Mar 22 2009

Wall Street Misguidance

I’ve slowly become an apologist for my industry. I say “slowly” because a year ago when Bear Stearns went belly up, I wanted Jimmy Cayne to go to jail along with several others at Bear Stearns. But in truth, I was just hoping someone would wipe the floor with his ass. So many friends and people I worked with got whacked. They were out of a job and/or unable to retire because Mr. Cayne was playing bridge. I was livid. Sick. I spent a decade of my life there. This wasn’t business. This was personal. 

Around the same time, I spoke to a friend who was a teacher. Her response to Bear Stearns’ demise was “well, everyone who worked there has a lot of money so it’s not like they’re suffering.” I paused. Aghast. Stunned. “Well, that’s not really the way it is.” I replied. I felt like saying “are you out of your fucking mind?!!!” But I knew she wouldn’t believe it if I told her. She wouldn’t believe that most of the people at Bear Stearns were just people earning a living. They had families. They had bills to pay. They were no different than her.

A year later I found myself defending AIG bonuses to my boyfriend. Then it hit me. I was like a teenager defending my school. It’s fine when I say it sucks, but god forbid someone else does. But the discussion wasn’t even about AIG. AIG isn’t even my industry. They’re a fucking insurance company.

Had I become this defensive by feeling personally attacked by the media and strangers? By the generalization that ALL people who worked on Wall Street should be burned at the stake? Had working a block away from the NYSE and fighting my way home through various protests made me want to come to the defense of my “comrades” who worked inside? Had it become clear that the public and the general media were disgracefully misguided on the financial industry? Yes.

The mere fact there are protests at the NYSE make this very clear. The angry mob doesn’t even know what people in the NYSE actually do. If they did, they certainly wouldn’t be protesting there. But as we know, perception is very different from reality.

It seems the perceived reality of Wall Street is a bunch of middle aged white guys in Hermes ties and Armani suits sitting around a board room conjuring up ways to screw people. Like witches stewing over a caldron; mixing and watching a magic potion clicking their Ferragamo shoes while the rest of us get the shaft. This is a fallacy.  And this fallacy has created a public monster.

And it’s not just the result of the current financial collapse. Even back in the late 90’s, during a time of great prosperity, I often avoided the question about what I did for a living. After all, I lived in the East Village, home to the most tolerant and open-minded group of New Yorkers, except if you worked in finance. I was tired of being berated. Christ, I was just earning a living doing something that interested me. But I had to hide like a Communist in the 1950’s.  So even in the best of times, when people are making big returns, Wall Street is still an evil empire.

Of course, when people are making money, they credit themselves. And when they lose money, they blame someone else.

The truth behind the “Great Oz” of Wall Street “wizardry” is that the vast majority who work on Wall Street are hard working people earning a living. I am one of those people. I’ve never owned a home.  I’ve never owned a luxury car. I don’t own art. I can’t fly first class. I didn’t get a job on Wall Street because my parents knew people.

Be careful on your witch-hunt. Be careful you don’t catch a bunch of dolphins when you bring in some tuna.

Funny. Nowadays I just say I’m unemployed. Seems to be in vogue. Especially down on Wall Street.

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Mar 1 2009

CREDIT CARD COMPANIES: WHY THE LAWS THEY LOBBIED SO HARD FOR WON’T HELP THEM NOW

Last week, Bernanke predicted the recession “could” end this year. Well, he’s out of his mind. Let me re-phrase. He’s lying. This is the same Bernanke who, less than a year ago, offered assurance there would be no recession while I jumped up and down pulling my hair out.

The IMF conducted a study on 124 banking crises over the last thirty years where massive debt overloaded the banking sector. Out of the six that occurred in wealthy nations, the speed of recovery varied from 2 (South Korea) to 10 (Japan) years. I think we can all agree that what’s happening now ain’t a typical banking crisis. Ending this year? No.

What was equally baffling was news that the market rallied on Bernanke’s comments. This was just plain wrong. The market rallied on technicals. As the DOW hit its worst levels since 1997 the market panicked. The “it can’t be this bad” panic actually created a rally and the DOW subsequently bounced off its 7100 level. And it happened again on Wednesday and again on Thursday. This had nothing to do with Bernanke.

I told a friend if the economy does show signs of strength in the next 6 months, to look out for hidden mine fields amongst the smoke and mirrors. In my mind, these will be the credit card companies. I suspect they won’t be racking up interest charges on new purchases these days while the sheer number of credit card defaults could make sub-prime mortgages look like a blip on the radar screen.

As virtually every sector in the stock market plummets deeper into the abyss, one thing eludes me. The credit card companies have remained relatively strong. Mastercard and Visa have actually outperformed the Dow in the last month. This worries me greatly. And it should worry all of you. But don’t be too concerned. Just like credit card debt, we will all simply pay for it later.

The average American household carries $10,700 in credit card debt. What was once a vehicle for emergencies, occasional purchases and travel expenses became a free for all “lay away plan.” And what’s even more outrageous is these companies can charge whatever interest rates they like. I consider their rates “usury” however, it seems the public disagrees given that they kept charging.

In 2005, credit card companies lobbied hard to change the bankruptcy laws in order to “protect” themselves. They won. This was really just an opportunity to eliminate massive amounts of risk while doling out $50,000 in credit to college students with zero credit history. In retrospect, they were just begging to be regulated. These laws won’t help them now. The public will soon want their heads on the chopping block. And I have no doubt the Obama administration will be more than happy to oblige.

How credit cards assess their risk is their business. If they deem it suitable to give an 18-year-old $50,000 in credit, that’s fine by me. However, don’t cry when you don’t get paid. And in turn, I don’t want to hear the whines of consumers who can’t pay their bills because they needed a new plasma TV. Leave me out of it. Cheap, easy credit is what caused the current banking crisis and what could soon create a credit card debt debacle. If you think consumer spending is at an all time low now, wait a few months. You’ll be able to get that $40 sweater at the Gap for $9.99.

Now these companies are offering incentives to people with large balances. American Express is offering $300. $300? Was that the magic number the algorithm machine spat out in order to alleviate their risk? Are they so deluded that they actually believe people have the money? Are they reading the same papers I’m reading? So if I rub the $300 American Express genie, $10,700 will automatically appear in my checking account? Well, if that’s the case, I’ll be swiping like crazy this week at the 5th Avenue fire sales.

This past week reminded me of an old lesson: at the end of the day, from stock prices to consumer spending to credit card debt: something is only worth what someone else is willing to pay for it.

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Sep 29 2008

The Financial Crisis Explained

I know you’ve ALL been waiting-nail biting in fact-to hear my commentary on recent market events. I mean you didn’t actually think you could escape this-did you?

 

There’s a quiz at the end. So pay attention.

 

Firstly, I love Bear markets. They cut to the core of reality and peoples true capabilities. I love the nervousness, the white knuckles, the sheer fear and yes-the loss. But most of all, I love the way Bear markets cut through all the bullshit and expose everyone involved for what they truly are. Stupid, greedy and unaccountable. Naked vulnerability is true transparency. I mean isn’t “transparency” the one thing “investors” are always screaming for? You see? A Bear market always delivers.

 

So-what happened? And who is to blame? The 2 questions always asked after any disaster.

 

A) The Clinton Administration: Back in 1999, Bill Clinton basically forced Fannie Mae to give mortgages to low to middle income people. In english that meant that Fannie Mae was forced to take on more risk. For anyone who has known me more than 5 minutes, you know I NEVER quote or validate the New York Times, however I should personally send them an apology letter for this amazing article from NINE years ago. And here is the most pertinent quote:

 

“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people ….. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.“

 

B) The Federal Reserve: Back in 2001, Alan Greenspan decided that it would be a brilliant idea to keep interest rates at 1% for over a year. This would, in his eyes, create a “soft landing” from the inevitable shit show also referred to as the “dot com bubble.” Well, this allowed thousands of people to borrow money at cheap rates. Of course it was money they couldn’t pay back, but hey, why not create a falsely inflated standard of living? I mean if it’s ok for Michael Jackson, then it’s ok for everyone else.

 

C) The Federal Government: Who had so prudently regulated the banking system thought that it was just dandy-a ok-for banks to erase loans from their balance sheets. So the banks could sell their loans. How innovative and progressive. The government always does such a good job at regulating things. Especially when they don’t understand them. They’re just so thorough. 

 

D) Mortgage Brokers and Banks: Decided “what the hell? Since we don’t have to keep these loans on our books, let’s just loan money to EVERYONE and then unload it to investment banks who will unload it to hedge funds and other investors. Fuck it.” Well done guys!

 

E) Consumers: Thought, “We don’t live in a cyclical economy. The value of everything goes up forever. So hey-why not buy a $300,000 home with an interest only loan (a fancy term for “rent”). It will go up in value FOREVER! We study and put more thought into buying a new television than spending $300,000, but since we KNOW interest rates will stay the same forever-then this is a sound and good decision.

 

F) Investment Banks: Then some brain trust decided to create a new structured financial product called a CDO (Collaterised Debt Obligation). How did this come to fruition? How did this strategic genius come up with the structure? He got drunk one night, picked up an “executive assistant” from the human resources department and took her home. Then he emptied the entire contents of his fridge into a blender and passed it off as “haute cuisine.” She drank it, complimented him on his keen fusion cooking skills and gave him a blowjob. The next day, while he was hung-over, he had an epiphany and thought it was ALSO a great recipe for a “structured investment product.” “Yeah” he thought, “let’s just throw in a bunch of different kinds of debt into a bowl and call it a CDO.” Then his credentialed ass sold it to investors. Not only could HE sell it, but it caught on like wildfire with every other firm. Not only did they sell it to individual investors, but also held huge positions at their own firms.

 

G) Investors: Thought that CDO’s were the investment vehicle of the future. A sure fire way to triple their money. These were probably the same investors who thought that the dot com boom represented a “new economy”-where a “click” magically turned into revenue. And another thing-when’s the last time an investor actually read an annual report? Might come in handy to know what your money is doing. 

 

This cycle kept happening and as interest rates stayed stable, home prices continued to soar. This enabled people to borrow more against the home that they already couldn’t pay for. I mean how else could they afford a new Plasma TV? And as the CDO’s that carried all this cheap sub-prime debt continued to soar-the investment banks also borrowed more money against them.

 

Then the mortgage rates got readjusted (not a surprise-they were scheduled to) and E couldn’t make the payment so they defaulted on their mortgage, which made G’s investments tank in value. E could no longer pay for their house so they took their Plasma TV and moved into a friend’s garage. F’s risk management departments had been playing golf and on the 19th hole, got a call. “We’re fucked. Um-you know those things that we have huge positions in and have been trading? Well, we don’t really know how to value them, but we know they’re ‘kinda’ worthless. So how are we going to pay the money back?” “Uh-I don’t know. I’ll call you back after my bridge game.” OOPS!

 

So they all estimated and wrote down the debt, but didn’t REALLY know how much they were losing (operative word here is “estimated”). And then they went out of business along with the people who moved their Plasma TV into the garage.

 

Then C decides that it’s the “short selling” that’s causing the market to go into the toilet. Yeah that was it. I mean it COULDN’T be that all these banks are going out of business. No. Absolutely not. It’s those evil short sellers. Oh-so let’s put a ban on short selling-that’ll save us! Of course we forgot that you can still short stock with options and that market makers are shorting stock ALL day because they have to by law in order to create liquidity-a law instituted by-um-it’ll come to me-oh right-by the SEC. Oh and look-the market rallied the next day. See? We were right. WRONG. Ever heard of a short squeeze asshole? And I can’t wait until they lift the ban. Then the Dow will be-let’s say around 8000? But perhaps it’ll hit that before…as no short selling means no short squeeze rallies. So don’t be stunned when the market tanks faster than you think.

 

Then C decides that perhaps we should bail out all of these motherfuckers. Of course, they don’t really know (nor do I) the ramifications of bailing or not bailing out-much like a sinking ship.

 

QUIZ:

 

So whose fault is this?

 

ANSWER: A, B, C, D, E, F and G

 

What was done right: “Hey Lehman Brothers? Go fuck yourselves.”

 

But as I walked past the New York Stock Exchange on my way home from work the other day, I wondered, “why are you people protesting here? Are you retarded? Apparently. Do any of you honestly think that any single person in the NYSE had ANYTHING to do with any of this? Apparently you do. So I guess if a similar thing happened in the beef industry, I would see you protesting your local deli who makes roast beef sandwiches?” It was like the Special Olympics of activism.

 

So what’s the good news? Yep-the old trading adage/superstition “Buy on Rosh Hashannah. Sell on Yom Kippur.” That’s about as good as it gets right now.

 

Future Installments:

 

A Penny Saved is a Penny Earned: Perhaps Benjamin Franklin had a point

 

Marking to the Market: The Newest Math: Why the term “fair” value is utter horseshit. If they couldn’t value it then, then you won’t be able to value it now.

 

Short Selling: The True Sure Thing

 

US Treasuries: Your Savings Account Has a Better Yield

 

Risk Management: Knowing When To Skip Golf in Order to Avoid a Global Financial Collapse

 

Structured Financial Derivatives: Structured Means….Structured!!!!

 

 

Credit Card Companies: Why Those Bankruptcy Laws You Lobbied So Hard For Won’t Help You Now

 

Mortgages: The Not So Fine Print: Yes, You Do Have to Pay Back The Money. It’s Part of the Deal.

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