December 04, 2008
The end of the affair — Michael Lewis explains why the market went south
The author [above, interviewed at Google's New York office on September 18, 2007 about his book "The Blind Side: Evolution of a Game"] of "Liar's Poker," amongst other things, returns to his old Wall Street haunts on behalf of Portfolio magazine to poke and pick, in his inimitable way, amidst the still-smoking wreckage for clues as to why the whole thing suddenly imploded.
His piece, published in the December issue, is entertaining and instructive and as amusing a cautionary tale (if, like me, you're so risk averse you think treasury bills are a walk on the wild side) as you're ever likely to encounter.
Note: it's quite long.
To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital — to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.
I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous — which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.
Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind.
Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.
There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria — to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded — without actually being insane.
The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.
The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L.
The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.
Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero.
Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.”
“You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche — the bonds Eisman had shorted. But Wall Street had used these BBB tranches — the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. [collateralized debt obligation]. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors — pension funds, insurance companies — who were allowed to invest only in highly rated securities.
Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
“That Wall Street has gone down because of this is justice,” he [Eisman] says.... “They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”
Paint-By-Numbers Toilet Paper
From a website: "Crumpler plans to distribute 100,000 rolls of Paint-By-Numbers Toilet Paper to unsuspecting bathrooms around the country."
'Distant voices, still alive' — Virginia Woolf speaks
There is only one surviving recording of the author, just as is the case with Sir Arthur Conan Doyle.
Both — along with those of many other literary greats of the past — are to be found on CD boxed sets released last month by the British Library's sound library, part of "The Spoken Word" series.
Jan Dalley's October 25, 2008 Financial Times column has the back story, and follows.
- Distant voices, still alive
Spend a couple of minutes with an internet search engine and you can hear rolling out of your machine the voice of Alfred Lord Tennyson reading "The Charge of the Light Brigade" in 1890. Captured on a wax cylinder that seems to have got a bit squished by time, the wobbly and distorted voice comes down to us as an almost otherworldly chanting, vividly pounding out the dactyls of "half a league, half a league onwards", yet as remote as if it were from another planet.
The year before that, in 1889, Thomas Edison made it possible for us to know what Robert Browning sounded like, excitedly galloping through the rhythms of his verse and shouting out hurrahs. Later that year Browning succumbed to his last illness and so became the first person whose voice was ever heard after his death.
More than a century after the recordings of these eminent Victorians, in a world where television and radio hungrily snatches at every syllable uttered by the famous, we might assume that writers' speaking voices are as easy to find as their printed texts.
But it's not so. Even though Thomas Hardy lived until 1928, we don't know what his voice was like. More strangely, there's no existing recording of George Orwell, even though he lived and worked in the early heyday of broadcasting and made several BBC programmes.
The heights of fame are no proof against audio obscurity. Poets are more likely to have been recorded because they gave readings (until recently, novelists didn't). And there is now the excellent Poetry Archive, which is building up a recording history of English-language poets, available online and on CDs. The impulse behind the archive was the realisation that so many wonderful poets whom we could have heard are now declaiming only to the angels. Prose writers and dramatists may have fared even worse in the ears of posterity. There is only one surviving recording of Virginia Woolf, for instance, only one of Sir Arthur Conan Doyle, only three of Scott Fitzgerald. But now all these are to be found on a superb pair of CD boxed sets released this week from the British Library's sound archive, in "The Spoken Word" series.
These are the brainchild of the British Library's Richard Fairman, who is also one of the FT's music writers. There's one box for British writers, and one for American. Each has three discs and each disc has many delights and surprises. In a wonderful interview between Ian Fleming and Raymond Chandler, for instance (and by the way this is also the only known recording of the author of "The Big Sleep"), we hear two highly successful but utterly different thrilleristes agree that, in literary terms, they are both "below the salt". Each man is so laid-back it's a transatlantic competition in being laconic. And you can almost feel the crackle in the studio air when the feisty Mary McCarthy takes on her questioner.
There's Nancy Mitford claiming to know nothing about social nuances, and a gravelly, Brooklyn-accented Henry Miller happily agreeing with his interviewer's assertion that people read his books "for the wrong reasons, for the erotic content". Evelyn Waugh reveals that he wanted to be a painter; Gertrude Stein answers a question in a single interminable unpunctuated sentence (it's just like reading her impenetrable prose).
Some sound exactly as you would expect — Rudyard Kipling with vowels so clipped they scarcely exist; Isaac Bashevis Singer exactly the growling, guttural-bass Yiddish-speaker I'd imagined. But I never thought that PG Wodehouse would have retained his full English plumminess through a lifetime spent in America (and who knew that "capitalist" used to be pronounced "ker-pittilist" by the posh?). Or that Scott Fitzgerald would try to make himself sound like Laurence Olivier, here patchily reciting "Othello." Or that Vladimir Nabokov would spout absurd pomposities in an accent so unlikely that it sounds like a Monty Python sketch.
These are, perhaps, rather abstruse pleasures — after all, why should we care what writers sound like? The first time I heard a recording of TS Eliot reading his own poems, I was bitterly disappointed by his dreary monotone delivery, flat and utterly off-putting; by contrast, Ted Hughes had a voice so wonderful he could have made a laundry list sound like an important work of lit, and a wickedly sexy one at that. But both are illusions, in their way — neither man's vocal style changes the value of his lines on the page.
Yet we do care. A writer's "voice" is the term we use for her or his style, the undisputed fingerprint of a talent captured on the page. The ever-growing popularity of literary festivals, where audiences flock to listen to writers whose books they often don't bother to read, suggests that what we really want is a writer to speak to us, in all the senses of that phrase. Well, on these fascinating recordings they do speak to us, and say more than they know. Listen and enjoy — but beware of your illusions, they may prove fragile.
"British Writers — The Spoken Word (3 CDs + booklet, running time 214 minutes) is £19.95.
"American Writers — The Spoken Word" (3 CDs + booklet, running time 210 minutes) likewise costs £19.95.
In Japan when the old get lonely they turn to shoplifting
Everything in Japan is upside down and what the elderly do with all their free time is no exception.
Long story short: On the northern island of Hokkaido for every two teenagers arrested, police collar three people 65 or older.
Said Hirokazu Shibata, a Hokkaido police official who leads a crime prevention task force, "Theft used to be a crime of the young, but now it is overwhelmingly a crime of the old."
Here's Blaine Harden's story from the November 30, 2008 Washington Post about this unexpected phenomenon.
- Silver-Haired Shoplifters On the Rise In Japan
Criminology is being stood on its head in fast-graying Japan.
Here on the cold northern island of Hokkaido, history was made in 2006 when total arrests of elderly people exceeded arrests of teenagers. The elderly accounted for 880 arrests, mostly for shoplifting, while teens were nabbed 642 times. Since then, elder crime has surged. For every two teenagers arrested on this island, police collared three people 65 and older.
The trend echoes across Japan, where crimes committed by the elderly are increasing at a far faster pace than the elderly population itself.
While the 65-and-older population has doubled in the past two decades, crime among the elderly has increased fivefold, according to government statistics released this month. Japan's overall crime rate, always low by world standards, has fallen for the past five years.
"We never dreamed we would be focusing on these old people," said Hirokazu Shibata, a Hokkaido police official who leads a crime prevention task force. "Theft used to be a crime of the young, but now it is overwhelmingly a crime of the old."
Around the world, criminologists have found that the propensity to commit crime peaks in the late teens and early 20s, and falls off steadily as people age. But Japan, with the world's oldest population and lowest proportion of children, is headed into uncharted waters for criminal behavior. Experts here predict that the entire country, like Hokkaido, will soon record more arrests of the old than of the young.
The elderly in Japan are committing crimes — nearly all of them nonviolent offenses, mostly petty theft — because of loneliness, social isolation and poverty, according to a Justice Ministry white paper released this month.
"When people feel lonely, there is an impulse to commit a crime so they will somehow connect with someone," said Shibata, whose task force has questioned 220 elderly people arrested mostly on charges of theft.
Shibata and other police in Hokkaido have also found what they describe as a consistent pattern of isolation and anxiety among elderly people who commit crimes.
"They are not in touch with their children and have no connection with their brothers and sisters," Shibata said. "These are people who worked so hard for so many years for their companies and for their country. All of a sudden, all their work has come to nothing. They have empty time on their hands."
A desperate desire for human contact or for novelty in their lives leads many elderly people to shoplift, experts say.
"They want somebody to talk to," said Hidehiko Yamamura of National Shoplifting Prevention Organization, a nonprofit group in Tokyo. "If they get caught, they can talk to the police. They are very easy to catch."
Here in Sapporo, police in September arrested a 71-year-old retired man in a grocery store after he tried to steal 14 items, including ice cream, worth $27. He told police that he often shoplifts.
The man receives a social welfare check for about $1,600 a month and lives with his wife, who is ill and unable to do housework. He told police that his wife's illness caused him stress but that when he steals, he feels "refreshed."
At the time of his arrest, he had $7,500 in cash in his pocket. He told police that he preferred not to spend money on groceries.
This country of 127 million has the oldest population on record. Slightly more than 22 percent of residents are 65 and older. (In the United States, about 12 percent of the population is that age.) For the first time in Japan's history, people 75 and older make up more than 10 percent of the population.
The number of children, meanwhile, has declined for 27 consecutive years. Demographers say the elderly — who tend to live longer in Japan than elsewhere — will continue to increase until 2040, when they will outnumber the young by nearly 4 to 1.
To slow the growth of elder crime, the Justice Ministry recommends that the government create programs to stabilize the lives of those older than 65, financially and socially.
The government, though, has moved in the opposite direction in recent years. As many as 64 million government pension records have been lost as part of a botched effort by the Ministry of Health and Welfare to computerize the pension system. Despite government reassurances, the loss of the records has frightened the elderly, many of whom are concerned that there will be no pension for them in the future, said Koh Fukui, an official of the shoplifting-prevention group.
"Some elderly people are shoplifting because they feel that with all the problems of the pension system, they should save their money for the future," he said.
A government survey of 137 elderly shoplifters in Tokyo found that a desire to "cut back on spending" was a primary motivation of 59 percent of the women arrested. Two-thirds of men said they stole because of their tough financial situation.
The global financial crisis, which has plunged Japan into what economists predict will be a severe and protracted recession, is likely to limit the government's ability to spend more on programs for the elderly. Spending is also limited by the government's enormous debt burden, the highest among wealthy countries, which amounts to 182 percent of gross domestic product.
Police and nonprofit groups say few organizations in Japan are able to provide counseling for the elderly, either before they are arrested for shoplifting or after they have been taken into custody.
Elderly people accused of petty theft are usually released after a warning if they show remorse, police say. In most cases, prison terms are given only to serious repeat offenders.
When the elderly are released from prison, most return to the same isolated lives that helped push them into petty theft, police say.
In supermarkets and convenience stores across Japan, public-awareness campaigns to prevent theft have been hindered by foot-dragging among store owners, who do not want to offend loyal customers.
"There is resistance to putting up posters saying, 'Shoplifting is a crime,' " said Fukui, of the prevention group. "Merchants don't want their customers to think that they are regarded as potential shoplifters."
MorphWorld: Land Area into Population
Above, the world's countries mapped by land area.
Below, by population.
Watch the transition here.
Got bling? Rap star kitchen brush
From the website:
- Gold Tooth Kitchen Brush
Su uses this beautifully hand-crafted and clever item to scrub vegetables and clean her dirty cast iron pans.
Made in a former school for the blind, the company now employs blind people to produce these extraordinary functional brush items.
Dimensions: 3"W x 3.5"H when stacked.
Made in Germany.
[via Alistair Why]
iReport — 'Unedited. Unfiltered. News.'
Long story short: CNN created this site "... in February 2008 to be a clearing house for user submissions — as many as 10,000 a month — that in the past were only culled by CNN staff," wrote Noam Cohen in a October 12, 2008 New York Times column.
He added, "It's not the first place to go for stock tips."
From the website: "iReport.com is a user-generated site. That means the stories submitted by users are not edited, fact-checked or screened before they post. Only stories marked 'On CNN' have been vetted for use in CNN news coverage."
And yet, there's gold there amidst the piles of citizen-journalist supplied dross — if you know how and where to look.
Judging by the numbers in the graphic up top, about one item out of every 200 proves to be newsworthy.
At least by CNN's standards.
Yours may vary.
From the website:
- Post-A-Note Pen
Ever wished you had a piece of paper with you to jot down a phone number or leave a message?
Ever written something important on an old receipt or ticket stub and then thrown it away?
This ingeniously designed pen contains its own supply of mini self-adhesive notes so you’ll never be without paper again.
It looks just like a smart, high-quality ballpoint pen, but turn the barrel and it dispenses a brightly-coloured self-adhesive note so your message won’t be missed.
Extra paper cartridges available.
Brushed Stainless Steel or Polished Black.