Trading Now

Trading Now

Saturday, October 17, 2009

Why the Financial Crisis Really Happened and some of my commentary

*I have been pulling my hair out for over a year telling people the reason we had a meltdown goes right back to a book called, When Genius Failed. It is on my book list to the right and a must read for any one of you ijiots out there determined to take your hard earned money and give it to those so called smarty pants on Wall Street whom you all think knows better than you what to do with YOUR money. well guess what: THEY DON'T. The op ed article below is the best thing I've read since that book and you should too. Those PHDs from MIT, you know the type: Martin Scholes and Black of the mathematical quant world, who went to work for Wall Street and created so called sophisticated spreadsheet program trading systems which helped them with John Merriwether, that Wall Street tycoon from Smith Barney I think, start a hedge fund called LONG TERM CAPITAL MANAGEMENT, which by the by, almost brought the financial system down in just FOUR years time in 1998 (I think thats right, read the book). They used mathematical modeling systems based on past experiences. They forgot to factor in deregulation and the fact that world had changed, FUNDAMENTALLY, especially in terms of trading and would never be the same. And in case you were wondering, a crash like we have seen recently, where you have made no money investing in the stock market in a DECADE, will happen again and again, it is the nature of things to come.
So the combination is the smartest guys in the room coupled with Congressional greedy wannabe's after they decide that a lifetime of gluttonous public service entitles them a position on the board of the likes of those hedge funds whom they helped deregulate at the expense of EVERY AMERICAN CHILD from now until the END OF FUCKING TIME!
Why so cynical you say? After all, what better system than capitalism? Well how about a system that incorporates all that is good about capitalism, making money, and all that is good about the people of the greatest country on the planet? How about you only get to prosper if we all prosper? Isn't that what God really wanted? That we are all on this planet together to love one another, right OR wrong? And not to see if you could accumulate so much money that when you died, like Lazards Wasserstein of late, you couldnt possibly fit it into the casket of your life at only 61.
Wake up people! Nothing, absolutely nothing has changed except that now the NEW NORMAL is that $1T means $1B and a lowly little dollar, means less than jack shit.
Happy reading. -Tradebum
Op-Ed Contributor
Wall Street Smarts

Published: October 13, 2009
“IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.”
The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend. “But I have to buy you a drink to hear it?” I asked.
“Absolutely not,” he said. “I can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening.”
He did indeed look capable of buying his own drinks — one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late ’50s or early ’60s — a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts.
“O.K.,” I said. “Let’s hear it.”
“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over.
“But weren’t there smart guys on Wall Street in the first place?” I asked.
He looked at me the way a mathematics teacher might look at a child who, despite heroic efforts by the teacher, seemed incapable of learning the most rudimentary principles of long division. “You are either a lot younger than you look or you don’t have much of a memory,” he said. “One of the speakers at my 25th reunion said that, according to a survey he had done of those attending, income was now precisely in inverse proportion to academic standing in the class, and that was partly because everyone in the lower third of the class had become a Wall Street millionaire.”
I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge — earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks.
“That actually sounds more or less accurate,” I said.
“Of course it’s accurate,” he said. “Don’t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”
“So what happened?”
“I told you what happened. Smart guys started going to Wall Street.”
“I thought you’d never ask,” he said, making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini.
“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”
“But you still haven’t told me how that brought on the financial crisis.”
“Did you ever hear the word ‘derivatives’?” he said. “Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn’t have done the math.”
“Why do I get the feeling that there’s one more step in this scenario?” I said.
“Because there is,” he said. “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.”
“So having smart guys there almost caused Wall Street to collapse.”
“You got it,” he said. “It took you awhile, but you got it.”
The theory sounded too simple to be true, but right offhand I couldn’t find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. “I think I need a drink,” I said.
He nodded at my glass and made another one of those eyebrow gestures to the bartender. “Please,” he said. “Allow me.”
Calvin Trillin is the author, most recently, of “Deciding the Next Decider: The 2008 Presidential Race in Rhyme.”

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