Cramer vs Stewart: An Aside

Rug Burn Junky on 26/3/2009 at 01:15

Quote Posted by Thief13x

Perhaps you should educate yourself on the opinions of alot of people these days who don't quite understand this mess.

I thought that that was what I was doing when I engaged you here.

You do not understand this at all, which is why you're oblivious to the shortcomings that I've been pointing out in your reasoning and factual statements all along.

Regardless, "failure of capitalism" as shorthand for the more nuanced criticism I echoed above is something worth discussing.

"Capitalism failed, therefore we need to be commies" isn't being discussed seriously by anyone, and only the paranoid deranged fantasies of the extreme right-wing would think it is.

Scots Taffer on 26/3/2009 at 01:25

Quote Posted by Scots Taffer

Hey, if you don't retain "the best and brightest" (who caused this monumental fuck-up in the first place) then how can we hope to get out of this horrific financial shithole? We can't have government who (rightly or wrongly) bailed us out then telling us how to spend our dollars, because after all, would you work for a company that wasn't doling out the big dolla bounties for doing your job well? And round and round we go. How do we stop it? Nobody knows.

Hm. This is an interesting (http://www.nytimes.com/2009/03/25/opinion/25desantis.html) article (well, resignation letter) that sort of gets right in the face of my comment above.

Thief13x on 26/3/2009 at 02:22

Quote Posted by Rug Burn Junky

Regardless, "failure of capitalism" as shorthand for the more nuanced criticism I echoed above is something worth discussing.

"Capitalism failed, therefore we need to be commies" isn't being discussed seriously by anyone, and only the paranoid deranged fantasies of the extreme right-wing would think it is.

Yep, keep plugging your ears and looking the other way. It's people like you that got us into this situation in the first place: out-of-touch, opposition-doesn't-exist ballbags, thank god we have a president that calls out you grossly out of touch folk. Reminds me of an AIG exec lol

the_grip on 26/3/2009 at 02:26

Quote Posted by Rug Burn Junky

letting AIG fail would have far wider consequences, and would cause instability and failure of other institutions that would be more damaging, and harder to fix

Definitely agree on the far wider consequences bit. In many ways, from what I understand, AIG is one of those spots where the buck stops (hence they are an insurance agency, in part).

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But, beyond that, this statement is entirely hypocritical on its face. Why is it OK to "backstop" the counterparties, rather than achieve this goal through AIG? (Never mind the fact that that's exactly what happened - the money was injected into AIG so that it could cover collateral calls by their counterparties based on their deteriorating credit rating.)

Because a company that so horribly mismanaged risk (when they were supposed to be the epitome of handling risk) shouldn't remain a middleman. Why pay the extra layer and not just route the dough to where it is needed?

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I can't imagine you truly understand the issues when you make statements like that.

Admittedly, I do not have first hand exposure to these issues, but I do understand what all the derivatives are and the problem, at least on the surface. But I do not have first hand experience in actually looking at vehicles like the ones that are causing the problems here, so my exposure is definitely armchair economist level. I do try to read quite a bit - not necessarily just people who have an axe to grind either way.

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Rather than covering collateral calls, and enabling AIG to wind down the positions in an orderly fashion, your proposal would require the instant termination of these positions. Which would cost far more to cover, and would leave many institutions unhedged and improperly collateralized, forcing further failures, and moving these losses throughout the system in a domino fashion, in a way that may not be containable or reparable. It is the height of folly.

Again, I could be short-sighted, but I fail to see why we need a middleman (esp. one that failed) and why this could not be handled instead of multiple bailouts that already cost a fortune.

All that said, however, you make good points. I would like your input as I'd like to learn more about this from different angles. I have two friends, one is a chief investment manager and another is an actuary who has handled credit default swaps, and both, while they radically disagree about economics in general, they do express the sentiment I expressed above. I have listened to their arguments and find them compelling, but if you have some thoughts I'd be one that would listen.

the_grip on 26/3/2009 at 02:33

Quote Posted by Rug Burn Junky

if banks like Goldman underestimated the counterparty risk of dealing with AIG

I'm also not sure that this is entirely true... it may be, but when the talking heads on TV were discussing how bad things were in early 2007, then the folks at Goldman, Lehman, Bear Stearns, or wherever else would have to be completely ignorant to just be wising up at that point. I think people knew exactly how shady all the shit was even when it first started going on, but it turned a buck and they played a big game of hot potato. GS just happened to be a lot savvier (and probably luckier) than some of the others.

Rug Burn Junky on 26/3/2009 at 02:55

Quote Posted by the_grip

A couple of reasons. It's not the full company, it's a subsidiary of the company whose liabilities dwarf the rest of the company. There's no reason to throw the baby out with the bathwater by destroying the standing positions that were still functioning.

And just as an example, one reason to keep AIG in place is this: As AIG lost creditworthiness, they had to post collateral, this is what the government put up. But that's a different, and LESSER, amount than they would have to put up in the event of a collapse. So the government can put up $50 to 100 to 150 billion to comply with the collateral calls on the contracts as they did. But if AIG goes down entirely, the full amount owed (say, $500 billion or so) is suddenly due. That changes the ballgame.

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That's just it, even they weren't savvy enough to fully avoid it - they mismanaged the risk, just like AIG. They covered their ass enough to prevent a collapse, and claim that they are sufficiently hedged now, but if AIG were to collapse, they would likely get taken down with them, and other banks most definitely would. At the end of the day, they made the same mistakes that AIG did - misjudging risk. So just writing AIG off as "they fucked up once, therefore they deserve to die" would apply just as easily to any of these other banks.

But more than that, AIG is like a choke point, it's easier to solve the problem there, than to let it spread out and disperse. Think of AIG as Thermopylae, and imagine that money being sent to them are the spartans fighting against the Persians of economic ruin (ignoring for a moment that the spartans lost ;)). Once AIG is out of the picture, you're fighting them on the open plain, and you're fucked.

But the creative destruction is coming, regardless of how this plays out. There's already a talent drain at all of these banks, and smaller, nimble investment banks and hedge funds are going to take up a lot of the functions that the behemoths did. The landscape of Wall Street is going to be completely different in 10 years.

Rug Burn Junky on 26/3/2009 at 02:56

Quote Posted by Scots Taffer

Hm. This is an interesting (http://www.nytimes.com/2009/03/25/opinion/25desantis.html) article (well, resignation letter) that sort of gets right in the face of my comment above.

Yeah, that was one of the things I'd been meaning to address. The bonus flap at AIG was blatant grandstanding, and really dangerous, damaging politics. It really sorta disgusted me.

At the root of this, was a matter of perception. People hear the word "bonus" and it brings up all of these misconceptions, because they do not understand the nature of the bonuses. They are not about rewards for performance, and they are not really tied to result, but tied to the work you put in. It's really a part of your salary, it's just that instead of being paid every other week, it's paid at the end of the year. You can say that it's exorbitant, and I wouldn't disagree. And you can say that it doesn't necessarily align with an output of good to society, and you're probably right.

But that really glosses over the fact that one has to make real tangible sacrifices to work on Wall Street. I'm not going to say that these poor souls are all being exploited, but the only reason many of these people (myself included) are willing to put up with the stress involved is the monetary reward. The lifestyle is brutal. And a company in crisis like AIG is going to be a cauldron of stress that no sane person is going to put up with unless there is a reward attendant thereto. To hold that reward out to people to fix it, and then yank it back AFTER they've done the work? That's really unconscionable (To be evenhanded, I agree that the autoworkers renegotiation was also a sleazy move - but at the very least that was mostly about renegotiating the payment provisions for work going forward, which is a different kettle of fish. And in full disclosure, that was strongarmed by a small number of republicans who represent Tennessee and other states where Japanese automakers had plants. It was not a wholesale abdication of common sense by all of congress)

In any event, (http://meganmcardle.theatlantic.com/archives/2009/03/institutional_investment.php) here's another great discussion of the AIG bonus situation. The money shot?

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So I'm distressed to see Tim Burke, of all people, making these kinds of statements about AIG:

[INDENT]Considering that the 11-year veteran executive VP says that he's not at all accountable for AIGFP's losses because he wasn't involved at all in the CDS trading and knew nothing about it, maybe the 26-year old MBA might do a fair enough job. [/INDENT]

Really? Really, maybe a 26-year-old MBA might do an okay job of liquidating the financial products division of the world's largest insurance company? I was a 28 year old MBA from (she noted modestly) one of the top finance programs in the country, and let me assure you that there is not the faintest whiff of a possibility that I or any of my classmates could have done an adequate job. We would have cost the taxpayer billions.

Among the necessary assets we would have lacked: 1) adequate skill to maintain the company's portfolio trading strategy in a really screwed up market until they could be wound down 2) contacts in other firms who could buy either our securities, or our line of business 3) experience in executing trades so that they make, rather than lose, money 4) knowledge about current market conditions 5) experience with complicated transactions.

This kind of hyperbolic speculation about an industry which he, respectfully, knows nothing about, is the exact opposite of how thoughtfully he approaches the institutional problems of his own industry.

As for Stewart/Cramer. I'm a huge Stewart fan. In fact, I went to a taping of the Daily Show just a couple of weeks ago. But that said, he was off base here, even though I agree with his sense of outrage, because Cramer is not the right target, and CNBC's role is not necessarily what he imagines it to be. CNBC is about traders. They provide daily short term bursts of information about the market to the guys that are actively trading the market, with an average of over a million in assets under management. That's the business they're in, not investigative journalism. I'm not going to say caveat emptor, entirely, but they're play by play guys, not investigative journalists. That "wall street sidebet" was on full display every day. It wasn't hidden.

Santelli was way out of line, because he was going astray of that mission, and Cramer is out of line when he starts whining about Obama being a socialist, but still, you have to take them in context, and that context is that they're concerned with how information reacts with the markets (and, for the record, grip's gripes aside, I just went back and looked at the technicals: Cramer picked Jones Soda when it was a breakout trade with strong upward momentum, and correctly called that that momentum would take it higher, which it did. The fact that it tanked later is irrelevant. He was correct about it being a good trade - get in at 20, and watch for indicators that that momentum was fading and sell at a profit.)

Furthermore, the "deer in the headlights" thing is a bit unfair. One of the things about the investment banks is that their investments are so very opaque, and subject to so many off-balance sheet liabilities that Cramer, or anyone else with less than a ridiculous research budget, couldn't uncover everything. That's why it was such a big deal when Meredith Whitney came out with her scathing analysis of Citi and tanked the stock in one day (I remember this vividly, because I had just come from a job interview with Citi when the news broke). It is possible to follow the markets in general every day, and not see A) the specific liabilities that would bring down any one bank, and B) the big picture systemic problems that could take everyone down. It's like asking a leaf about forest fire prevention. You can't know everything, and you're reliant on other analysts and your data flow, and ability to parse it. More power to people who could see it coming, like Whitney, or Einhorn, but I'm not going to string up anyone who didn't see it about to collapse how and when it did.

Rug Burn Junky on 26/3/2009 at 02:57

Quote Posted by Thief13x

Run along and let the adults discuss things, 'mmmkay?

Thief13x on 26/3/2009 at 04:19

Quote Posted by Rug Burn Junky

But that really glosses over the fact that one has to make real tangible sacrifices to work on Wall Street. I'm not going to say that these poor souls are all being exploited, but the only reason many of these people (myself included) are willing to put up with the stress involved is the monetary reward.

Well, the world got one thing right when it said Wallstreet is out of touch with Mainstreet. Glad you make good money there, but ya know, stress kills. So does Wall Street when it comes to a reputation.

Stitch on 26/3/2009 at 04:21

You certainly are the local authority on destroying one's reputation.