Fear and Loathing on Wall Street

Bear fails and Lehman fails and then all faith is lost and I'm crying in front of my computer, then the government is pushing a gun in my mouth and saying, the only way to save the economy is for you to own the banks, and everyone is always saying, this is all your fault, this is all their fault, we need more regulation we need Obama we need to lock the bastards up we need more and more and more.

A lot of people say speed kills. It does, but kindness is the crueler killer. We are a litigious society, cursed with an overabundance of legalistic talent and excellent orators. We even have a President who can string together metaphors, imagery, and alliteration to make a point. Unfortunately none of this particularly guarantees us a bright, shiny future. In fact, forget the President, if you can, and think about yourself. What do you use? What do you need? What do you want? Odds are, unless you have extremely impractical or particular tastes, you need what a lot of other people need, you want what other people want, etc. From here, it's not a long logical leap to making half-decent investment decisions. And yet, nobody does. Because protecting our investments is no longer our responsibility, it's everybody's responsibility, and everybody's fault when things go wrong. Anything that is everybody's responsibility is nobody's responsibility and will never get done. If you can't manage your own money, you'd better find someone you trust to the ends of the Earth to do it for you, and you'd better stay close enough to them that you can hit them with a brick if things go wrong. Having the Man do it for you is bad, even if I concede some degree of involvement by the Man in our lives is necessary.

We look to icons in times of trouble; it's a natural human reaction. We have specialists in society, experts and gurus, all expected to use their luminary talents to lead us out of the dark times and back into the land of honey and milk. So you call up Alan Greenspan. You led the Fed for years, and during the good times were regarded as a sort of lucky totem, despite your dot-com era warnings about irrational exuberance. Did Richard Fuld rub your head for luck? Ah well. Tell us what went wrong, Alan.



"I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders."

Actually, you're making a bigger mistake by going in front of Congress and surrendering a lifetime of belief in the ability of markets to regulate themselves. Are you still the same guy who palled around with Ayn Rand? Come on.

So you call up John McCain. Senator, how bad are things, really?



John McCain unwittingly walked into a political minefield when he said that the fundamentals of the economy are strong. He was playing it up to his audience, and when attacked claimed that Barack Obama wasn't respecting the American worker and that Wall Street was corrupt and so on. Bullshit on all sides, but McCain should have known better. We're all stupid and in bad times will be taken in by anger and frustration, and the sort of dogged optimism required to power through bad times isn't popular or easy. Investing is the same way. Lining up executives to be shot for redecorating their bathrooms isn't justified in any way. At the same time, they, too, should have known better. Popular anger isn't easily ignored or brushed off. It doesn't matter if, in the long term, it's not justified. You still have to deal with it now, and Americans won't abide a whiner, even one who may be right.

But if EVERYBODY starts whining, well! It's time to roll up our sleeves and take action, doggone it! So the President, ignoring concerns about too much government intervention, decides to put a hard cap on executive pay. Well, that'll certainly make our leaders better stakeholders. It sure is a good thing that we have all this regulation, post-Enron, post-2000, post-Lehman. Why live with risk when we can live with crushingly obtuse regulations? I'm not an expert; I don't know which are good and which are bad, but I do know that the US is no longer the preferred destination for foreign companies looking to list on a stock exchange. It's just too annoying for them to register here. If these companies end up failing elsewhere because they were badly managed, well, aren't we smart over here. If they end up doing phenomenally well and leading the next global boom, from Mumbai or Dubai or London or Berlin, well, it's time for another lynch mob in the Senate Finance Committee! Who let this happen? WHO?! Answer: We all did. Shut up and get a job.

I remember reading Fareed Zakaria's The Future of Freedom. He discusses democracy and its merits and failings, and concludes that without great benefactors and civic morality, democratic capitalism is mostly the cruel system that Marx and others claimed it was. It needs Andrew Carnegie, it needs Bill Gates and Warren Buffet. It needs them to be rich and it needs them to be good. But not just them, I think. We're all participants in the capitalist experiment, and if we aren't good citizens then we will creep ever closer to a socialist democracy where emotion rules more than it ever has. How do you regulate morality, though? I've never been convinced that outside of a circle of family and friends, we're really able to change the moral compass of anyone else. It's good and right to try, but I don't foresee a lot of success. It's like expecting this schizoprhenic blog entry to revolutionize the financial and social viewpoints of its readers. "Yes, Michael, after I read your blog I cut up my extra credit cards, paid off my loans and started donating to public television and charities that I support. I also lost thirty pounds and you saved my marriage." There's no such thing as a moral bailout. It's up to each of us to be good at our own lives. Capitalism is a great system, it's so good that it magnifies our decisions and causes the impact to actually trickle up the chain, and when we're all in our overpriced, depreciating houses that we could never afford to begin with, the whole house starts to fall down around us. And we're left, trapped in the suburbs, wearing our McMansions around our necks like golden albatrosses, wondering how did this happen? Could it be my neighbors made the same bad decisions I did? Could it be we're not so different after all? Shocking.

Did anyone else notice that in the auto bailout, Ford made a big deal of refusing aid? They just had their worst quarter ever and said, nah, we're okay over here for now. You guys go ahead, we don't want you to fail. They're no doubt hoping to turn that in their favor, and curry favor with the bailout-weary American public. It worked with me - I love a survivor. But more and more, I think that this wasn't their main motivation. They aren't running a hyper-risky marketing campaign over at Ford. They're afraid. Afraid of the retribution they might face in what is becoming a public kangaroo court for business and industry leaders, and afraid of being dragged in front of our representatives, so angry on our behalf, and mocked and interrogated on CSPAN. They are afraid of us.

I would be, too.

Terms, part 2

I thought that applying to the Treasury Department's haphazard relief program as an individual, or first incorporating myself and then applying, would make for an interesting bit of humor and perhaps get me a form rejection letter as a memento, but being lazy I figured it wasn't worth the paperwork.

But lo and behold, although I've missed the deadline, the paperwork is a mere two pages. As DealBook points out, it's shorter than the average home mortgage loan application. And that's a bit of black humor in and of itself, and I don't care to try and top it.

Someone commented on the DealBook post, saying that Peter Solomon, since he's an investment banker and all, has no right to offer suggestions or critiques on the economy, and in fact has left his time-out corner without permission and will be consequently be banned from recess. In response, the government has decided to continue the trend of appointing officials with no supervision and giving them Russian-sounding titles like 'John P. Walters, Drug Czar' and 'Energy Czar' and 'Henry Paulson, Secretary of the Treasury, Dark Lord of the Troubled Asset Relief Program, Doom of Men and Elves Alike', and appoint Joe the Plumber to 'unclog America's stopped-up credit markets.'

Blame is stupid. TARP is stupid. Why a federal agency specifically tasked to deal with this hasn't been formed, as has been suggested both in Solomon's post above and by others is mindboggling.

Terms

Once upon a time I was a legal assistant for a major international law firm specializing in venture capital financings, large and small. A key element of these deals is the term sheet, a concise (relatively speaking) document containing definitions, amounts, goals, and other components of the deal. How much money, when, and under what conditions. Simple. They usually clocked in around 10 pages for an average deal, and could often be shorter. Larger deals or funds would instead have prospectuses with all sorts of research etc. But one shot investments - the term sheet is the starting point for all the other legal wrangling.

What does a short term sheet indicate? That the writer is using an economy of words? In the case of the term sheet for the Citigroup bailout, it's just another blank check. It indicates that the government either has high confidence in the value of the securities and divdends it is receiving from Citi, or, more likely, it simply doesn't want to muddy the water. It is a clear statement: 'We are rescuing you, and damn anyone who says otherwise. We also hope to receive dividends.'

What securities are being purchased? Wait, are we even purchasing distressed assets? I thought we were injecting captial now. Oh, we're doing both. Okay.

The term sheet targets assets relating to commericial and residential real estate "and their associated hedges...and other such assets" as the USG has agreed to purchase. Agreed? Where? The TARP? The only clear limit on anything is the amount, up to $306 billion. The rest of the terms are quite ordinary. There are fairly generous dividends, interest plus 300 basis points, it seems like a fair deal once you get past the part where they've done nothing to justify any of it. And comparing this to a corporate law firm is pretty pointless, given that the government has fiat power over the currency, which it is currently wielding like a broadsword in a nursery school. The government doesn't have to come up with a lot of milestones for Citi, or be specific about the executive compensation plan, because it's the government, okay?

I'll Miss the Chevy Volt

...but I don't think General Motors warrants a taxpayer (stop calling it a 'government' bailout, it's our money) rescue at this point. The tide seems to be against them. It does raise the question, if AIG was simply 'too big' to fail, why isn't GM the same? Put simply, GM has been in decline for years. It didn't get screwed by a sudden and total reversal in its credit default swaps, for which I'm still waiting to pillory someone, it got screwed by competition, declining domestic production, and not enough profit from its overseas ventures. There are many good arguments against preventing their bankruptcy, but perhaps this is the best.

Also, Baidu.com, the Chinese Google, has delisted unregistered pharma companies from its search results. Previously they had massively outranked the legit producers in most results. What does this say about Baidu? Nothing. Baidu is pretty good, even if its stock is stupidly overvalued and due for a crash. It simply goes to show what a god-awful mess the Chinese Internet is, and how easy it is for pirated goods in any industry to rise to the top. My question is, are these rankings determined purely by a Google-like algorithm, or are the fake companies paying their way to the top? Baidu has transparently allowed alteration of search results for money before, during the milk-powder scandal, so it's difficult to trust them. But I think this would be far more interesting if it was a consumer-driven trend and not Baidu being shady.

Also, CCTV doing investigative reporting? Pinch me?