this from the Senate hearings 2 days ago:
the G-S sales guy, Fabrice Tourre who sold some of the much-discussed securities said in an email
“...a product of pure intellectual masturbation, the type of thing which you invent telling yourself: ‘Well, what if we created a “thing,” which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’ ”
There's no way to top it.
Thursday, April 29, 2010
Friday, April 23, 2010
G-S: Is It Surprising?
Like everyone else, I'm listening to the dialogue on Goldman's most recent media-worthy transaction: the creation of the synthetic CDOs for Paulson and sold to DB and others. Above the title actors in this movie include the president who loped into NY yesterday to shake a finger at Wall Street. But doesn't most of this hand wringing and grand standing sound pretty naive. Or worse, sound as if there is another huge misdirection going on. As the heathcare debate lost meaning and clarity with talk of death panels, the issue of financial reform is already sinking under its own weight.
Some simple observations:
Is having clients on both sides of a trade unique? No. IBs are in the middle of transactions all the time.
Is trading gambling? Yes.
Is gambling illegal? No.
While we're talking of financial regulation, is there a clear end to 30+% interest on credit cards? No.
The fundamental issue, it seems, not whether parties were betting on outcomes, but if there were any real assets attached to the paper they were betting on. All of the jargon shouldn't distract from the fact that there's nothing to a synthetic CDO. There's no where to go when it goes bust.
And that might be a basic change in the model of commerce. Where once the model was based on things--companies, factories, inventories, receivables, etc--now it's based purely on math. As we're learning over the course of the meltdown and the current recession-based recovery, there aren't any houses attached to the mortgages in the mortgage-backed securities in the collateralized debt obligations mirrored in the synthetic cdo's.
It even possible that's there isn't enough blame to go around. For as the winds of babel swirl, forgotten is Barney Frank's role in democratizing home ownership and the right to mortgage regardless of means. Lost are Countrywide and Lehman and countless brokers, originators, boilerooms and packagers who had no attachment to real property of any kind. Lost is the nonsense of Sarbanes Oxley, ironic that the 'transparency' regulation is utterly irrelevant on these invisible investments. Lost are the ratings agencies, who did what they've always done--rubber stamp the goods of their paying clients.
The rise of the technocrat in modern finance enabled new formulas for a new, shadow market. Based on reflections of other financial objects, their science was so sophisticated that markets were created to buy and sell nothing but the idea of the investment. Now politicians and pundits are getting off sound bytes about 'not contributing to the economy', but all of this stuff generated billions in fees, bonuses, travel expenses, Hermes bags and Greenwich ice skating rinks. They're railing against something new with an old handle. The object of their wrath isn't the contribution to the economy, but the concept that so much happened--both p and l--based on nothing.
There are so, so many causes of our current condition--the rise of the publicly held advisor, the loss of the partnership, the decline of manners, the rise of the machines and dark pools. Is it all inevitable? The technology that drives every aspect of the modern world is shifting the culture right out from under the feet of everyone under 33. The world is run on code. Whatever is written here, or in the WSJ or the briefs being filed right now against and on behalf of Goldman, are words only in appearance for it is unrecognizable code that will make them part of the ether and part of modern reality. And, if you've developed websites or algorithms you know that the thought process to develop that code is completely different from writing words. The differences here are the divide between the analog and the digital. There is no judgement in digital. There is no nuance. If it can be done, do it.
The abilities of the technicians beings hired by the most successful hedge funds and banks go far beyond the current scope of finance, accounting, law and investing. Science will keep them advancing. New laws and regulations will attempt to rein them in. Management needs to decide what their brief is--win by scorching the earth or not. And management needs to control them.
Markets are designed to create winners and losers and enable the exchange of value across players. Markets in the past were always driven by humans with judgement, ethics and experiences which tempered trades based on stuff--the debt, equity, receivables, gold, cotton, pigs--tangible, seizable stuff. Everyday, new code is written to reveal a new way to make a penny. This code operates at the speed of light, without human supervision or operation. The codes trades on the code. The code get progressivly more abstract and detached from the stuff we traded in the past. Smart people and history teach us that markets will out. There is pain and anguish, but precedents show that markets get what they deserve. If we are truly entering a different age, as scribes were from the printing press, then our sense of the efficacy of markets is based on a different definition of the 'market'. The market, if we look at the GS contretemps as a harbinger, is not based on assets or things but on code. And then our models for judgement, discretion, success and failure.
In a situation with such unprecedented complexity and so few truly knowledgeable players the only sensible strategy should be to keep the basic truths at a laser-like clarity and the courage to keeping asking idiot questions like 'if there's nothing (no thing) attached to the investment, is there an investment?'
Some simple observations:
Is having clients on both sides of a trade unique? No. IBs are in the middle of transactions all the time.
Is trading gambling? Yes.
Is gambling illegal? No.
While we're talking of financial regulation, is there a clear end to 30+% interest on credit cards? No.
The fundamental issue, it seems, not whether parties were betting on outcomes, but if there were any real assets attached to the paper they were betting on. All of the jargon shouldn't distract from the fact that there's nothing to a synthetic CDO. There's no where to go when it goes bust.
And that might be a basic change in the model of commerce. Where once the model was based on things--companies, factories, inventories, receivables, etc--now it's based purely on math. As we're learning over the course of the meltdown and the current recession-based recovery, there aren't any houses attached to the mortgages in the mortgage-backed securities in the collateralized debt obligations mirrored in the synthetic cdo's.
It even possible that's there isn't enough blame to go around. For as the winds of babel swirl, forgotten is Barney Frank's role in democratizing home ownership and the right to mortgage regardless of means. Lost are Countrywide and Lehman and countless brokers, originators, boilerooms and packagers who had no attachment to real property of any kind. Lost is the nonsense of Sarbanes Oxley, ironic that the 'transparency' regulation is utterly irrelevant on these invisible investments. Lost are the ratings agencies, who did what they've always done--rubber stamp the goods of their paying clients.
The rise of the technocrat in modern finance enabled new formulas for a new, shadow market. Based on reflections of other financial objects, their science was so sophisticated that markets were created to buy and sell nothing but the idea of the investment. Now politicians and pundits are getting off sound bytes about 'not contributing to the economy', but all of this stuff generated billions in fees, bonuses, travel expenses, Hermes bags and Greenwich ice skating rinks. They're railing against something new with an old handle. The object of their wrath isn't the contribution to the economy, but the concept that so much happened--both p and l--based on nothing.
There are so, so many causes of our current condition--the rise of the publicly held advisor, the loss of the partnership, the decline of manners, the rise of the machines and dark pools. Is it all inevitable? The technology that drives every aspect of the modern world is shifting the culture right out from under the feet of everyone under 33. The world is run on code. Whatever is written here, or in the WSJ or the briefs being filed right now against and on behalf of Goldman, are words only in appearance for it is unrecognizable code that will make them part of the ether and part of modern reality. And, if you've developed websites or algorithms you know that the thought process to develop that code is completely different from writing words. The differences here are the divide between the analog and the digital. There is no judgement in digital. There is no nuance. If it can be done, do it.
The abilities of the technicians beings hired by the most successful hedge funds and banks go far beyond the current scope of finance, accounting, law and investing. Science will keep them advancing. New laws and regulations will attempt to rein them in. Management needs to decide what their brief is--win by scorching the earth or not. And management needs to control them.
Markets are designed to create winners and losers and enable the exchange of value across players. Markets in the past were always driven by humans with judgement, ethics and experiences which tempered trades based on stuff--the debt, equity, receivables, gold, cotton, pigs--tangible, seizable stuff. Everyday, new code is written to reveal a new way to make a penny. This code operates at the speed of light, without human supervision or operation. The codes trades on the code. The code get progressivly more abstract and detached from the stuff we traded in the past. Smart people and history teach us that markets will out. There is pain and anguish, but precedents show that markets get what they deserve. If we are truly entering a different age, as scribes were from the printing press, then our sense of the efficacy of markets is based on a different definition of the 'market'. The market, if we look at the GS contretemps as a harbinger, is not based on assets or things but on code. And then our models for judgement, discretion, success and failure.
In a situation with such unprecedented complexity and so few truly knowledgeable players the only sensible strategy should be to keep the basic truths at a laser-like clarity and the courage to keeping asking idiot questions like 'if there's nothing (no thing) attached to the investment, is there an investment?'
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