a network of crooked scams with very little basis in the kind of reality that can be eaten, lived in, worked on, used, etc.

Two, in the process of building up this fantastic labyrinth of illusion, we have created a vast new sector of the economy, literally millions of jobs, that produces nothing, adds no tangible value to anything, indeed, does nothing except create and maintain the fiction of intangible value to keep the whole thing afloat.

Three, tethered to that sector is the pitiful remains of the real economy where the rest of us live-- where we expect to get at least eight dollars and fifty cents' worth of food we can actually eat when we hand over a ten dollar bill, or an actual pair of shoes we can wear when we pay our hard-earned cash for them. The world where we need short-term credit to buy milk and bread and toilet paper to stock our convenience store until we make enough money selling the milk and bread and toilet paper to pay off the credit and buy a little more milk and bread and toilet paper. The world where we need to be able to trust that when we take out a loan to buy the truck we need to carry our tools around to fix customers' leaky sinks, we'll actually have all of the term of the loan to pay it off, at the agreed-upon interest rate, and without any hidden "fees" or "service charges" that will inflate the cost of the loan.

Yep, that reality-based world is so infiltrated and submerged and interlocked with the fantasy world where mythical commodities are sold and re-sold at 200% markups without ever actually existing in the first place, that we can't escape the disaster descending upon us all.

And all because a whole lot of "smart" people believed it was possible to suspend the rules, let the watchdogs go to sleep, pretend that fantasy is reality, and we'll all get rich, rich, RICH! Something for nothing, in other words.

Yep, I'm smarter than them.

All I can hope is that Obama has a lot of people on this incoming team who are willing to take the hits that will need to be taken to put the economy back into a new, smaller, reality-based box. Yes, we'll have to stop promising everyone that they, too, can make MILLIONS! Without working, without exchanging any real value, without carefully assessing risk and applying trust only where merited. It will be dreary, for a while. Giving up fantasies, especially in the face of an immediate reality that looks pretty unpleasant (at least for the near term) generally is a pretty dreary affair.

But in the long run, reality has got to be better. I'm happy with limiting my potential returns, so long as I am secure from the kinds of colossal risk we've been so blithely and ignorantly slinging around. I'm happy to build a new, simpler, more concrete economy where value is measurable and tangible, and it doesn't require the equivalent of a hit of windowpane to believe an IPO will make me FABULOUSLY WEALTHY for a modest up-front investment.

Just remember: No one on Wall Street, no one in the government, no one in any fancy office tower or private jet has yet invented, or will ever invent, a bona-fide exception to this rule:

If it seems too good to be true, it's TOO FUCKING GOOD TO BE TRUE.

You're welcome. Now you, too, are smarter than Hank Paulson, et al.

generously,
Bright

[truedelphi]

1. Reading your thread just made me wish I could rec it several dozen times

These people are NOT SMARTER than the rest of most of us. They couldn't do brain or heart surgery, handle complicated nursing cases, handle corporate tax or accounting situations, understand how to take care of a kid that needs love and encouragement on the same day that an important office presentation comes up.

ANd like you say - they don't really understand these things themselves. But they realized a long time ago that it was best to rely on their innate predatory abilities and create complex financial instrumetns that they can hype as being a good deal. Then they pretend that there is enough regulation out there to handle this weird system - even though there wasn't.

For instance, "Sixty Minutes" TV show rightly called the ""Credit Default Swaps" insurance for the SIV's - which is what they were. However for some reason, because they were called something other than insurance, they were not regulated by the insurance regulation people.

Why not? I cannot market a medical device as a novelty or a toy, just because I don't wanna bother with FDA approval. And people have already tried selling marijuana or heroin as parssley or fudge brownies. Didn't help them get a "Get out of jail" free card, did it?.

[napoleon_in_rags]

3. Yeah, that was fun, and true.

I think all of us, ALL of us, buy into the myth of our own inferiority because its comfortable, it keeps us from taking responsibility - looking at the gravity of what we do - which can be scary indeed. I read an account of how the default credit swaps became a common practice. It sounded like people heard about it, and they just assumed that this (essentially nonsense) idea must make sense because people in such high places where doing it, so they didn't question, they did it too. In this sense I think many of these people in 'high places' committed the same offense so many of us "common" people do in doubting their own assessment of the situation...

[Demeter]

6. I'm Willing to Bet They Can't Even Cook or Clean for Themselves

or do simple homely tasks like sew on a button.

[Lucky Luciano]

22. haha, you are so right!

I am a math PhD and I just got laid off from my trading job due to the dipshits that lost money. Incidentally, I did not lose money. Go figure....but I am thoroughly domestically retarded. Never had a lick of interest in the mundane tasks such as cooking, cleaning, etc. Too boring and no adrenaline. Now I am playing poker to support myself while I wait to get back in the saddle again.

The OP is overly simplistic. The only way he gets to claim he is smarter than the rest of Wall St if he puts his money where his mouth is and shorts the market at the top. He did not short the market at the top...and if he tried to short the market in 2004 or 2005, he would have had his face ripped off and he would have looked not-so-smart.

...and CDS's are not overly complicated. They are very easy to explain. The CDOs are much harder because you do not have a good feel for what is inside of them. People priced them using statsistical models. Let's say that the CDO involved securitizations of mortgages. The idea being that a large package of mortgages should have a default rate that is equal to roughly the mean of defaults in the past for similar kinds of mortgages. The trouble was that the statistical study probably assumed that underwriting standards were constant...clearly not. In any kind of bubble, standards are lowered...so loan qualities were much lower and people who did not deserve to own a home at all bought very big fancy homes.

[TygrBright]

25. One: I'm not a he. Two: Google "Steve Eisman"

There were, indeed, people shorting the market at the top.

There have been plenty of people shouting themselves hoarse trying to point out the essential nudity of our financial emperor. Michael Lewis, Meredith Whitney, Ivy Zelman.

Getting out of a pyramid scheme early with a profit is a variety of smart, I suppose. But only in the short term. Do it too often and you create a (admittedly temporary) dearth of marks willing to play, because they've all been burned or know someone who's been burned. If all you know is running pyramid schemes, your smarts have effectively run out.

Look, I'm not advocating some neanderthal, financial-primitivism, barter-based economic fix.

Nor am I advancing the argument that we shouldn't (temporarily) rescue the giant Fantasyland that surrounds what remains of the reality-based economy, because we're inextricably linked with it for now, and it's passed the fortieth floor on the way down to a very hard pavement. Yes, by all means, stick out the net.

Yes, we need A financial services industry. Yes, we need tools and methods to capture risk and confidence, assign reasonable intangible values and exchange them. We need symbols of value that can be exchanged across markets, and people willing to master the details of a fairly arcane system to make those exchanges.

But after we've stuck out the net, at enormous cost to ourselves, our grandchildren, and our grandchildren's grandchildren, we need to begin the process of cutting away the gigantic mass of non-reality-based accretions to the financial structure, and strengthening the ties of the remaining concepts and tools to bona fide, bite-able realities that can be kept on a damn' short leash. Even if that means a slower-growing economy, a much smaller and less free-wheeling financial services sector, and many, many fewer opportunities to accrue inflated paper fortunes.

helpfully,
Bright

[truedelphi]

29. Was Eisman an early warner, or part of the problem? My problem is that

At least fourteen Eisman's come up over at the google, and several are in the financial world.

[TygrBright]

31. Steve Eisman FrontPoint.

He was shorting the derivatives market practically from the start. Technically part of the problem, but he never made any secret of what he was doing and why, so I guess that makes him an early warner, too.

Smart guy all around, though.

helpfully,
Bright

ed. for embarrassing speeling misteak

[truedelphi]

45. One thing that is very sad about all this is when you have

An incredibly complex and vastly overrated system of economics relying on the stock market, it is the little people that suffer both when "The Market" is going strong (As whenever a bubble is expanding and has not yet burst) and now through the prevailing New Communism that is pervasive on all levels of government, as we the little people have to bail the bastards out.

When a small business approaches their friends an relatives for financing, often needing only a few thousand for help to do an advertising campaign or some other facet of expansion, the relatives and friends are all like "Go away! We need to put every penny of our $ 500,000 inheritance into the stock market because it's return ratio is three times what you are offering if not more."

Then when the bubble finally bursts, those same friends and relatives realize how much better off they would have been helping the small business. But it is too late, they are wiped out.

And the small struggling business is now the only one viable in a sea of failures, but it will be the one penalized by lack of services and increasing tax burdens. Etc.

[Lucky Luciano]

33. Of course someone shorted the top of the market

The biggest winner was John Paulson - he totally crushed it. He really put his money where his mouth was...he looks smart right now - and he is, in fact, starting to buy troubled mortgage assets - let us see if he looks smart a second time. I was just suggesting that those who did not make appropriately timed bets cannot really scream from the top of their lungs that they are smarter than the rest of Wall St...take my former boss for example....he was a pretty smart guy. He was shorting the sub prime mortgage originators in 2006. He lost a lot of money - about $20MM (for the bank of course - not him) from that trade alone. In February 2007 (roughly) he threw in the towel. In March New Century went bust...if he had the stomach to stay with his trade, he would have made $100MM with New Century and all the other sloppy shops, but instead he looks dumb with his $20MM loss. He knew the bubble had to burst, but timing is everything when shorting a bubble. It is very hard to do. A lot of very smart people look dumb when they mistime it...and it is very hard to get in front of a fast moving freight train with high coinviction that you have it timed right. Very hard. Get it wrong and you may never work again. My former boss was quite lucky. Someone loves him, so despite his large loss, he kept his job. It is very easy, on the other hand, after the bubble bursts, to say that "I would have traded it right!" Unfortunately the following inequality is very true in trading:

would have traded it right =/= traded it right

[BrklynLiberal]

46. How is playing the market different from gambling in a casino?

You are simply betting on a particular outcome...if you are right you win. If you are wrong you lose.
If you get greedy, you can ruin it for everyone.

Just as with any other type of gambling, the market is ripe for scams. Wherever and whenever you find greedy people, you can pull a scam. Gamblers are looking for the biggest return on the smallest investment. If someone comes to them with an idea that seems to guarantee that, they will go for it. If part of the deal encompasses bringing in others to guarantee their profit, they will do it.
It is all a big ponzi scheme, whether you call it Three-card Monte or Wall St finances.

[truedelphi]

64. Here's the difference in one short sentence:

In a casino - they provide you with free drinks and cheap tasty food.

[Lucky Luciano]

68. You are playing for postive expected values

Any investment has risk. The question is can you get good risk adjusted returns on capital over a long period. Very few can really do it in a way that outperforms the market...of course, by default there has to be someone who does it - even if that is also luck. To be honest, the success in the game may not necessarily be from having any true edge outside of being able to be all over all of your positions at all times - it is a serious game of incredible multitasking at an extreme level. If you can do that and stay on top of everything with an attitude that you would prefer death to defeat, it will get you ahead.

That said, I am thoroughly convinced that having a true edge is possible. Jim Simons of Renaissance Technologies has been far too consistent and brilliant for many years. He has, for over 20 years, averaged returns over 30%. That is pretty incredible - especially when you consider the fact that that is including the exorbitant fees. He uses purely quantitative strategies that algorithmically trade when statistical anomalies occur - rarely do they invest or care about the companies they are involved in. Some strategies may be high frequency strats that take advantage of small anomalies between S&P 500 futures and the components of the S&P 500 - for that you need supreme IT skills and programmers who can program and execute with such great ability - here you need to shave milliseconds off of your execution time to win...etc....etc...the guy is brilliant...and was also one of the best mathemticians of the 20th century.

[progressive_realist]

53. Based on this and your previous post...

It seems clear that success in the market is more a matter of luck than intelligence. Lots of people knew this market was headed for disaster, but nobody knew exactly when. With enough participants, someone was bound to guess right. Shouldn't really give them bragging rights.

In fact, it seems like a waste of resources to have so many of our brightest minds employed in an industry where success and failure are a matter of rolling the dice.

[truedelphi]

63. Do you mean John Paulson or Hank Paulson?? n/t

[Lucky Luciano]

65. Hank is not shorting the top of the market. John Paulson owns Paulson & Co.

[Joe Chi Minh]

32. Eisman figures in this article by Michael Lewis, who apparently wrote a book called "Liar's Poker":

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true#

An incredible, but all too credible read.

[Lucky Luciano]

34. Liar's poker is a great book and required reading for traders. nt

[Joe Chi Minh]

42. I expect it helps you to keep your sanity, confirming that your intelligence and

senses are not playing you false. It is really happening!

[rhett o rick]

56. Or wipe thenselves. Just sayin

[GoesTo11]

2. Not me.

I fell for it and kept my 401k, er, 201k in stocks. Too bad too, because most of the time I'm like you and think if it sounds too good to be true it is, and would rather err on the side of taking care of nuts and bolts instead of going with flash.

[BlooInBloo]

4. mmmm.... I love the smell of anti-intellectualism in the morning.

Look, pa! Dem dere edumacated peoples did a bay-ud thing!

That's ri-ight sun. Un yuh see - thay-ut rah-ght dere is why you nay-ver needs ta learns yo-self nuttin in dem dere books!



Please don't stop for any reason - you people have already guaranteed lifetime job security for me, it's true. But lifetime job security for my kids would also be much-appreciated.

Thanks again!

[unblock]

9. have i told you lately that you're a fucking genius?

:rofl:

[RandomThoughts]

5. Great post K&R

One of the elements of control is to make the serf think he is dumber then the barron. But when the barron is picked for a job not on merit, and when people really are alot more equal in intelligence then people thing. (just different in how they apply that inteligence).

Then

The truth is thousands of middle managers at department stores, people in tech jobs, people in teaching, and even janitors and assembly line workers know BS when they see it. And really are not that far away from a guy who got a job and a degree because he had money and connections.

Lots of the dumbing down of people is really to make them think they are dumber. Dumb people on TV, dumb people celibrated. Make all software with little cartoon icons. If someone thinks they are working on a professional level program, they might realize they to can be as smart as a professional accountant. Lots of things are to make us commoners think only 'they' are smart and deserve the money they take from pensions and retirement funds.

To make money that is not earned they have to create money. So they make money up, just say something has value, give half of it to investors, and take half for their staff and their bonus.

So now we have Trillions of money, that really does not exist, never did, never will. Just a bunch of numbers on computers. No value.

So here is the question. When those trillions disapear, (which happens as soon as people actually look and see the money never existed in the first place.) When that happens. Whose accounts get wipped out. The rich people that created the money so they can have a really big bonus and income. Or the houses and pensions of average people.

[Demeter]

7. It's the Ethics, as Well as the Intelligence

An ethical person wouldn't try to pass off these counterfeits as having any value.

[unblock]

8. well golly gee. try explaining "money" in simple terms. terms you can understand.

i guess that's just a big hustle also.


just because they under-regulated some of these things and the results worked out poorly doesn't mean the whole thing was a scam.

[Joe Chi Minh]

10. Just....? under(-regulated)....? some.....? Move over Karl Rove. Your time is up.

Given the "philosophical" nature of Friedmaniacal neoliberalism ("What's mine is mine, and what's yours is mine. But, noble soul that I am, I'll trickle some back down to you..."), a moral compass was always out of the question. Obviously stillis and will remain so.

The males, in politics, however, do seem to have an "immoral compass", a way of bodging along, plotting a path that looks uncommonly like "the low road" when they think it will help their career ambitions, but without making a religion of it.

Most women, on the other hand, are all at sea as regards this "immoral compass" males that seem to come so naturally to male politicos, expecting the world to be run in accordance with some basic rules and a degree of reason, of rationality. Hence so many female big-league whistle-blowers.

Consequently, they either make a religion of "taking the low road", or far more commonly have a hopeless stab at taking the really low road, like Hillary did on occasions during the primaries. Really, a fish out of water in the idiotic rough-and-tumble of male politics. However, the corollary could well be, would seem to be, that that may make her a far better Cabinet Minister than most males. A proper moral compass would surely be better than that "bodging along", masculine "immoral compass" in a Secretary of State.

Obama seems to defy any political categorization. A magnanimous spirit more like an Attaturk, than anything, I expect, though less secular in his beliefs and outlook. Better for the nation, although at a personal, informal level, mercy, goodness and justice are true religion, informally as well as by way of the basis of formal religion, judging from Matthew's Gospel.

http://www.woopidoo.com/business_quotes/authors/mustafa-ataturk/index.htm

[unblock]

11. lol and look who's using rovian debate tactics!

:rofl:

[Joe Chi Minh]

12. Since when did Rove speak the truth? Tell me more. I'm fascinated. Be back a bit later.

[Joe Chi Minh]

20. Rove should be so lucky. He twists truth. I don't even have to rebut

right-wingers' posts, to reveal the reality. Just point to their own words, exposing to general ridicule the fact that they condemn themselves out of their own mouths! Too easy. But that's the benefit of having truth on your side.

[unblock]

24. i see you've gone back and edited your post #10

there was no body before, only the header, which seemed to accuse me of being rove.

now there's a lot more text and i have to confess i don't understand what it relates to.

in any event, kudos to you for having truth on your side; please find some right-wingers to use it on.

[Joe Chi Minh]

27. I'll do my best. Thanks for the encouragement. All the more noble for being

uncomprehending. I salute you.

I must concede though that my rather discursive addendum now looks utterly gratuitous. Anomalous, even. The advancing years, I fear, take their toll.

[Joe Chi Minh]

30. So, there's no Ponzi scheme? Well that's a novel insight. Iconoclastic even.

A Nobel prize beckons. If Friedman, why not you?

[unblock]

37. ah, if only sarcasm were a hard currency.

most of the instruments we're talking about bear no similarity to ponzi schemes.
not every investment that goes south is a ponzi scheme.

the main problem was simply too much leverage. that doesn't mean it was a bad investment, it just means an imprudent amount of it.

[Joe Chi Minh]

40. "ah, if only sarcasm were a hard currency." You leave an ugly suspicion that

you "know the price of everything and the value of nothing". But perhaps that's just the Polonius in me.

Just imprudent? So, Lewis, Meiser and Whitney were all towering geniuses?

[bongbong]

13. The truth of the global economy

The bottom line is that one of the main drivers of this crisis is the ability of automation and mass production to make things so cheaply that no one can make a living wage working at a job that produces any kind of widget. ANY kind.

Another driver of this crisis is the natural tendency of those with dough to do things that allow them to accumulate more dough. Once the rich class gets past the tipping point of having enough money to buy congress making laws benefiting only them, all bets are off. That tipping point happens after the rich class passes another tipping point - the moral tipping point of giving a rat's ass about anybody NOT in the rich class.

[w4rma]

14. yup and yup. (nt)

[onlyadream]

16. The idea was

ship those low paying manufacturing jobs overseas, and the Americans will step up to the next level. So all we heard for a while was "technology technology technology". But then they started shipping those engineering (and architecture, accounting, etc.) jobs overseas as well, and we stood by and watched a good portion of our high paying jobs leave too. I remember when Kerry was campaigning and his answer to this was -yes, the American people will have to adapt - he then went on to talk about the medical field. Not everyone can 86 their engineering degrees and go back to school for medicine... So, now we're left with a bunch of low paying service jobs and then, big surprise, people are having a hard time paying their mortgages.

[jfkraus]

15. There's no free lunch.

The wealth and power of this country comes from two things: 1) an abundance of natural resources; and 2) smart, hard working people who turn those resources into things of value. We are a strong country because we had fresh water and land suitable for growing food; we had natural harbors and rivers for transportation; we had mineral resources, such as iron ore, oil, gas and coal, that fueled the industrial revolution; and we had people who knew how to develop these resources and people who ADDED value by turning them into useful things. Everything, everything, everything of value originally comes from the Earth in the form of natural resources. You simply cannot make something from nothing (it's a physics thing). The same rule applies to financial instruments as spelled out by the OP. You can't bundle poor investments and pass them off as something greater than the sum of the parts, there is no way to add value to that equation. Zero plus zero will also and forever be zero, and ever worse, think of this...negative numbers plus negative numbers equal LARGER negative numbers!

As a country, we need to protect our natural resources by using them in a sustainable way. We need to be innovative and industrious to turn our resources into things of value and provide jobs so people can afford to buy said things.

[European Socialist]

17. Bottom line--For over 30 years....

the ruling classes have been pushing cheap labor policies on the USA. Now it is becoming clear that you can't have a healthy economy when most of the people are earning less.

[wilsonbooks]

18. I have a relative that works for Citibank

They were back here (rural Missouri) over a year ago for a funeral. This relative is very high up in the bank (Harvard Mba 1980). I told them that the talking heads and the economists that were telling us how wonderful the economy was going were full of shit. I asked them to spend an hour at the local Walmart and see if the people there looked like they were sharing the wealth that was supposed to be trickling down from the booming stock market. I told them that there were over 2000 unsold homes in our little housing market. I asked how much the bank was exposed to the mortgage market and the derivative market. They told me that the bank had sold the bad paper to Europe.
Now either they were not telling me the truth about how bad the bank was exposed in order to not give any inside information or they did not know that the bank was going to soon be bankrupt.

[Lucky Luciano]

23. Only the top dogs know the overall risks at the bank...so

either your relative is not one of the top top dogs...or he was indeed not being truthful...he certainly would not be allowed to legally disclose to you Citi's high level risk profiles - it is absolutely inside information.

[Joe Chi Minh]

35. Michael Lewis roundly rebuts your assertion, claiming instead that they.

have no idea of what their managers are up to; which seems to carry on right the way down the line.

An interesting four-paragraph excerpt from the article by Michael Lewis I linked above:

"He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the ­documents and that I hadn’t understood a word of the fucking things.”

Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn’t include J.P. Morgan, but it did encompass many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending—the lower class of American finance.

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. “He’s sort of a prick in a way, but he’s smart and honest and fearless.”

“A lot of people don’t get Steve,” Whitney says. “But the people who get him love him.” Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

In another paragraph of the article, what a wonderfully evocative name for a Citibank CEO: Chuck Prince! With a name like that, you couldn't easily imagine him being a whistle-blower, could you...? Chuck Prince. Wow! Life has a lot of curious symmetries.

[Lucky Luciano]

36. I was referring to Citibank, but Lewis was referring to some tiny dipshit financial inst.

That being said....it may very well be the case that some of those top dogs at Citi did not know what was on their balance sheets and what their true risks were - well, it is clear that they did not know what the true risks were, but I sure hope they knew what was on the balance sheet. I should revise my statement then to say that only the top dogs MIGHT know what the risk profiles are. Others will not know because that information is not shared with them. My boss was very highly ranked and reported directly to one of the top guys and he had no idea just how much of that awful mortgage exposure our bank really had. If he did know, he would have sold all of his stock. Quite honestly, I am not even sure if the guy my boss reported to knew how exposed we were to mortgages because that guy was the head of the equities division - not fixed income. He probably knew though...and could not say anything - to us at least.

[Joe Chi Minh]

38. Thank you. That was very interesting. I'm just re-reading Michael

Lewis' article, and, as usual, finding stuff I'd skimmed over. Some very humorous asides.

Of course, the implications of this derivatives business could be apocalyptic and I don't like to dwell on it, so, instead, the farcical enormity of the subject matter of Lewis and and Meisner's words appeal very strongly my dark sense of humour.

[Left Brain]

19. you. are. brilliant.

Mind if I share this far and wide?

[TygrBright]

21. aw, thanks... feel free! n/t

[Joe Chi Minh]

26. A letter by a Paul Sousek, in today's UK Daily Mail, with the heading, "Don't send good money

after bad," gives a fascinating and rather scary overview of our economic plight.

He begins: "I'm frustrated that many still fail to understand our current crisis. Not one politician or commentator has correctly identified the true nature of the interlinked problems the world is facing." (He should read American Internet sites)

He then goes on to state that if the problem were the sub-prime mortgage debts or banks not lending to each other, a $10 trillion cash injection would have remedied it at a stroke, but the problem is derivatives to the value of $500 trillion. Planetary GDP = $50 trillion. The only "solutions" he can think of are: hyperinflation, to degrade that debt, the legal cancellation of all those derivatives (which had occurred to me), or collapsing the whole financial system and starting all over again. But action must be taken now.

He considers that pumping borrowed money into the economy (banks or manufacturing) in the vain hope of stimulating a recovery is the worst possible strategy, since it "might impoverish economies to a point where no investment will be possible where it is needed, such as renewables". (On edit: such as "renewables"? He doesn't specify any other area). Also, like other commentators, I don't think he allows for synergies which a proper and long overdue concern for the populace at large, would, I believe, come into play. "Cast your bread upon the waters." Or rather, "Give some of your ill-gotten bread back to those you stole it from."

Next year: Peak oil will be reached, Peak Gas 10 years later.

This year, 2008, will be the last growth year, since growth is predicated on cheap energy. No amount of investment in oil or gas fields will prevent a fall of about 4% a year, and "our primary energy sources will halve every 20 years or so."

"The depression in the Thirties was bad enough, but this decline will be on a much larger scale AND WILL LAST AT LEAST 40 YEARS" (my capitals). Eventually, with all renewable sources combined, we can expect to be using only about 25% of the energy we are using now.

"At that stage, and provided governments have been wise enough to have invested massively in renewable energies, renewables might be able to take over from fossil fuels and stabilise the world economy.

He thinks we "should embrace the Green New Deal, including £50 billion a year invested in renewables in the UK," and that the government "should forget about tax cuts or increases in current spending, choose one of the strategies above and go sustainable.

If he's talking about hyperinflation or collapsing the whole financial system, surely contemplating that is unacceptable - leaving only the legal cancellation of all derivative contracts; which presumably would have its own unfavourable consequences, not just on the richest. His view obviously contradicts Krugman's and seems the more plausible, but let's hope Krugman's right. An article on Krugman's solution is on the Daily Mail website, linked below.

Mr Sousek's letter refers specifically to the UK, so it can only correlate to the US, which, I believe, is much stronger in terms of its ratio of indebtedness to GDP: about 5%, very small compared to Western European countries. I can't remember where I read that. I've probably got it wrong. Not the relative scale, but the items.

I couldn't find the "Letters" column on their website, but perhaps some of you might.
The Daily Mail online site is:

http://www.dailymail.co.uk/home/index.html

[Gregorian]

28. Somewhere, someone is buying a lottery ticket right now.

We're living in an artificial world. And phd's aren't necessarily smart.

In a pyramid scheme, someone does walk away with the cash. And that is the lure. Maybe it would be similar to a tribe knowing that if they all run into the forest with spears, everyone might die except for one remaining member who gets to walk out with enough lion meat to feed his family for a year. So the idiots all run into the forest and suffer. Whereas, if we plan together and work as a whole,... oh man I can hear the freepers now. Commie! Maybe that is a poor analogy. I was thinking of a crop analogy. No, that doesn't work either.

Basically we are trying to get something for nothing.

After years of running from one piece of real estate to another, and inevitably being disappointed, my mother told me the same statement you made. If it seems too good to be true, it is. It was then that I discovered that the good pieces of land were long gone. And they weren't for sale. At least not at affordable prices. But every once in a while someone gets lucky. And that's what we're looking for. That's why these pyramid schemes continue. Hey, I've got at least two friends who made millions and lost millions in the stock market. From driving a Ferrari, to living in a basement.

And the thing about phd's that I've known is that they have a few more years of COLLEGE under their belts. And those years are highly focused. Being highly focused is good for some things. Very very few things. I think of the first times I read Bartcop. Now I don't think he even has a degree. But he's got an overall grasp on what ails this country.

We need broad thinkers. Not focused, highly specialized geeks like Greenspan. I don't think he understood what came out of his own mouth. I know the rest of the country didn't.

But then we aren't working together. So my words are moot. Greenspan's specialization was probably more geared toward keeping the big gears turning rather than making an economy that was sustainable for the next 300 years.

Just remember, the LOVE OF MONEY is the root of all evil.

[ElboRuum]

39. Close but no cigar...

At least a lottery ticket has FINITE odds. When you're trying to get something for nothing, you've just jumped on the perpetual motion machine expecting it to take you to Neptune and beyond with nothing more than a handful of cookie crumbs as your source of power. Now the cookie crumbs are just symbolic, because anyone who has ever fabricated a perpetual motion machine knows that as the output of the machine approaches infinity (as it will... duh... perpetual... it's in the name) the input required approaches zero. The cookie crumbs are there just to give an air of legitimacy to the whole thing.

[Lucky Luciano]

41. PhDs are likely to have very high IQs

They usually also have a good grasp, at the undergraduate level, of many other things as well. Believe me, the following shit requires a super high IQ:

http://www.math.uiuc.edu/K-theory/0469/ss.pdf

That being said, it would not help land a Wall St job on its own because it is not applied math/statistics/Electrical Engineering (Wall St likes the EE's understanding of signal processing for quant strategies). PhDs are very smart.

[Joe Chi Minh]

44. Unfortunately, Lucky, even then most cerebral guys can have such half-witted

assumptions, that they are rendered less intelligent than a person with an IQ of 60.

From Wikipedia on Einstein:

"All four papers are today recognized as tremendous achievements—and hence 1905 is known as Einstein's "Wonderful Year". At the time, however, they were not noticed by most physicists as being important, and many of those who did notice them rejected them outright. Some of this work—such as the theory of light quanta—remained controversial for years."

I don't know who it was, but one very distinguished scientist of the day said that he was an idiot.

The will, the human heart, can interfere with our reasoning in the most farcical ways. I like to look for a balance between academic accreditations and good sense. Personal ambition, lust, envy, anger, all sorts of factors can stymie our capacity to reason. And that's leaving aside the bizarre, missing, moral dimension of the essential psychopath. I dare say Dr Mengele did very well at medical school, but who would consider him intelligent? No doubt some would. But not me. Though he might have "walked" into Mensa.

Also, there is always some kind of trade-off between the worldly intelligence and wisdom, spiritual prioritization. The best we can hope for is to subordinate the former to the latter, to be informed by the latter. And the latter, immeasurably superior, is not, alas, the forte of the worldly-wise. But it is our assumptions that are our life's work, not our scientific achievements or literary "oeuvres", though when you're young you assume, at least subliminally that you'll never grow old and die. The present will last for ever.

[BrklynLiberal]

47. You are right

"even the most cerebral guys can have such half-witted assumptions, that they are rendered
less intelligent than a person with an IQ of 60."

Liars and thieves have always been popular figures in America. Is there another country where Billy the Kid and John Dillinger would be more well-known and highly regarded by the average citizen than Woodrow Wilson or Lyndon Johnson?

Most people love a man who can tell a good tall tale especially when he pulls the wool over the eyes of those who consider themselves especially powerful and intelligent. There is nothing wrong with making a Congressman look like a clown.

<snip>

Looking back, Greenspan's book was a simple defense of his tenure at the Fed. Even before he retired he could hear the whispers that he had left interest rates too low for too long and had encouraged home ownership which could not be sustained by the living wage of many Americans.

<snip>

Greenspan misjudged how the world would see him. He came face-to-face with this when he visited Congress today. He described the present credit crisis as a ``once-in-a-century credit tsunami'' and admitted to a modest flaw in his analysis of the economy five years ago and in hindsight questioned his admiration for derivatives as a way to expand and improve the efficiency of the financial system.

Greenspan broke the cardinal rule of every person who has successfully misled or hornswoggled those who looked to him for advice. He admitted that he may have been wrong. In his own words, ``We cannot expect perfection in any area where forecasting is required. We have to do our best but not expect infallibility or omniscience.'' The moment the words left his mouth, Henry Waxman, a Democrat from California began to savage the old man. Greenspan was smart enough to inconspicuously unplug his hearing aid and ask that the questions be repeated.
<snip>

article at....
http://www.247wallst.com/2008/10/alan-greenspan.html

Greenspan: I misjudged subprime lending crisis
THE former US Federal Reserve chairman, Alan Greenspan, has warned that house prices in the US are likely to fall by at least single digits and probably double digits before they reach the bottom of the cycle as a result of the subprime lending crisis.

However, despite acknowledging that he had underestimated the impact of such risky lending practices on the broader economy, Dr Greenspan said the bigger long-term risk for the US economy and the global economy was inflation.

<snip>

As Fed chairman, Dr Greenspan had talked about "froth" in the housing sector but never said there was a bubble in the market as a whole. He told the Financial Times that froth "was a euphemism for a bubble".
Some sectors have blamed Dr Greenspan for the loose credit that fostered the housing market boom, giving rise to subprime lending. Between 2001 and 2004, he cut interest rates several times to stimulate the economy.
House buyers who would not have ordinarily qualified for finance from a conventional bank took subprime loans, which were marketed by mortgage brokers with little regard for whether or not the borrower would be able to meet the repayments.

<snip>

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I really didn't get it until very late in 2005 and 2006." Even though one of the Fed's governors raised concerns about the lending practices that were going on, Dr Greenspan said there was little he could do.
"Well, it was nothing to look into, particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," he said.

<snip>

article at....
http://www.smh.com.au/news/business/greenspan-i-misjudged-subprime-lending-crisis/2007/09/17/1189881432189.html

[Joe Chi Minh]

48. Thanks for those gems, Brklyn Liberal. Loved the opening sentences

in the first article:

"Liars and thieves have always been popular figures in America. Is there another country where Billy the Kid and John Dillinger would be more well-known and highly regarded by the average citizen than Woodrow Wilson or Lyndon Johnson?

Most people love a man who can tell a good tall tale especially when he pulls the wool over the eyes of those who consider themselves especially powerful and intelligent. There is nothing wrong with making a Congressman look like a clown."

Though, somehow, I don't think Greenspan is going to become any kind of folk hero; while Waxman may well do.

Loved Greenspan's admission to a modest flaw in his analysis of the economy five years ago! Reminds me of a particularly half-witted Law Lord in the UK all the media and polity used to fawn over, the late Lord Denning. He once proclaimed that a professional person could not "blunder". They could only "make an error of judgement". I thought of occasions when a surgeon had cut off the wrong limb. More recently, the wrong kidney, so the patient had to rely on dialysis from then on.

Loved Greenspan's non sequitur: "Well, it was nothing to look into, particularly because we knew there was a number of such practices going on,....". I bet his testimony was full of them. Blair was truly a past master at such non sequiturs. Far more risibly outlandish, in fact.

and then perhaps the most bizarre contention:

".... but it's very difficult for banking regulators to deal with that,".... Although maybe there was some insuperable technical impediment that I couldn't grasp.

[BrklynLiberal]

49. I cannot hlep but think that their inability to "look into" what was going on, was based on the

knowledge that at that time many of them were making fortunes from the practices.

[Joe Chi Minh]

62. You and the rest of us, I dare say.

[dbmk]

50. Who says Greenspan is among the "most cerebral guys"?

[Joe Chi Minh]

51. Well, he appears to have a Phd and to have enjoyed high office

for quite a time, so you woul expect it. Though, personally, I don't necessarily take that as a sign of smartness. I actually have a PHD before my surname, but alas that doesn't seem to count for much.

[rhett o rick]

55. Frickin Greenspan lives in a bubble. He needs a good dose of reality or the clap. Just sayin. nm

[Joe Chi Minh]

60. ".... or the clap." Now that's a riotous imagination!

[Lucky Luciano]

70. I hear a lot of what you are saying...

...but I would probably consider Mengele to be extremely intelligent...but he is also quite clearly an even bigger psychopath. Those are the most dangerous people in the world - for example, imagine if bush were a genius - scary thought.

Also, I cannot blame the other early 20th century physicists from being skeptical about Einstein's work. Their job is to be very skeptical. Of course, if after repeated experiments that verify the work of Einstein, they still call him an idiot, then it is very likely that there is a big ego that has been bruised. Ego is clearly a dangerous thing when it is too big! The person is still probably very smart though. In other words:

"Personal ambition, lust, envy, anger, all sorts of factors can stymie our capacity to reason."

[12string]

58. And PHD's aren't necessarily Smart

Bingo.I've always said that just because someones' parents could afford to see them through all those years of college doesn't automatically make them good at what they do.It has been my observation that no matter what vocation,doctors,lawyers,engineers,truck drivers,welders,waitresses,etc..the best are the exception rather than the norm.

[Lucky Luciano]

69. Almost all PhDs pay their own way.

They can do this because the vast majority get teaching assistantships in which the doctoral student teaches classes, and in return, gets free tuition and barely enough for food and rent. It is a very tight living style. I could not handle that tight living style, so I borrowed to have a better lifestyle (Of course a better lifestyle is a lot more fun and slows down your doctoral progress) - in effect, betting on myself that I could get a good enough job to pay for it....and it is very hard to get into a PhD program (at least for math) - it is very much a merit based thing. An MBA, on the other hand...yes...that could very well be mommy and daddy's money and connections at work - but there can be merit as well.

[BrklynLiberal]

43. You are right!!! You are a g'damn genius! Not just because you figured that all out, but also

because you were able to explain it all so clearly. You created one of those "Oh my gawd! I should have known that!" moments.



Thank you so much. I am forwarding this post to everyone I know.

I wish I could recommend 100 times...

[knitter4democracy]

52. My BIL tried explaining it all to me.

Apparently, he's responsible for about ten percent of all that mess. He was one of the lawyers who helped create all those insurances for those bad loans being bundled together.

He did a good job of explaining it, but my brain just couldn't get beyond--how do you sell a mortgage but still keep getting the monthly payments for the mortgage you don't own anymore? After that, I stopped listening. It wasn't that he couldn't explain it, though.

And he is smart: he bailed out before everything went down and is now at a law firm that caters only to wealthy clients. He'll be just fine.

[rhett o rick]

54. Damn you, I don't want to be smarter. I drink especially to help numb this schtuff.

Thanks a lot. I do know that if the asshole Paulson wants 800 billion dollars to fix the problem I ain't buyin. I wouldn't buy siding from that asspot.

[OwnedByFerrets]

57. I would like to add a caveat.....

If you count "smarts" in dollars, they are all genius's. They used the shock doctrine to get congress to GIVE them billions of tax payer money so they could loan it back to the taxpayer at interest. If this isnt smart, I'm not sure what is. I want to know where those billions are right NOW. I dont think anyone can tell me.

[Historic NY]

59. Wonderful its all one big Nigerian 419 scheme........

I thought so. Who else would buy worthless bad paper?

[eilen]

61. I've pretty much lost faith with

anything but direct-use economy and I'd like to edit that sustainable direct use economy. All the smoke and mirrors exist for the thieves to pick your pockets--there is no reason for financial instruments to be so complicated and vapid. Basically, if you are not selling a share of something tangible, a piece of a company, then it is insurance. If you are not insuring something tangible like a life, a car, an opera singer's vocal chords, you are betting on a horse. Betting is gambling.

I am not too worried about my 401K as it represents shares of companies, or parts of shares of companies and is well diversified as it is invested in index funds. This will bring the overall worth down as some companies that populate the funds that I am invested in will go bankrupt but there are others that are healthy or at least treading water and will go on to live a better day and I have time on my side. I am concerned for other people who don't have so much time, like my husband's parents (who are functioning as an example by virtue of their age). I'm also done with investing in a 401K and plan to bank my cash, purchase savings bonds and invest in myself and my family via education and travel, elimination of mortgage debt, development and investment of home resources (solar panels, increased garden plots, fruit trees, etc.) and running my own business. I'm also looking at where I might want to concentrate on i/r/t political action and service/charity.

[Joanne98]

66. I've been thinking about the new 8 trillion number for days now and I'm coming to a conclusion

I think they did this on purpose. When Paulson said mortgages, car loans and credit card debt. Credit card debt? WTF!

I think I finally get it. They broke the CC debt up and sold it all over the world too. Then they bought "protection" on debt they knew was going bad, just like the sub-prime mortgages. The reason they can't tell us where the money is going is because THEY ARE PAYING THE WINNERS!

Who are the winners? The people who bought the "protection" the CDS's.

That's what we need to know. Who are the winners? What are their names?

Wall Street has to pay because who would ever gamble at a casino that didn't pay the winners? Nobody would. They would just go to another casino. But Wall Street can't pay so WE HAVE TO! Bush is going along with it because he gets to skim.

This is why Paulson is now talking about 8 trillion dollars. because the CDS bubble is 50 trillion. Where is he going to get the rest of the money?

He'll probably create a NEW derivative. That's the ticket. We're so screwed!

[Lucky Luciano]

71. 50 Trillion is not the amount of money various banks owe from CDS exposure

50 Trillion would be the amount owed only if all banks owned no offsetting positions (like own $10MM of Dec09 CDS and being short $10MM Dec09 CDS thru another counterparty - they offset, but it looks like $20MM of CDS). In addition to that, for this to mean $50T of liabilities, we would need to assume that all companies and bonds deafult and that all recoveries are zero..not likely. The liabilities are much smaller than the $50T would indicate. Probably $2.5T would be my wild guess.

[Jackpine Radical]

67. You're right--I AM smarter than I think you are.

Sorry--that was too easy to pass up. I admit it, I'm weak.

But seriously, a very nice piece. The world is run by conmen. This has been true since the degenerate, inbred dynasties of the Old World, in league with the Vatican, were pushing the Divine Right of Kings snake oil.