Virginia’s Other Questions

December 3, 2011

On September, 21, 1897, the New York Sun newspaper ran what has become the most reprinted editorial of all time (reprinted below). It was in response to a letter written by eight year old Virginia O’Hanlon of Manhattan. She was looking for reassurance that Santa Claus existed and she turned to the Sun for that reassurance. (Can you imagine someone one hundred fifteen years later in our times turning to their local paper for reassurance on anything? Well, they could turn to The Local Paper!)

The story can now be told of what happened to little Virginia after she got her answer from the Sun.

Virginia had a wonderful Christmas that year, but as winter turned to spring she began to wonder about different things. A string of letters to the Sun and other publications followed over the course of the  years that followed, inquiring about other characters of lore, myth and fantasy. Characters she’d heard about but hadn’t seen in real life.  Characters like the Easter Bunny, the Tooth Fairy, Superman, Republicans willing to raise taxes, Televangelists not looking for money or self-aggrandizement, flamboyant accountants, and Baby Boomers willing to admit that the Beatles may not  in fact be the greatest thing since the invention of perforated toilet tissue.

As Virginia grew older, she realized that she’d been hoodwinked by the Sun and others to whom she’d turned for succor. It was inevitable that she became cynical and curmudgeonly. Instead of focusing on things that perhaps never were, she turned her attention to those things were once accepted as facts but had for various reasons had come into question as perhaps myths. Things like evolution, the willingness of college presidents to control their athletic programs, the ability for people to see a crime being committed, stop it and report it to the police, Hollywood’s ability to produce original material that isn’t based on washed-up television shows and that the United States Congress was actually the “World’s Greatest Deliberative Body”. She wondered whether the quarterback was in fact a football player or some porcelain doll, only to be looked at and admired from a distance. She looked for guidance on the ability of people to mow their own lawns and rake their own leaves, whether there was actually anything that government didn’t have an interest in trying to fix for us, and whether it was really possible that something bad could happen without it being someone else’s fault and actionable in court. No matter where she turned, no one had any answers. Just head shaking and shoulder shrugging.

So many questions, so few answers.

She considered whether there was ever a scorned or harassed woman who didn’t call Gloria Allred (or take Gloria’s call).  She tossed around the old notion that there actually isn’t news being created twenty-four hours a day and there used to be a time when people were left alone to actually do their jobs without being bombarded by the littlest thing turned into the “crisis of the moment.” Not paying the debts you signed up to incur used to be a bad thing, she was almost sure of it, but now the evidence was inconclusive and no one could tell her how that happened or why. She wondered if sportscasters were actually paid by the number of times they said the words “Brett Farve” [sic].  Acting like an idiot used to get you scorn; now it gets you a television contract and a book deal despite the fact that you can neither act, read or write.Virginia wondered how that happened. These were questions no newspaper could answer.

She couldn’t find anyone to help her with her recollection that candidates seeking to be President of the United States were once among the brightest and best people this country had to offer and not a band of deliberately ignorant, skirt-chasing boobs.

Finding no one to answer her more complicated adult questions about what to believe and what to believe in, she dreamt of those innocent days when thinking about the existence of Santa was as complicated as it got.

Yes, Virginia there is a Santa Claus, but even he would have trouble fixing what we’ve done to ourselves.

. . . . .

“DEAR EDITOR: I am 8 years old.
“Some of my little friends say there is no Santa Claus.
“Papa says, ‘If you see it in THE SUN it’s so.’
“Please tell me the truth; is there a Santa Claus?


VIRGINIA, your little friends are wrong. They have been affected by the skepticism of a skeptical age. They do not believe except [what] they see. They think that nothing can be which is not comprehensible by their little minds. All minds, Virginia, whether they be men’s or children’s, are little. In this great universe of ours man is a mere insect, an ant, in his intellect, as compared with the boundless world about him, as measured by the intelligence capable of grasping the whole of truth and knowledge.

Yes, VIRGINIA, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus. It would be as dreary as if there were no VIRGINIAS. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The eternal light with which childhood fills the world would be extinguished.

Not believe in Santa Claus! You might as well not believe in fairies! You might get your papa to hire men to watch in all the chimneys on Christmas Eve to catch Santa Claus, but even if they did not see Santa Claus coming down, what would that prove? Nobody sees Santa Claus, but that is no sign that there is no Santa Claus. The most real things in the world are those that neither children nor men can see. Did you ever see fairies dancing on the lawn? Of course not, but that’s no proof that they are not there. Nobody can conceive or imagine all the wonders there are unseen and unseeable in the world.

You may tear apart the baby’s rattle and see what makes the noise inside, but there is a veil covering the unseen world which not the strongest man, nor even the united strength of all the strongest men that ever lived, could tear apart. Only faith, fancy, poetry, love, romance, can push aside that curtain and view and picture the supernal beauty and glory beyond. Is it all real? Ah, VIRGINIA, in all this world there is nothing else real and abiding.

No Santa Claus! Thank God! he lives, and he lives forever. A thousand years from now, Virginia, nay, ten times ten thousand years from now, he will continue to make glad the heart of childhood.

Boehner Willing To Bet Financial Markets Get The Joke

June 29, 2011

Betting Humpty Won't Break

In an interview with Hannity yesterday, House Speaker Boehner showed that he is taking the Powell “Pottery Barn (you break it, you own it) Principle” to the extreme in saying that “nobody believes that the U.S. is going to walk away from its obligations” if the federal debt ceiling is not raised by August 2nd.

If he wants to bet that financial markets will believe that an organization like Congress (if one can something that incapable of functioning an “organization) will take the necessary steps to avoid default on US Treasury debt after they’ve watched the fiasco that has unfolded over the past six months on this topic then he’s welcome to it.  But he and his party then “own” the result.

I think that Speaker Boehner ought to spend a few minutes reading up on the Law of Unintended Consequences.  Did he not learn anything from the last financial crisis in which the situation quickly got beyond the control of those responsible, and it was only through extraordinary means that control, such as it is, was restored.

If Boehner is wrong, and I think that he is, the potential tornadic impact of his cavalier treatment of the world financial markets will make Gingrich’s shut down of government in 1995 look like a gentle spring shower.

Here’s the full video:

See “ulater”

December 9, 2010

The news of the day reminded me of my love for words that end with “ulate”.

Headlines of “President Capitulates”, blog posts of “President emasculated” revived my memory.

Seeing the President gesticulate at his press conference furthered the cause.

His detractors accumulate even though he can calculate the votes in Congress and postulate the likelihood of success.

Democrats speculate at what might have been.

Republicans ululate at the chance to stimulate their base. They self-congratulate.  Do they miscalculate?

What will happen when the bills actually circulate; when they tabulate the votes?

Did Obama stipulate that tax cuts drive economic growth?  Has he followed the Clinton strategy to triangulate?

The President postulates that this agreement will inoculate or insulate him from criticism.

Democrats think that the Republicans only want to manipulate, deregulate and discombobulate.

(What of “combobulate”? I’m sure that things can be combobulated, yet we never speak of them as such.  I think this is an oversight.  Similar to being merely “whelmed” as opposed to overwhelmed, we owe it to ourselves to combobulate and be combobulated.)

I postulate that these matters are vital to our nation and its future, yet large sections of the population (bank shot!)–those viewers of Entertainment Tonight and TMZ and those readers of People and US Weekly–simply want to focus on celebrities and whether they ejaculate and with whom they copulate.

Banking is not a simple business

April 28, 2010

We're trying to handle the truth, but it doesn't conform to our desire for a simple answer

An admittedly overly simple example. I’m sure that my trading desk friends and others that read this with greater knowledge than I on this topic will laugh at my “crayon-like” simplicity.

There’s obviously lots of attention, anger and frustration being directed at Goldman Sachs, who had their senior mortgage staff and CEO testify before Congress yesterday. There was frustration on all sides, since the lawmakers don’t understand the business and the attempts by Goldman to try to explain it struck many as evasive. The example I’ve concocted below does not speak directly to the conflicts Goldman had in selling “shitty” CDO bonds to investors because they had a bigger fish on the other end of the trade who wanted to short the deal. My purpose in providing this elementary example is to show that this is all not as simple as people would like.

Let’s look at a major bank. They have one of the largest originators of loans in their Home Finance unit. This unit reports up through their Retail division. They don’t sell of all of their loans (i.e., they don’t securitize them or sell them all to the GSEs—you can see them on their balance sheet), so they are naturally “long” housing risk. They’re making loans and retaining the risk.

The Investment Banking division includes the loan trading and derivatives trading desks. It’s here that bonds, swaps, foreign exchange, loans and other securities are sold to clients. The Desk buys and sells these instruments based on client demand. The Desk is constantly buying and selling assets—positioning them—so that they have access to the assets that their clients want to buy and sell.  In addition, the Desk is responsible for selling those assets that are underwritten by the Firm. For purposes of our example, let’s say that some of those underwritten assets are bonds backed by home mortgages.

Management, housed in the “Corporate” segment, looks at the risks in the portfolio and has a choice: a) they can either sell the loans outright and forego the interest income on the ones that are going to pay in full, b) they can wait for those that are going to go bad to default and charge them off dollar-for-dollar or c) they can buy insurance on the portion of the portfolio that they think might go bad. This insurance doesn’t cost them 100 cents on the loan dollar (in the same way your car insurance premium is less than the cost of your car). They get many benefits from choice (c): loss protection at a fraction of the cost (it reduces the earnings drag on the firm as a whole with respect to charge-offs; it’s providing the funds used for reserves instead of having them come out of other earnings) and increases the stability of earnings to name just two. This process protects their shareholders.

What form does this insurance take? It can come from shorting the ABX index. This index is in layman’s terms the mortgage-backed securities equivalent of the S&P 500. They sell the ABX to someone who, for their own portfolio reasons, wants exposure to the US housing market but can’t buy individual loans and wants the diversity of an index as opposed to a single MBS issue. Foreign banks, insurance companies, pension funds, etc. might represent some typical buyers.

Home Finance is long housing. One part of the Desk is selling mortgage-backed bonds to clients, while another part is executing short trades on behalf of the Corporate segment. But if you look solely at the Desk as the Senate Permanent Subcommittee on Investigations did yesterday, you see a firm that is “selling bonds to clients while betting against the very same bonds”.

My question is: What should they do? Only be long housing and selling bonds? If that’s the case, they will reach the point where they don’t want any more housing risk and will stop making mortgage loans. This will raise the “why can’t I get a mortgage?” complaint from consumers. We don’t want that.  If they don’t manage their portfolioexposure in some way–by shorting or in the vernacular, “flattening the book”–they’re exposing their shareholders (and it need be said, the FDIC and ultimately the taxpayers) to more risk than they want to take. This increased risk is almost the opposite of the moral hazard.

What Goldman and the other Wall Street firms do is much more intricate and complicated than this example and much more complicated that they can explain when confronted with loaded questions, but looking only at one part of the picture is both unfair and disingenuous. But then again, no one said that the purpose of these investigations was to get to what’s fair or ingenuous. None of this excuses what the SEC alleges Goldman did wrong in the Abacus trades. That part of the story—the “who should have told whom about who else was involved in the deal” stuff, will all be aired in court. I’m not capable of judging whether Goldman violated the law or ethical treatment of their multiple clients.

The point of all this is that these firms are all engaged in multiple activities across their different platforms, and looking at only one part of a firm’s business can lead to drawing the wrong conclusions and bad legislation to try to “fix” the problem.  It is likely that any legislation that comes out of this will likely activate my favorite law, the Law of Unintended Consequences.

To those who say that there was no incremental economic activity associated with the synthetic trades at the heart of the Goldman deals, I ask, “How is that different from the secondary trading on the stock exchange?” The companies that have issued the stock already have the money, it’s just a transfer of wealth from one party to another; one that thinks that the value will go down and one that thinks that the value will go up. The firms that make markets in equities—that trade them off of their own book to facilitate client transactions aren’t telling their client that “someone else thinks the value of the stock you’re buying is going to go down—that’s why they’re selling it while you buy it.” No one seems to complain about that.

I fear that people take advantage of the fact that these activities happen beyond their normal sight. They’d rather not consider on a regular basis with the messy details of what makes markets work, of who gets and who is denied credit and for what reason. They reap the benefits of a vibrant capital market (and yes, on balance we’ve reaped much greater benefit from these markets and these activities than the events of the last two years have cost us) but once these practices are out in the open people are shocked (shocked!) and dismayed that such things happen.* The Wall Street Journal on Monday provided an email of unknown authorship that mashed up Colonel Jessup’s famous “You want me on that wall,” testimony from “A Few Good Men” in with the concept of the allocation of capital that the banking industry provides. I won’t dwell on it here, because it’s an overdrawn example (pardon the pun). But this letter to the New York Times printed today is worth reading and considering. In essence, the author says that had there been more John Paulsons out there, more people who wanted to “sell” and not “buy” exposure to the US housing market, the end would have come sooner and the damage less dramatic.

I understand that people want a scapegoat. They want a villain. I hold no quarter for Goldman Sachs. But none of this is as simple to explain as people might like and all of it is critical to the future success of our economy. Getting this wrong will have long-lasting effects and we may pay a price for it in terms of economic growth for years to come. It may be a price worth paying, but I think that we’d be better off knowing that price ahead of time.

*  When you hear an entrepreneur lament that he can’t get a loan to start his business, ask them how much equity he’s putting into the venture versus how much he’s trying to borrow. Banks have never been good at venture capital—they’re good at lending to businesses with track records of performance. People that are trying to borrow money to start businesses are looking in the wrong place. They want to use the bank because the bank is cheaper than going to a venture capitalist who will likely demand a higher coupon and an equity interest in the deal, which the entrepreneur is loath to surrender. The fact that during the bubble banks made these loans is as much a testimony to the lack of lending standards that existed as all those poorly conceived mortgages. It’s not that “banks aren’t lending”. It’s that banks are trying to return to the underwriting standards that kept them safe  for so long without a giant spasm of failures. We shouldn’t want banks to do the same deals they did over 3 of the last 4 years. We should want something better. There’s money out there to be had, but it’s more expensive than it used to be.

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