A Simple Twist Of Fate

    I'm between books today( New one..The Living Constitution by David Strauss) and wanted to tell you a story about what happened to me thirty-eight years ago while hitchhiking from Oakland to Los Angeles. It's not very interesting but it could have changed my life if I was open to an experience someone offered me. I lived in a large house on 47th St in Oakland when I went to California in 1972.The owner was a young man around two or three years older than me(a past roadie for the Jefferson Airplane). Around ten to fifteen men lived at the house at any given time.It had three floors and I lived in the attic. You gave the owner a few dollars to live there from time to time.People came and went as they pleased and women appeared and disappeared like the wind.One could say we were having a very good time the majority of our stay. The house was full of people from Ohio,Florida,Manhattan and the Bronx.I was a member of the Bronx contingent. Some of my friends were Viet Nam vets that returned a little unhappy about being involved in the very dangerous experience. They had "freaked" when they returned and became part of the underbelly of the counter culture movement. I say" underbelly" because a lot of vets were addicted to some form of drugs when they returned and this house provide the escape they needed on a daily basis.

I met a young lady through a friend that lived in L.A. and decided to go see her one day. Of course I had little money or transportation, so I started to hitchhike one morning.I've received numerous rides,some good and some very bad ,in my travels but one ride stands out because I was offered a job by the president of a company. I don't remember the type of company but I do recall we talked for a long time about my education,experiences and perception of our culture. I guess we debated the usual issues and tried to make our points about the war,business and general lifestyles.I knew a little about business because I had graduated from one of the better business schools in the country at the time. As I took business classes in college,the more I wanted to remove myself from that environment.I just thought it was very conforming and not very interesting.Also,I always had a poor response to authority which continues to today. I didn't think I could be competitive and take orders from someone who didn't fully respect me and see me as an equal.I was also radical when it came to one's attire. I fully believe to this day that a human should be able to wear what he/she wants at any time and in any situation.  Judgemental people, with that one issue, has always been a thorn for me.My view of this issue has lead me to accept any attire in the form of clothing or tattoos.I like to tell the story that I was the first young man to wear bell bottoms and gym attire(outside) in the Bronx.

With this stated, the man still offered me a job if I would conform a little(clean up) and join the company. He pleaded with me to give up my perception and engage the other world that was ready for my arrival.What if I took him up with that proposal?Would I be a rich man living in a fancy San Francisco co-op,donating money to Nancy Pelosi and underprivileged children in Oakland. Would those years bring passion for my work and open my world to experiences I never had?

If you've been reading this blog, you might think I am distrustful of all business activities. I am not against the capitalist system and rejoice when companies are fulfilling places to work and grow. The majority of companies are very good to their employees and help communities flourish. They contribute to the welfare of many through donations and support programs. Wealthy individuals are very generous through their foundations that meet an assortment of needs. I wish all our citizens had wonderful jobs and experiences with their employees.

I couldn't take that leap because I was truthful to myself at that time in my life. The world was upside down for those of us that needed something new. Why that happened sometimes remains a mystery to me. Only a small percentage of my peer group took the counter culture path in earnest. It was a challenge at times to turn your back on the culture you came from and go down an unlit road. Many stumbled and got caught up in the darkness of drugs and bad dreams. Each path was open at twenty-two for me. I think about the "straight"job sometimes and wonder where those steps might have led me. In the end, it really only matters if the time spent here was worthwhile. When I think in those terms,I know that I took the correct path because I've been very happy being true to the person I think I am.

The Bill For The 2008 Financial Collapse: Who Is To Blame?

The bill for the U.S. bailouts will come to $4.6165 trillion according to Barry Ritholtz,a market commentator.If you put that figure into historical perspective,it is bigger than the Marshall Plan,the Louisiana Purchase,The Apollo moon landings,the 1980 savings and loan crises,the Korean War, the New Deal,the invasion of Iraq,the Vietnam War and the total cost of NASA's space fights all together.To compound this desperate picture,we also have a huge level of personal debt arising from the credit bubble.Countries around the world are contracting and everyone seems to still be in economic trouble two years after the 2008 collapse.Spain has an 17.4 unemployment rate while powerful USA has close to 10%.Anger is coming and will continue to come towards the banks and government.Laws are coming to try to fix the banking problems but it can't change the culture where securitization took place.The power and complexity of modern financial instruments combined with the will to profit and the reality of (To Big To Fail )to create a situation in which,as soon as rules are made,people will be looking for ways around them. Some countries will always try to seek a competitive advantage by having looser banking laws and some banks will always try to exploit that fact.Finance is completely transnational and see national frontiers as places to be exploited via their differing legislation.

The level of state intervention in the U.S. and United Kingdom is comparable to that of wartime expenses.The huge bailouts of major institutions means that the Anglo-Saxon model of capitalism has failed.It is a 100% pure form of socialism for the rich.The unregulated boom where all the upside went into private hands(top 10% income levels) is followed by a gigantic bust in which losses were socialized. The Western world can't afford another bust like this one for another generation.On a political level,we have the chance to insist that our governments change the rules to make sure that this never happens again.

Free-market capitalism's victory party(last twenty years) has come to an end. We have to slow down and decide how to make the finance industry back into something which serves the rest of society rather than preying on it.Citizens have to start thinking about when we have sufficient money,sufficient stuff and start worrying about our neighbors who might be without.In a world running out of resources,the most important ethical,political and ecological idea can be summed up in one word:"enough". Credit bubbles(low rates) and asset bubbles(CDO's) didn't happen without people joining in the process. Citizens borrowed and spent more(junk),bet assets would grow higher in price,used credit cards like ATM's and became greedy through increased materialism

Maybe the West should have listened to the ideas and perspectives of the counter culture movement forty years ago. The movement rejected materialism by building owner designed small scale housing(under 1000 sq.ft.),limiting purchasing of  new clothing,furniture,appliances,haircuts,food(welcomed vegetarianism),automobiles,costly heating and air conditioning systems,vacation trips and entertainment. The movement grew gardens and explored "free" nature in the public parks and rivers of our nation.Many mothers and fathers stayed home to raise their children and make them their priority.They worked at jobs that they found interesting and avoided workplaces that focused on profits before people.  As the media talked about buying new consumer goods, the movement recycled and formed coops for health and food needs.The same media(their revenue coming from capital companies  thru advertising) trashed the movement as drug infested and self serving at every opportunity. Traditional Christian religions joined the attack because the movement found peace in nature,not in the buildings of man. The greed for the new and better didn't come from the counter culture because we knew America could do better.

I highly recommend"I.O.U" by John Lanchester for all its insights.

Garn-St.Germain Depository Institutions Act,Gramn-Leach-Bliley Act and John

Well,John Fogarty was great yesterday and played like a youthful twenty-two at sixty-five. I was very glad I went to see his band play. They all were very exuberant about the show and John performed non-stop for two hours.He played all of his hits from Creedence and more. I didn't realize what a fine player he is. His young band was excellent and every song had instrumental parts where John excelled.Every form of rock was played and they continued the pace throughout the show.I'm also glad a nice crowd turned up to support Family.

The "asset price bubble"is economist speak for the housing bubble.During the years of the buildup,while interest rates were low and poured into houses; or many took money out of their homes by taking out loans against the increased value,people treated their houses like giant ATM machines. Greenspan(Central bankers) claimed that China kept interest loans low buying T-bills and that the central bankers didn't raise rates(slow the bubble) because there was no reason for prices to rise. The housing bubble also took place in the United Kingdom and most of Europe. The Chinese didn't invest in these countries like the U.S. and therefore Greenspan's account is false and misleading. Under his watch,interest rates remained so low that it encouraged the market to spin out of control. This lack of insight was one of the main causes of the bubble that lead to disaster for so many citizens.

The movement to de-regulate the financial industry went too far by exaggerating the resilience of laissez-faire capitalism. There was a decades long process of deregulation and opening up, of stripping out(by lobbyist and pro- business politicians) all measures designed to second guess the financial world's ability to regulate by "market discipline". The total free-for-all started with the 1982 Garn-St. Germain Depository Institutions Act(Reagan) that created insurance for mortgage lenders which increased their reckless practices and eventually begot the savings and loan crash and a bailout of $124.6 billion. This bill stood at the beginning of two and a half decades(Reagan, Bush, Clinton and Bush) of consistent deregulation and loosening of regulatory supervision and all subsequent legislation.

The bankers asked for and got the following: (1) insistence on free movement of capital across borders (2)the repeal of Depression era regulations separating commercial and investing banking (3) a congressional ban on the regulation of credit de-fault swaps(4)Major increases in the amount of leverage allowed to investment banks(5) a light hand at the SEC in enforcement(6) an international agreement to allow banks to measure their own risks(7)an intentional failure to update regulations so as to keep up with  financial innovation.

In 2004,the SEC agreed to allow five big banks to cut the amount of capital they needed to hold in reserve against potential losses in its investments.This change allowed the banks to increase their leverage hugely.(3 of 5 eventually went under after 2008..Lynch,Lehman and Bear Stearns) Stearns increased its leverage to the point where it had $33 in debt for every $1 of equity.

The Gramn-Leach-Bliley Act of 1999 killed the Glass-Steagall Act of 1933 that separated commercial and investment banking.The bill was sponsored by three republicans and backed by Treasury Secretary Larry Summers(Dem). This bill allowed the banks to use commercial money for high risk investment that increased the probability of failure in the housing market,especially subprime mortgages.The culture which lead to this point was ingrained in the system that was a secular religion with no apologies to the millions who lost their jobs when the crises came.

More to come from "I.O.U" by John Lanchester.

John Fogerty...41 years later with a little Bruce Springteen thrown in

I didn't finish "I.O.U" by Lanchester yesterday so I'm going to write about a concert I'm going to attend with my wife today.We are going to see John Fogerty who authored numerous hits with Creedence Clearwater Revival in the 60's and 70's.It is my understanding Bruce Springsteen might play a few songs with him and I sure hope he joins him.I saw Creedence forty-one years ago as an opening act for the Rolling Stones in MSG.(N.Y.) That was 1969 and I remember the group had one or two hits by then.

This outdoor concert will take place at HITS,Inc,a high quality,international level hunter/jumper horse show located in my hometown of Saugerties,N.Y. This horse show has a premiere Pfizer $1 Million Grand Prix which will be the largest equestrian show jumping event in the history of the U.S.Bruce is going because his daughter has been involved in equestrian shows for a long time and I believe might be participating in the big event. The concert is a fundraiser for Family,Inc. which has numerous safety net programs in Ulster Co.

I only saw Bruce perform once before.He joined a show with Ringo Starr close to his home in Homdel,N.J. I'm the same age as Bruce and remember $3.50 shows at the Filmore(NYC) in the late sixties and early seventies.I saw numerous big time groups there and refuse to pay $100 to see him or anyone today...especially if it's at a large facility. I saw Dylan a few years ago($50) and had seats in the back of a large arena.I almost got arrested for tyring to find ways to get up close.If I go to see anyone these days, I want to be very close to the action.

 I go to see jazz groups as much as possible. They play better and improvise throughout the show. The shows are in small clubs where you can see the notes and chords played by the artists. I always had a taste for jazz but I really started to buy records and follow different artists in the late seventies when I listened to WBAI in NYC. It was a great radio station back then with numerous talk and music shows. I listened to a lot of classical and jazz shows during this period. Woodstock,N.Y. had a good station when I first moved to the country. They had special classical and jazz shows similar to WBAI. I started to record shows on cassette tapes and still have them stored away for future use. Today, I can listen to jazz from numerous stations around the world through the Internet...wonderful invention.

I think about celebrated artists(my age) that are still playing music today. They are still playing their hits for large sums of money.Why do they continue? Obviously,Keith Richards doesn't need the money.I know they love to play music(I play a little and enjoy it immensely) but why do they continue to put on big, expensive tours and sell it to the public. Do they enjoy the limelight or is it a job that fulfills them like the typical person in everyday life. I believe I would get a little bored by it all. Bill Wyman (Stones)quit about ten years ago and went and played with a jazz band in London. I think I would want to explore something different like Wyman because almost anything we do can become routine. Teaching is very routine and scheduled. It drives me crazy even if everyday is really different. Most of us(myself included) are not enlightened enough to practice Zen Buddhism in their daily lives and disregard duality(judgement of what is good or bad..see that everyday is completely different).We set ourselves up to look into the future and dream about a different place to be with various new activities to entertain us. Most of us are in the past or future and stray from the present because it is difficult and demanding.

I also find it interesting that celebrated artists are ordinary people with the typical problems and character faults of everyone else. We elevate them because they can perform a set of skills better than the common person but a ten minute conversation would show( I believe) that they are vulnerable to the same maladies as us. I have read that artists, with great lyrics concerning human relationships, live far differently than their lyrical insights.Are they self-centered,ego thirsty souls who get caught up in their celebrity that hinder creativity? Why do so many celebrated artists live on songs from the past? Is it only youth that springs creativity?

Bruce,Dylan and Jagger/Richards can still write and have something to say but they also get very repetitive. The public is very nostalgic(myself included). I know I will appreciate and enjoy the songs today by John Fogerty.I hope he improvises with his guitar work in his hit songs by changing it up so something new comes from them. If Bruce appears, I know I will be excited because he is America's greatest popular artist today. He is a political symbol for what has gone wrong with America today and his best songs reflect those sentiments.He is a fabulous showman and a very good rock guitarist. I just want them to play straight rock and roll and move us to another place. This collaboration should take us to a new reality if they become free enough to explore and create from the child within.

Credit De-Fault Swaps,Securitization and The Grateful Dead

I was watching the Grateful Dead on MSG last night and I began to think about the song"Ramble On Rose"that was recorded from a live show in 1972.There is one line from the song that summed up the counter culture movement for me..."the wine ain't sweeter,the grass ain't greener,either side of the hill"(Zen Buddhism). I love that line because I interpret it as a call to avoid the race for materialism and an acceptance of  the great gift of life. It is life, with the wonder of our own breathing, that is important.To go beyond this thought and wish for more would be disrespectful to the life that has been given to us.Life and nature,with all its beauty,should be enough for our souls.Greed,with all its illusions,is counter to the purpose of life and hinders our spiritual development. I also remember casting aside the business section of the Times for so many years.I would go to the art section or the op-ed articles and swing around and read the wonderful play of the Knicks. I rarely stopped to read what business was doing. I guess we all should have been watching more closely. We left the door open and they stole everything,even the plumbing.

Credit de-fault swaps were started by J.P.Morgan around 1989. The Basel rules in banking required that each bank had to hold 8% of their capital in reserve against the risk of outstanding loans.These rules limited the amount of lending they could make and profit they could achieve. Morgan was the first to sell a line of credit(loan) to another bank for a fee. The bank that was sold the loan would be responsible to pay for the outstanding loan if it defaulted(Morgan's insurance).Morgan  would now be in a position to lend the same,original credit to another customer and increase profit on the same amount of money. They could continue to do this endlessly if they could find the willing partners. Morgan's risk was free and the capital could be used for "sexier" activities.

Securitization was an invention to allow this process to happen.What securitization did was bundle together a package of such loans and then rely on safety in numbers and the law of averages:even if some loans did default,the others wouldn't;they would keep the stream of revenue going,and thus the risk of default would be spread and minimized.These securities would also be divided into different levels of risk and sold of accordingly,into riskier and less risky"tranches" of debt, all paying different rates of interest in return for differing levels of risk.

There was one final component of the Morgan invention.It set up an offshore shell company,called a special purpose vehicle,or SPV, to fulfill the role of the bank that served as Morgan's insurance.The shell company would assume the line of credit(loan) risk.After this SPV assumed the loan, it would sell off the risk to investors in the form of securities paying different rates of interest according to the risk. The shell companies were located in the Caymans,Bermuda,the Bahamas or the British Virgin Islands to avoid paying taxes(so un-American and un- patriotic).

AIG was the main insurance company for all these securities It was worth $200 billion at its peak.They had their tentacles around the world and certainly throughout the U.S.When the crises came in 2008,AIG was saved because so many banks were tangled with them in this security game.Our government gave AIG $190 billion so our whole economic system didn't collapse. So far have we strayed since the days we produced  the products we bought. We produce securities instead of appliances today. Today,the finance industry and the manufacturing industry have switched their importance in our present economy.

The collapse came because mathematical geniuses devised formulas that took risk out of the equation so banks could run wild and free. In 2000,David X.Li,while working for Morgan applied a piece of mathematics called a Gaussian copula formula to the creation of CDO's(Collateralized Debt Obligations). This formula could measure and analyze risk in subprime mortgages through correlation for the first time.This model made banks feel safer about credit obligations especially concerning ones with great risk and great profit(subprime mortgages).Banks and financial institutions could now buy job lots of mortgages and put them together in a single pool.Eventually,they were divided up into units and sold to investors.The problem with the formula was the newness of the subprime market and it had never been through a severe period of market difficulty.From 2000 to 2006, subprime mortgages were given to anyone who could walk and talk.The banks.mortgage companies,etc. wrote non- conforming mortgages because they passed the risk along and didn't care about initial repayment.The formula failed the test and citizens defaulted in numbers not imagined by the financial community.The Grateful Dead were masters of improvising, our financial community failed because they didn't understand the basics of playing.

More to come from"I.O.U" by John Lanchester tomorrow.

Trading Away the Stimulus

I read this op-ed today in the Times and wanted to share it with you.I will return to John Lanchester's book tomorrow.The piece was written by Alan Tonelson and Kevin Kearns.The following is from their article.I thought they made some very good points about improving the economy and creating U.S. jobs.The trade figures from the Commerce Department this week aren’t pretty: despite anemic economic growth, so far this year America’s trade deficit has hit $289 billion, compared with $204 billion for the same period in 2009.




For many people, the trade deficit seems unrelated to the nation’s continued economic crisis. But it is actually a central reason why American growth has lagged and President Obama’s stimulus hasn’t led to a robust recovery: since February 2009, the government has injected $512 billion into the American economy, but during roughly the same period, the trade deficit leaked about $602 billion out of it and into foreign markets.
Consequently, a successful recovery strategy will require aggressive measures to reduce the trade deficit — including new and expanded tariffs to encourage the sale of domestic goods over imports and a serious reindustrialization policy to create the manufacturing strength to exploit these new opportunities.




Advocates of traditional stimulus measures, like increased government spending or tax cuts, rely on recovery models rooted in, respectively, the 1930s and 1980s. Back then government stimulus and tax cuts made sense, because Americans spent almost all the new money on domestically produced goods and services.




For the last few decades, though, our growing trade deficit has undermined the relationship between spending and growth. Today Americans purchase so many foreign-produced goods and services that even large stimulus programs produce virtually no new net growth or employment at home.



Of course, trade deficits have subtracted from American economic prosperity for decades. But until recently, that damage was masked by artificial sources of growth, like the last decade’s credit and housing bubbles. With these phony economic engines gone, the trade deficit’s impact has become painfully clear.



President Obama’s pledge to double exports in five years at least shows the White House is aware of the problem. But without greater reductions in imports, even a doubling of exports would fail to generate substantial net growth or job increases.



It’s also true, as some claim, that the rising personal saving rate could reduce the trade deficit. Indeed, the deficit dropped from July to August in part because American consumers saved more and thus bought fewer foreign goods and services. But increased saving cuts both ways — consumers buy fewer domestic goods and services, too. Higher savings might bring down our trade deficit, but growth would still stagnate.



Fortunately, the government can take other, more effective steps to reduce the trade deficit. For starters, Congress and the president should allow American victims of currency manipulation — primarily industrial companies whose prices are kept artificially high when trade partners keep their currencies under-valued — to obtain compensatory tariffs against currency-subsidized imports.



Second, “Buy American” requirements for federal procurement should be expanded to cover all spending at every level of government.



Also essential is a border tax to counter foreign export rebates. In countries with value-added taxes, those levies are returned to producers when they export their goods — which allows them to lower their products’ prices in our market. In response, we can ensure fair competition in our home market by applying a tax equal to the rebate upon a product’s entry to the American market.



Finally, America needs more sweeping and proactive tariffs on foreign goods and services that compete directly with existing and start-up domestic producers. Opponents insist that significant tariffs would increase international trade tensions. Experience, however, suggests otherwise.



In 1971, President Richard Nixon set unilateral tariffs against Japan, Germany and other countries that refused to let their currencies rise in value. Far from setting off a trade war, the tariffs persuaded other countries to help rebalance the world economy cooperatively. There’s no reason the same thing couldn’t happen today.



These steps would revolutionize American trade policy. They would require suspending some international trade obligations Washington has spent years fighting for. But in such perilous economic times, trade-policy conventions can hardly remain sacrosanct. Otherwise, imports will continue to sabotage the recovery.





Alan Tonelson, a fellow at the United States Business and Industry Council, is the author of “The Race to the Bottom.” Kevin L. Kearns is the president of the council, which is an association of small manufacturers.





A version of this op-ed appeared in print on September 10, 2010, on page A29 of the New York edition.

2008 Leverage Ratios in Banking ..Hard To Believe

I put down "Coming Climate Crisis?"yesterday and began reading John Lanchester's "I.O.U." It is a fascinating book about the sudden collapse of our economy in 2008.Lanchester doesn't write obtusely but tries to explain today's financial world in a clear,uncluttered way so someone with no experience can understand the key concepts. I am thankful for this service.

The book has many little examples and stories how finance works and how we started on the path to "credit de-fault swaps" and securitization.He lists Hong Kong as the first unbridled free market in the world.He posits that after the fall of communism and the Berlin Wall,the business climate changed.The West no longer had to sell it's ideas about who had the better society to anyone. The West didn't have to detail how their system took care of all of the citizens with large safety nets.Hong Kong had no rules in the early nineties.They had no income taxes to speak of,no welfare state,no guarantee of health care or schooling.Shanty-towns sprawled halfway up the hillsides where the inhabitants had no electricity,medicine,education for children or running water.Unregulated sweatshop factories were a significant part of the economy.Many came to try their luck in this free-for-all system.In terms of GNP, Hong Kong was very successful.Measurable growth in GDP came to Hong Kong but so did inequality.He quotes Marx that this type of capitalism sows the seeds of its own destruction.Workers in factories would have opportunities to observe how they are exploited and have a desire to organize against the exploiters. So true for many around the world today.This new version of capitalism has spread around the world with Adam Smith,Fredrich von Hayek and Milton Friedman building the foundation with their ideological theories.This version tended to act as if their was a fundamental connection between capitalism and democracy.The capital monarchy was running wild with eyes open for any deal that put money in their pockets regardless of the exploitation.Democracy in this workplace was dead.
Even before this new version, economic inequality around the world was growing.Since 1970,the income of the highest fifth in U.S. has grown by 60% while everyone else was paid 10% less.The top .01% received a 700% increase during this same time period.

Lanchester noted that banks began to run like a money making machine. They began to increase their risk  in this free-for-all economy.They increased their leverage ratios dramatically.The ratio of Barclay's assets to its equity at its peak in 2008 was 61.3 to 1. This ratio is the amount you have to multiply your equity to make it equal your liabilities.Imagine that for a moment translated to your own finances,so that you could stretch what you actually,unequivocally own to borrow more than sixty times the amount.The median leverage ratios of banks in the U.S. were 35 to 1 while European banks were 45 to 1. This means that if 1/35 of the banks assets(loans) go bad,the would be insolvent.(go bust).As we know, the loans went under for many banks and had to be rescued through government loans( healthier banks refused to help in this process).

Between 1986 and 2006,the average annual return on banking shares rocketed from its historic norm of 2% to 16%. because the banks made bigger bets.Unfortunately for taxpayers,those bets went bad in 2008.Gigantic holes appeared on the left-hand side of their balance sheets,where"Assets" are listed.Those now-worthless assets are for the most part linked in one way or another to the collapse in property prices in the U.S.and elsewhere.

I will continue tomorrow with derivatives(options and futures),Black-Scholes formula,credit de-fault swaps and securitization.