Phil Greenspun's finance buddy explains how JPMorgan Chase and Goldman Sachs made $6.8 billion in profit last quarter. Basically they borrowed money from the US Govt at 0% and then bought bonds from the US Govt that paid 2-3%.
What kind of bonds are they buying? Are they investing the money in American business? "No, they are mostly buying Treasuries." So the money is just being shuffled from one Federal bank account to another, with each Wall Street bank skimming off $1 billion per month for itself? "Pretty much."
We catch back up with the people we met in 2008, to see how they've fared over the last 18 months. We talk to Clarence Nathan, who in 2008 received a half million dollar loan that he said he wouldn't have given himself; Jim Finkel, a Wall Street finance guy, who put together and managed complicated mortgage-based financial securities; Richard Campbell, the Marine who was facing foreclosure; and Glen Pizzolorusso, the mortgage company sales manager who led the life of a b-list celebrity.
I went to the lottery's website after finding the ticket and realized that I had won. I freaked out ran up to my apartment's door and locked all the locks. It was completely irrational.
Vanity Fair has released their 2009 list of the "top 100 Information Age powers"...Goldman's Lloyd Blankfein, Steve Jobs, Jeff Bezos, Warren Buffett, and the Google triumvirate make up the top five. Only 12 women made the list, most of them coupled with a man. A similar list from Business Insider has a better name: The 25 Who Won the Recession. I thought this recession business was supposed to kill the influence of the financial sector...funny how that never happens.
"I'm good at that. I must be good at this, too," we tell ourselves, forgetting that in wars and on Wall Street there is no such thing as absolute expertise, that every step taken toward mastery brings with it an increased risk of mastery's curse.
Eight Michigan credit unions are offering an unusual way to save: putting $25+ into a one-year CD comes with an entry to a raffle with a monthly prize of $400 and a yearly grand prize of $100,000.
This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
Why not put the lottery effect to work with Kiva? Instead of straight-up loans, enter lenders in a raffle and slightly decrease the return rate to account for the prize money. I bet (ha!) the lending rate would increase accordingly. (via waxy)
Update: Several people pointed out that British Premium Bonds have worked this way for decades. (thx, christopher)
Anyone know where to get stock data in a standard API format (XML, JSON, etc)? Just looking for hi/lo/close data, not real-time.
I may or may not get around to doing the project I wanted the data for, but in the meantime, here's a list of the suggested resources that people sent in:
A brilliant account -- character-rich and darkly humorous -- of how the U.S. economy was driven over the cliff. Truth really is stranger than fiction. Who better than the author of the signature bestseller Liar's Poker to explain how the event we were told was impossible -- the free fall of the American economy -- finally occurred; how the things that we wanted, like ridiculously easy money and greatly expanded home ownership, were vehicles for that crash; and how shareholder demand for profit forced investment executives to eat the forbidden fruit of toxic derivatives.
We are continuously crossing the best trading rats with each other in order to breed specialists in various markets for our clients. The second generation of top traders usually shows a much better performance compared to their parents.
Right now, the top trading rats are advising long positions on Exxon, UBS, and Caterpillar.
The big themes of the day so far are confidence and experts: should we and do we have confidence in the experts? Malcolm Gladwell kicked off the morning with a talk about overconfidence. He talked about the three types of failure possible in a situation like the financial crisis:
1. Institutional failure. The regulators and regulations were not sufficient.
2. Cognitive failure. The bankers weren't smart enough and got in over their heads.
3. Psychological failure. The bankers were overconfident and failed to recognize the direness of their situation.
Gladwell argued that the financial crisis was caused largely by overconfidence, which has two key effects. One is that people become miscalibrated. They think that the predictions that they are making are actually a lot better than they are. Secondly, there's an illusion of control problem in which people think they have control over things that are impossible to control. Fixing the situation will be hard because overconfidence is a useful trait to possess and experts are hard to purge from systems (they're the experts!).
[Experts talking about how experts are wrong! My brain is seizing up.]
Next up were Nassim Taleb and Robert Shiller. Shiller believes that confidence drives the economy and that macroeconomics is flawed because there's no humanity in it. Taleb was very quotable and the most full of doom of all the panelists so far. He doesn't like economists. Like wants them gone from the world, or to at least marginalize their effects so that their opinions and decisions don't affect the lives of normal people. In talking about why this crisis is different than similar situations in the past, he argued that globalization, the Internet, and the efficiency of global financial markets has created an environment where very large and very quick collective movements of money are possible in a way that wasn't before. Taleb had the last word: "people who crashed the plane, you don't give them a new plane".
The panel moderated by Suroweicki was a little odd. Two out of the three panelists kept repeating in reference to the solution to the very complex financial crisis: "this isn't that complicated". There has also been a undercurrent to the discussion so far that the goal of any solution to the financial crisis is to get the economy back to where it was. I'm with Taleb on this one: where we were wasn't very good, why do we want to go back.
[John] Paulson is a hedge fund manager who has been ridiculously successful betting against banks and other entities that had exposure to the subprime crisis: In 2007, his funds were up $15 billion. In 2008, he didn't do as well: His main fund rose 38 percent in a year when the S&P 500 fell almost 40 percent. His 2007 earnings were in the neighborhood of $3.7 billion. According to Forbes, while 656 billionaires lost money last year, Paulson was one of the 44 who added to their fortunes.
This is the peculiar thing about financial markets: if you know something bad is going to happen (you know, like the global collapse of the financial markets), you can either sound the alarm and save a lot of people a lot of grief or you can make a billion dollars.
That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. "A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs," the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. "And apparently not very well." They bought stakes in businesses they knew nothing about and told the people running them what to do -- just like real American investment bankers!
But it was all essentially make-believe.
A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets -- the banks, soccer teams, etc. Since the entire world's assets were rising -- thanks in part to people like these Icelandic lunatics paying crazy prices for them -- they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. "They created fake capital by trading assets amongst themselves at inflated values," says a London hedge-fund manager. "This was how the banks and investment companies grew and grew. But they were lightweights in the international markets."
The table on the preceding page, recording both the 44-year performance of Berkshire's book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
As the year progressed, a series of life-threatening problems within many of the world's great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: "In God we trust; all others pay cash."
Paging through, I was surprised at how much stock Berkshire owns in some major companies, including 13.1% of American Express, 8.6% of Coca-Cola, 8.9% of Kraft, and 18.4% of The Washington Post. Berkshire's stock price is of interest as well; the stock has never split and the current price for one share is more than $73,000.
You may remember the Google Motion Chart from Hans Rosling's TED talk about Gapminder. Now 26 Variable has used the chart to graph the movement of the stocks in the S&P 100 in 2008. The strange thing is that with the default settings, you're left with the impression that those stocks were more up than down over the year...if you ignore all the dots sliding to the left towards zero market cap.
A related thing is that there was blind faith in the value of financial innovation. Wall Street dreamed up increasingly complicated things, and they were allowed to do it because it was always assumed that if the market wanted it then it made some positive contribution to society. It's now quite clear that some of these things they dreamed up were instruments of doom and should never have been allowed in the marketplace.
Porsche's move took three years of careful maneuvering. It was darkly brilliant, a wealth transfer ingeniously conceived like few we've ever seen. Betting the right way, Porsche roiled the financial markets and took the hedge funds for a fortune.
Update: Not so fast there, Porsche. Bloomberg says that the company may not have the money necessary to exercise those options and realize $24.3 billion in profits.
In an Op-Ed piece for the NY Times called The End of the Financial World as We Know It, Michael Lewis and David Einhorn explore what checks and balances should have been in place to prevent the US financial markets from running themselves into the ground in search of perpetual short-term gain.
Our financial catastrophe, like Bernard Madoff's pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today's financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that's the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
Here's part 2, in which Lewis and Einhorn propose some possible remedies.
How little there was worth reprinting. I had six interns digging up all kinds of stuff, and I looked at 20 times the amount of material that appeared in the book. I assumed there would be lots of stories predicting each panic before the panics actually struck. But there was very little. Afterwards you'd have a flurry of literary activity, and then everybody was on to the next thing. Still, there was a common thread: You were watching America's growing financial insanity.
Much of a modern depression would unfold in the domestic sphere: people driving less, shopping less, and eating in their houses more. They would watch television at home; unemployed parents would watch over their own kids instead of taking them to day care. With online banking, it would even be possible to have a bank run in which no one leaves the comfort of their home.
Also, desuburbanization:
In a deep and sustained downturn, home prices would likely sink further and not rise, dimming the appeal of homeownership, a large part of suburbia's draw. Renting an apartment -- perhaps in a city, where commuting costs are lower -- might be more tempting. And although city crime might increase, the sense of safety that attracted city-dwellers to the suburbs might suffer, too, in a downturn. Many suburban areas have already seen upticks in crime in recent years, which would only get worse as tax-poor towns spent less money on policing and public services.
Picture a pig trying to balance on a mouse's back and you'll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland's financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: "The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland."
"We have a simple thesis," Eisman explained. "There is going to be a calamity, and whenever there is a calamity, Merrill is there." When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman's logic-the logic of Wall Street's pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.
It's a fantastic article, well worth reading to the end...the final dozen paragraphs are the best part of the whole thing. Who knew deviled eggs were so pregnant with metaphor?
As I was reading the article, Matt Bucher dropped a note into my inbox. As hoped for months ago, Lewis is writing a book about this whole mess.
MONEYBALL and THE BLIND SIDE author Michael Lewis's untitled behind-the-scenes story of a few men and women who foresaw the current economic disaster, tried to prevent it, but were overruled by the financial institutions with whom they worked, sold to Star Lawrence at Norton, by Al Zuckerman at Writers House (NA).
The [cod population] models were all wrong. The cod population never grew. By the late 1980's, even the trawlers couldn't find cod. It was now clear that the scientists had made some grievous errors. The fishermen hadn't been catching 16 percent of the cod population; they had been catching 60 percent of the cod population. The models were off by a factor of four. "For the cod fishery," write Orrin Pilkey and Linda Pilkey-Jarvis, in their excellent book Useless Arithmetic: Why Environmental Scientists Can't Predict the Future, "as for most of earth's surface systems, whether biological or geological, the complex interaction of huge numbers of parameters make mathematical modeling on a scale of predictive accuracy that would be useful to fishers a virtual impossibility."
In the same way, incorrect but highly lucrative financial models caused people to take on too much risk and leverage.
Volkswagen briefly became the world's largest company by market capitalisation on Tuesday as panic-buying by hedge funds desperate to cover losses caused its value to shoot up by up to €150bn.
Porsche revealed that it owned 74% of VW instead of the previously assumed 35%...which caused panicked buying by hedge funds. (via mr)
This radio program made the rounds last week, but I finally got caught up this weekend so I'll add my voice to the chorus urging you to listen to This American Life's episode on the financial crisis, Another Frightening Show About the Economy. Paired with The Giant Pool of Money from back in May, this is an excellent overview of what's going on in the financial markets right now. The hosts of the two shows are also doing a daily blog/podcast thing at Planet Money In addition, the last half of this week's TAL concerns the political angle of the financial mess. I haven't had a chance to listen yet, but check it out if you're into that sort of thing.
This particular annoyance is the graphs of share prices in the press and on TV. It is standard practice to start the y-axis at a number much higher than zero, in order to magnify the ups and downs of the market.
Kevin: Imagine that I let you borrow $50, but in exchange for my generosity, you promise to pay me back the $50 with an extra $10 in interest. To make sure you pay me back, I take your Charizard Pokémon card as collateral.
Olivia: Kevin, I don't play Pokémon anymore.
Kevin: I'm getting to that. Let's say that the Charizard is worth $50, so in case you decide to not return my money, at least I'll have something that's worth what I loaned out.
Olivia: Okay.
Kevin: But one day, people realize that Pokémon is stupid and everyone decides that the cards are overvalued. That's right -- everybody turned twelve on the same day! Now your Charizard is only worth, say, $25.
The only thing that's missing is the part of the explanation where the parents swoop in and pay Kevin full value for that Pokémon card, which allows him to keep lending money in exchange for cardboard rectangles.
The Money Meltdown is a one-page site which aims to provide visitors with the best places to go online to get a handle on the current financial crisis. (thx, robin)
Their clients were coming to them for a mix of escape and encouragement. As Jean, a New Yorker and a 35-year-old former paralegal turned "corporate escort" (her description) told me, "I had about two dozen men who started doubling their visits with me. They couldn't face their wives, who were bitching about the fact they lost income. Men want to be men. All I did was make them feel like they could go back out there with their head up."
Michael Lewis rents a mansion in New Orleans and finds in the experience a parable about the thirst of Americans for better housing than they can afford, the subprime mortgage crisis, and the ensuing financial panic.
The real moral is that when a middle-class couple buys a house they can't afford, defaults on their mortgage, and then sits down to explain it to a reporter from the New York Times, they can be confident that he will overlook the reason for their financial distress: the peculiar willingness of Americans to risk it all for a house above their station. People who buy something they cannot afford usually hear a little voice warning them away or prodding them to feel guilty. But when the item in question is a house, all the signals in American life conspire to drown out the little voice. The tax code tells people like the Garcias that while their interest payments are now gargantuan relative to their income, they're deductible. Their friends tell them how impressed they are-and they mean it. Their family tells them that while theirs is indeed a big house, they have worked hard, and Americans who work hard deserve to own a dream house. Their kids love them for it.
When it comes to markets, the first deadly sin is greed. Michael Lewis is our jungle guide through five of the most violent and costly upheavals in recent financial history: the crash of '87, the Russian default (and the subsequent collapse of Long-Term Capital Management), the Asian currency crisis of 1999, the Internet bubble, and the current sub-prime mortgage disaster.
It's out in December so I imagine that it won't include the current Lehman/AIG/Merrill/bailout kerfuffle, but that's what "with new material" paperbacks are for. (thx, paul)
Our willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences. It underpins Wall Street's brokerage operations, for instance, and leads to a lot more people giving out financial advice than should be giving out financial advice. Thanks to the current panic many Americans have learned that the experts who advise them what to do with their savings are, at best, fools.
God I hope he writes a book about all this someday, sort of a Liar's Poker 2. He can call it Fool's Roulette or something.
Google is providing real-time stock prices now...no page refresh necessary. So you can, for instance, watch Apple's stock price drop after Jobs' keynote. Now I know how daytraders feel...I can't take my eyes off of the screen.
Yay! Today is sub-prime mortgage day on kottke.org, I guess. The collapse of the sub-prime mortgage market took everyone on Wall Street by surprise...except Goldman Sachs, which earned $11.6 billion in 2007 when everyone else lost money. How'd they do it? Michael Lewis says that Goldman went against the flow in shorting sub-prime mortgages by assuming that the entire rest of the industry, including their own expert and extremely well-paid traders, were, as Lewis puts it, "a bunch of idiots".
n+1 magazine has a fascinating Interview with a Hedge Fund Manager. Topics of conversation include the sub-prime mortgage crisis. I gotta admit that I didn't understand some of this, but most of it was pretty interesting. (via snarkmarket)
Hedge fund manager John Paulson and investor Jeff Greene both became insanely wealthy over the subprime mortgage crisis. But how? (Parsing the Wall Street Journal is hard!) So Paulson "had to think up a technical way to bet against the housing and mortgage markets." His guys bought up "collateralized debt obligation" slices, which are repackaged mortgage securities. (Kind of lost already!) His firm also bought up "credit-default swaps." Paulson then opened a hedge fund shop, taking $150-million in mostly European money to back his scheme. Then he hung on. Now "he tells investors 'it's still not too late' to bet on economic troubles." Neat! Paulson's ex-friend Greene did much the same thing, getting an investment bank's participation for assets for the swap. Then... something happened and he bought three jets and a 145-foot yacht. Finance for idiots explanations eagerly sought! (And is there any small-scale way to do such things? Or do the abilities of regular people to make money on a crisis stop at short-selling and investing in Halliburton?)
The logic of catastrophe is very different: either no one is affected or vast numbers of people are. After an earthquake flattens Tokyo, a Japanese earthquake insurer is in deep trouble: millions of customers file claims. If there were a great number of rich cities scattered across the planet that might plausibly be destroyed by an earthquake, the insurer could spread its exposure to the losses by selling earthquake insurance to all of them. The losses it suffered in Tokyo would be offset by the gains it made from the cities not destroyed by an earthquake. But the financial risk from earthquakes -- and hurricanes -- is highly concentrated in a few places. There were insurance problems that were beyond the insurance industry's means. Yet insurers continued to cover them, sometimes unenthusiastically, sometimes recklessly.
James Simons, hedge fund manager, earned $1.7 billion last year. $1.7 fucking billion! His company charges fees of 5% of assets and 44% of profits while the fund grossed 84% this year. Can one person add $1.7 billion of value to the economy? Something is wrong here.
A record-breaking year for Goldman Sachs; they're setting aside $16.5 billion for salaries, benefits, and bonuses. That's $622,000 (!!!!!!) for each employee. Instead of the typical business puff piece telling us about what these i-bankers are going to do with their money (cars, houses, expensive dinners!), how about investigating where all this money is coming from and what, exactly, Goldman does that's so beneficial to the economy to earn such incredible profits.
You know those spams you get touting penny stocks? It turns out they actually work. "The team found that a spammer who bought shares the day before starting an e-mail campaign and then sold them the day after could make a return on his or her investment of 4.9%. If he or she were to be a particularly effective spammer, returns to this strategy would be roughly 6%."
The Neiman Marcus Paradox: How dumb rich people end up in debt. "14 percent of people with more than $5 million in assets have credit-card balances [which is] mystifying since credit-card cash is perhaps the most expensive form of money legally available."
