Tuesday, August 30, 2011

It Comes As No Surprise

Only A Little More Sophisticated

I had been out of High School Madness less than a year when I ran into a person who had graduated two years ahead of me, and had taken some pleasure in making my life difficult (not all that hard to do, particularly in Der Hochschule).

For whatever reason, I was talking about how people changed after high school, or didn't. This person replied, "You're wrong; people still run the same numbers they did in high school. They only get more sophisticated at it."

At the time, I thought No, you're wrong. In the many, many years since that conversation, however, I have begun to doubt the We-Can-All-Change-Yes-We-Can spirit from which I parted from HS Madness, more in favor of plus ça change, plus c'est la même chose (and after you, my Dear Alphonse).

Later on, I remember reading a character in someone's novel (and I think it was one of Stephen King's), explaining to another character that "there are two versions of history -- 'conspiracy', or 'fuck-up'. Which one do you believe in?" I'm reminded quite often of the timeliness of that observation.

Particularly, when I read something like this: David (thereisnospoon) Atkins at Digby quoted writer Michael Lewis, in his book about credit-default swaps magnifying the impact and disaster that was The Real Estate Bubble, The Big Short.

By way of saying there was no conspiracy in The Great Bubble Game (only a massive, Black-Swan, Perfect-Storm series of fuck-ups), and no shortage of gifted, intelligent people sounding the alarm, Atkins quoted Lewis as he recounted a story of Michael Burry, legendary hedge fund manager.

Burry, thirty-something founder of a hedge fund, Scion Capital LLC, looked with some alarm at the trading in Credit Default Swaps (or CDS's), an exotic investment vehicle that had only been allowed with changes pushed through Congress under "Lil' Boots" Bush -- never contested by a compliant SEC (in the same way that the ratio of leveraged dollars to assets among investment and banking firms was allowed, without question, to go up to 40:1).

Burry 'saw the whole board' -- from inflated real estate prices, to mortgage loans with bad terms and no due diligence; to over-leveraged banks and trading houses; and finally, the 'side bets' of Credit Default Swaps, which he believed made a domino-effect crash of the Bubble that much more likely.

Burry wasn't entirely a saint -- he thought he might make money for his clients and himself by betting that the Bubble was going to burst and that the Crash would occur (Goldman-Sachs did, too -- and kept pushing toxic, securitized mortgage pool investments to their clients at the same time).

If everything fell apart, Burry and Scion would make a fortune -- and did; after the Crash, Burry had earned a personal profit of $100 million, and a profit for his investors of more than $700 million. By comparison, most other hedge funds, and their clients, lost heavily.

In 2005, Burry contacted five major Wall Street firms and banks, and asked questions to test how they were investing in Credit Default Swaps; and were they interested in doing business around CDS's with his hedge fund? The answer was that "only Deutsche Bank and Goldman Sachs had any real interest in continuing the conversation. No one on Wall Street, as far as [Burry] could tell, saw what he was seeing." They were trading in CDS's without understanding the risk.

David Atkins continues:
No one could see what he was seeing. This is in 2005 -- fairly late in the bubble game. And still no one could see what he was seeing. Later on in the book Michael Lewis tells of the crucial moments when Wall St. first started to really realize that credit default swaps were going to bring the whole system down and stopped selling them. It was a like a spooked herd of cattle stampeding for the exits all at once.

And as the book chronicles, most of Michael Burry's wealthiest clients were furious with his market-shorting investment strategy for years, often pulling their money out of his firm in protest because they all wanted in on the big money mortgage derivative game all the rest of the big boys were playing.

One of the biggest lessons one can learn in life is that no matter how far up one rises or doesn't rise, the world is still populated by the same sort of morons we met in high school. It never gets better. The people at the top of the economic [sic] are just as greedy, impulsive, reckless, shortsighted and petty as everyone who annoys us in our everyday lives.

... It's idiots, all the way up the chain. Idiots like Thomas Friedman and Alan Greenspan, neither of whom can prognosticate two feet in front of their noses, but whose words are taken as gospel by all the rest of collective fools who think they're the smartest guys in the room. Which makes it all the more important that the idiots at the highest levels of government, whether they sport a fancy meaningless Ivy League degree or not, start listening to the actual smart people who did see it coming. Accurate prognostication is how policy makers can actually tell the smart people from the idiots.

Plus ça change, plus c'est la même chose.