Feb5, 2018

Floating in New York Harbor, this message was found in a bottle:

 

Sorry to burst the bubble here but

What the hell happened at 3 o’clock?

Somebody yell fire in crowded theater?

Thundering herd, caught up in the Smoke and mirrors!

Blindsided by  a Flash Crash?

Blame it on the ‘bots!

Gotta be them damn short-selling ghosties

in the machine

again

Oh . . . what the hey. . .

The last thing I remember, Doc

I slid into the curve.

Downward, I remember

Downward, I can tell you that.

In the winkin’ of  an eye, and suddenly it’s every man for himself—

and the thundering herd turns tail, reverse

like some slumbering bearish curse,

Stampede!

Blind-sided by the ‘bots, or so I’m told.

Or did Jerome grab  the punchbowl

Already?

Did he pull the plug?

Did he pull  the rug

out, already, from under, 

toppling now, asunder

the elephant in our room?

Watch out!

We’re coverin’ our assets here. But it’s hard to hit

a moving target.

So I’ was thinkin’

This is more dire than a bull in a China flop;

caught in a freefall only the ’bots can stop.

Or until the final bell doth drop

Hell! It’s 4 o’clock;

but I’m still in shock.

We didn’t see it coming, from near, nor far!

you know how your assets are?

What about my precious metals?

Now the dust settles:

Dust bowl

Super bowl

punch bowl, where have we landed?

America has disbanded.

Yet the Eagles have landed.

Where the Eagles gather—’tis there the body’s found.

No more Patriot tricks to score touch down.

No, nay, hardly a sound

there’s no more joy in BeanTown;

might Brady has struck out!

Dynasty done, without a doubt.

Who’d’ve thunk it,

equivalent to a Philly gridiron dunk it!

Oh, you couldn’t hear the clock stop

as we watched the black swans flop.

No, we ne’er did detect that long-dreaded pin prick

as it burst our bubble like an e.d.wick,

yet we caught a twit from way, way down

in the beltway, political town

struck dumb now with some eerie Nunez memo

more cryptic than a dreary Ruuskie demo.

But I remember

it was 3 o’clock and then . . .

That’s all she wrote.

 

Glass Chimera

From Black Friday to Derivatives Saturday

Back in the crash of '08, clueless underlings such as myself suddenly were made aware of a mysterious component of our financial system called "derivatives."

What is a derivative? you may ask. Funny you should ask. I didn't know either, and I still don't. Although I have been trying to figure it out for seven years now, every time I think I know what a derivative is, I encounter acronymic terminology such as MBS, CDO, CDS or SEC.

These slimmed-down nomenclatures should simplify things, but they do, in fact simplify nothing. Although everybody knows SEC stands for Southeastern Conference, which is the football conference where the best American football is played, and where my alma mater LSU exercises its right to excel in athletics, except when teams like Alabama or Florida are on the field.

But I digress. I was explaining to you what a derivative is and I mentioned some of the simplifying terminology.

For instance, as alluded to above: MBS.

Well some well-positioned bloggists of the worldwideweb identify an MBS as a Masters of Bullsh*t, which is attained through much blood sweat and tears and dedicated gamesmanship acquired at a venerable institution, such as Barnwell University or Cayman College. The MBS is attained through years and years of shoveling potentially useful data into HFT, which produces a yield from which its index is derived, and lucrative assets which are then deposited into accounts on behalf of the bullish denizens of WallStreet. These rich deposits build up the notional value of our economy as a hole, thus enriching all of us, not only those who are forever horsing around on Wall Street, but also you and me and all the folks on Main Street, Easy Street and Ventnor Avenue.

Somebody has to do it. I don't mind doing my part, working with a shovel. Keeps me in shape.

Anyway, that's not the MBS of which I spake. I'm talking about Mortgage Backed Securities. I think Uncle Freddie Mac and Aunt Fannie Mae gave these instruments as gifts back during the holidays of 2007, when life was oh simple then, before time had rewritten every line.

My understanding of a Mortgage Backed Security is that they're something like an Arkansas RazorBack, which is probably why they didn't work out so well for investors, although Arkansas is ranked third in the SEC west, behind Florida and--excuse my language--Ole Miss.

After that is my LSU Tigers, presently in fourth place of SEC west, but as always and forever will be, bound for greatness.

It's quite complex to describe just how LSU could be in fourth place, because its position in the rankings is derived from the ratio of victories to losses, divided by the number of footballs passed beneath the legs of a center when he hikes the ball to the quarterback during any given play of the game.

Nevertheless, as I was saying before, a derivative is derived from the outcome, that is to say the, rear-end of a complex financial instrument.

Now I'm sure you're wondering, as any serious investor is wondering, about the real question here, which is: how much is it worth?

One thing that my research has revealed, and one thing I can tell you with surety is this: The value of any particular derivative is derived from fluctuations in the value of the underlying asset.

Here's an example: how much is my ticket to this season's Sugar Bowl worth? Well, at this point it's an open question, but let's just say this: I'll give you my ticket to the Sugar Bowl for your two tickets to the Orange Bowl.

Meanwhile, back at the ranch (Texas Aggies be forewarned), the guys who are shoveling out in the barn are asking what's the real value of these derivatives. And as I explained before, you remember that the value of any particular derivative is derived from fluctuations in the value of the underlying ass-set. That should come out plain enough.

As for the collective value of all the derivatives, this figure is derived from its notional value, which is calculated based on the notion, as defined by the US Treasury, the Fed, the NYSE, and the AP sportswriters, that whatever goes around comes around, so therefore if the value of the aforesaid derivatives passes through enough piles of assets then when it comes out the other end nobody really knows what its worth, so that it can be revalued at the going rate.

This is unpredictable, of course, as the LTCM affair had indicated back in the Glass-Steagall days, but it is bound to be worth, somehow somewhere when you least expect it, more than it was in January of 2009. So that's progress, although the Progressives may not agree with me. I don't pay much attention to all those freaks on the fringe anyway.

And you understand, of course, that all this has taken place after Cronkite passed from the scene. Before that, it was pretty much everybody working together in America toward the same values and goals. But that was then and this is now. Derivatives happens.

I'm glad I could clear this up for you. As for the Sugar Bowl and the Orange Bowl, may the best team win, as it frequently does, but sometimes not.



Glass Chimera

Through the kindling glass: Uncle Ben in '08

History is fascinating when you get into it.

Today I'm remembering the fall of 2008--that perilous time when the financial crash was pummeling down all around us. The reason I'm remembering this is: I'm reading on kindle Ben Bernanke's book Courage to Act:

http://www.amazon.com/The-Courage-Act-Memoir-Aftermath-ebook/dp/B00TIZFP0I

So I'm remembering.

My day job during that time was working with students at a local elementary school. The workday began every morning at 8 a.m. I have vivid memories of sitting in my old Subaru wagon in the school parking lot each morning, catching the latest financial news before going inside to punch in. I'd be sitting in the car during the last ten minutes of the 7 o'clock hour while listening to Marketplace Morning on NPR.

Not that I had any real money or assets to work with, mind you, just a little nest-egg house that wife and I had just about paid for, and a little spare change we had after the three young'uns had finished college, etc. just like most folks our age.

But here's why the memory of those news reports clings to my unfettered mind so tenaciously. Those fateful September days of seven years ago released megalithic destructive financial forces of mayhem and immense complexity that changed forever the economic world as we kno(e)w it. Perilous WallStreet cluster-fuds suddenly opened a flood of financial and fiscal confusion unprecedented in the history of the world. The only thing that compares to it would be the crash of '29, but of course that was then and this was now.

In Uncle Ben's book, Courage to Act, through which he strives to shine a light of transparency into the workings of the Fed and its relationship to the financial powers that be, he explains, in chapter 12, the demise of one particular entity (the AIG insurance conglomerate) that fell during that month's frantic rearrangement of dominoes. He describes the problem this way:

"AIG FP's risk was compounded by the difficulty in valuing its highly complex position, in part because the securities that the company was insuring were so complex and hard to value."

This universal fragility about value (or sudden loss of value) of toxic assets would be something akin to a global computer-virus, but in the financial world. Nobody knew how, when, or where, the infection of overnight falling asinine asset prices could obliterate the richness of previously fat portfolios. It was like Ebola on WallStreet.

During that third week of September of 2008, the bankruptcy of investment bank Lehman Bros, and then the unraveling of worldwide cluster-fudded AIG, damn near brought the whole house of WallStreet et al etc cards of down.

I guess US Treasurer Hank Paulson and a few other arm-twisting high-flyers later put the fear of dog into Congress and into whomever else was in charge of this country at the time, so that the gov-softened crash landing of worldwide money tranches wasn't nearly as bad as when something like that happened in '29 and the whole dam American economy fell apart.

As I told you before, I was just a detached observer at the time, September 15 2008, a regular guy with no skin in the game trying to figure out what the hell was going as I heard about events on the car radio.

Now reading Uncle Ben's memoir, I see a little more clearly what was going on behind the scenes. I guess his transparency mission is being realized; at least it is on me.

I see the light. I think I understand. Fear, as Joni Mitchell once sang, is like a wilderland.

Fear is a big part of this whole things fall apart deal that we see in life sometimes.

In the case of the investment banks and Wall Street and all that derivative-induced shenanigans that came unwounded in fall of '08, it was fear of losing value on a massive scale, fear of diminishing assets on a global scale, and hence fear of metastasizing money-loss on a megadential scale.

But hey, there are worse fears in life. . .fear of dying?

Speaking of death, we could say that old folks are generally closer to it than young ones. But the fear of death can be, I feel, softened somewhat by the sense that one has lived a fulfilling life, or maybe an adventurous life, or perhaps a prosperous life, whatever attribute of the good life floats your boat.

Here's something Uncle Ben wrote in his memoir about the old-timers on Wall Street during that fateful fall of '08:

"For Wall Street old-timers, the events of the (Lehman weekend) weekend would evoke some nostalgia. Two iconic Wall Street firms that had survived world wars and depressions, Lehman (Bros.) and Merrill (Lynch), had disappeared in a weekend. I felt no nostalgia at all. I knew that the risks the two firms had taken had endangered not only the companies but the global economy with unknowable consequences."

Unknowable consequences. That's what you get when a bunch of old (or young) wise guys play fast and loose with a world-class pile of other people's money.

But hey, that was then and this is now; it could never happen again.

At least not the same way.



Glass Chimera

Bankers, Banksters, Bernanke, Black and Beethoven

How's a fellow to make sense of it all? Who you gonna call? Who you gonna believe? What's the world coming to? What's it to ya? and Who's in charge here?

I've been trying to figure out a few things about our financial system.

About a week ago I loaded Ben Bernanke's book, Courage to Act, and have been reading what the former Chairman of the Federal Reserve has to say about those events of 2007-8 that brought this country to its money-grubbing knees.

http://www.amazon.com/The-Courage-Act-Memoir-Aftermath-ebook/dp/B00TIZFP0I

Now about a quarter of the way through Bernanke's explanation of things, I must say I like the guy. He has a personal mission to bring more transparency to that enigmatic institution known to us as the Federal Reserve. I think he really wants regular folks to understand our financial system and the function of the central bank which, having been founded by Congress in 1913, tries to keep a rein on the nation's banking system so it doesn't become a runaway horse.

Nevertheless, the System did morph into a kind of bucking bronco back in the fall of 2008. The crash and crisis of that time may have seemed quite sudden to many of us, but in fact the collapse of Wall Street et al during September-October of that year was the culmination of a bunch of misadventures and misdeeds that had begun a year or two or more before it all came crashing down.

I vividly remember, during that time seven years ago, sitting in my car in a parking lot, a few minutes before 8 am when I would enter my day-job, and hearing on the car-radio with dread or fascination about the demise of such formerly venerable institutions as Lehman Brothers, Washington Mutual, Bank of America, Wachovia, Countrywide, Golden West, AIG, Fannie, Freddie, even General Motors, and then about how Hank Paulson and Wall Street and the Fed, Bernanke and the President and Congress would deal with the degenerating situation by instituting TARP which was rejected by our Representatives and Senators before it was passed and implemented a week later after Hank and Larry and Tim put the fear of god in the legislators' minds or whatever it was they told them to convince them that they should loan the distressed banks $767 billion so the whole dam bailiwick wouldn't fall apart and drag us into another Depression, or so they said.

The world was changing. Have you ever watched the world changing? It is an awesome thing, to see history being made.

What a time a time oh what a time it was. . . a time of innocence (lost), a time of confidences (lost forever), as Paul Simon once sang. Oh what a time it was. Eventually the dust settled and the country lapsed back into normalcy or something like it but not really.

Things were different after that. You know what I'm talking about. . . the Great Recession, everybody and their brother deleveraging, budgets tightening, layoffs and downsizing, fading into perpetual "jobless recovery" with wage deflation, rising unemployment, then descending unemployment but with more part-timing and less money. . . stock-crunchers and media fixated on monthly numbers from the Fed, the gov, BLS, etc, a languid economy generating fewer jobs, then a few more jobs, then leveling out and stabilizing and lapsing into destagulation and blah blah blah. . .

And it was about that time, or actually a year of three later by n' by, that the Occupy Wall Street crowd came along.

My wife and I visited our son in Seattle during fall or early winter of 2011. I woke up one morning and strolled down Pike Street. I stopped at the Westlake Center and entered a Starbucks where I settled in for a while. I was observing through the large glass storefront, the Occupiers who had gathered across the street in Westlake Park.

After a while I noticed among all those protesters, many of whom were carrying signs (mostly say hooray for our side) . .here comes an especially noticeable fellow with a sign. He was tall, scruffy, with a long beard. He looked like the classic cartoon image of the street-corner doomsday prophet, and his sign said:

"Jail for Banksters"

Well that's interesting.

Now, yesterday, November 7 2015, I recalled having seen that fellow and his sign, and I was thinking about what his sign said.

I had been reading Uncle Ben's very informative book--his plainly-written, quite "transparent" explanation of what had happened back in '08, when the low quality of vast numbers of subprime mortgage loans catapulted those same home-loans into default, and subsequently cast a ubiquitous monkey wrench into the vastly complex financial machinery of sliced/diced tranches of mortgage-backed-securities and collateralized debt obligations and credit default swaps, etc etc and then wall street came crashing down and all the Fed's horses and all the Treasury's men couldn't put humpty dumpty together again (not for a while anyway) and the world changed forever, or so it seemed at the time and for quite a long time after that, even until now.

Yesterday, I had made note of this sentence from Ben Bernanke's book:

"As the chain from borrower to broker to originator to securitizer to investor grew longer , accountability for the quality of the underlying mortgages became more and more diffused."

And I was wondering, if the accountability had become more and more diffused, then who was responsible for this mess?

My own personal answer to that question is: Human nature, collectively. Shit happens.

Not everyone sees it that way, though. Some folks feel the need to investigate, litigate, prosecute, execute, and. . . as the protester's sign said, send the "banksters" to jail.

So here I was yesterday, having taken a break from reading Uncle Ben's book, and I was fiddling around online when I landed upon an interview that Chris Martenson did with Bill Black.

http://www.peakprosperity.com/podcast/95125/bill-black-why-banksters-winning

Now Bill is well-informed fellow; he's an academic like Ben Bernanke, but from a totally different perspective than Ben's. Bill is a regulator, investigator, earth-shaker, litigator who is crowing that Eric Holder, former Attorney General and head of the U.S. Department of Justice, should have prosecuted the banksters for their corruptive abuse of the system. In his interview with Chris that I listened to yesterday, Bill Black said:

"Every dollar by which you inflate an asset inflates capital by a dollar and creates an additional dollar you can steal. . . they lied and they lied to the extent of trillions of dollars. They lied and made stuff that was really in the trade, right. So the bankers are actually calling these things toxic in their internal memorandum. And they are simultaneously rated Triple A, which is supposed to mean that they are equivalent to United States Treasury and are “risk free” by which they mean credit risk."

Furthermore, whistle-blowing Bill Black says that culpability for the crash also includes the Fed's complicity, when Bill says:

"You say Bank of America has got 50 billion of these things. They sell them to Fannie/Freddie.

Next thing we know, Black Rock is in there with the Federal Reserve helping the Federal Reserve decide which tranches of MBS to go out and buy. And the Federal Reserve vacuums up 1.25 trillion or thereabouts of these mortgage backed security pieces of paper. Here is the question. What is the chance that the Fed preferentially or accidentally (but I am going to think preferentially) went out and vacuumed up some of the worst of these things so that they could die quietly on its balance sheet rather than do damage to bank balance sheets?"

So Black is implying that Bernanke shares some of the blame for the Crash of '08.

But in my reading of Uncle Ben's version, I see a very smart man, an honest man, who was trying to do his job--that job to which he had been appointed by the President and approved by the Congress of the United States. He was striving, as best he could, trying to stop the nation's calamitous slide into financial oblivion. Ben writes:

"Just as the bank runs of the panic of 1907 amplified losses suffered by a handful of stock speculators into a national credit crisis and recession, the panic in the short-term funding markets that began in August 2007 would ultimately transform a 'correction' in the sublime mortgage market into a much greater crisis in the global financial system and global economy."

From Chairman Ben Bernanke's perspective, he was doing his job-- using every tool in his Reserve tool-chest to arrest to the "panic" that would eventually impose a "much greater crisis" in the global financial system and global economy.

You can't blame a fellow for trying to do his job. And that's how I make sense of it all. I try to do my job, while I see everyone else doing theirs, and that's what makes the productive world go around.

Although, every now and then shit does happen. Then, as Schumpeter said. . . it is creative destruction, and somebody's got to clean up the mess. Jobs for everybody, cleaning up the mess from places high and low. And then reconstructing it all, a vicious (or inevitable) cycle. It's been going on for 10,000 years. But now with hi-tech, everything goes faster and faster, until it grinds again to a screeching halt and. . . can you hear it? The music of the ages.

https://www.youtube.com/watch?v=TEbyBINYBfo

Glass half-Full

A Tale from Ole Uncle rOMBus

Ole Uncle rOMBus, he usa be de stockman down at d'gov.mnt sto, back in Uncle Ronnie days, so he gots a lot t'say from a qualified viewpoint. From time to time he tell us chilluns bout tales o' what be hap'nin down on d'plantation. Yest'dy, Uncle rOMBus he be done tole us bout d'time little ChiknHank and big BenBird a'most let the flo fall out from undneath our banking system. Oh, shut my mouth, an what a close call it was! Gatha roun' now chilluns, and you shall hear, how 'merican capitalism got turn'd on its ear.

Dis is how it hap'n:

One fine, zippity do-dah day back in September '08, when wan'at nobody lookin' and ev'body be kinda layback, not thinking' bout much o' nuthin, suddenly der be one big ruckus shenanigans whenz little ChiknHank come a runnin down d'road t'ween NewYawk an Wash'n, jez a whooping an a hollerin':

"D'flo be fallin'! D'flo be fallin' out from und'neaf us! We gotz to do sumpn now!"

Down inside d'beltway, Ole UnclePrez he turn 'roun quick, and pay close 'tention, cuz little ChiknHank he be d'wine some serious secretaryin' down at d'Treasur patch. "Whaddup now, bro?" Ole UnclePrez say.

Little ChiknHank, looking' all nervous on tv an sweat'n and discombobulated like, he say:

"We gotz to do sumpn now, or all dem MBSs and CDOs an CDSs, an AIG, dey be crashin' down in subprime und'neaf d'flo! and dat whole load o' low-grade unqualified drive-up receivables in cyberspace conduit, all sliced and diced for speculat'n obscurity conflummocks, wi' cooked-up SnP rat'ns an moody AAAs--dey be crash'n down befo yo can say overcollateralized leverage lickety-split, crash'n down on AIG an d'wallstreet flo! An d'mainstreet momnpops down und'neaf-- dey weel be crushed to smithereens! We gotz to do sumpn now, Uncle Prez! Quick, call big BenBird!"

Well, ole Uncle BenBird he come along and take one look at d'sitiation, an he say:

"I believe der be only one way out dis conflummucks. We gotz to t'row ChiknHank an' his barnyard wall street pals in de bailout patch, cuz dey bin in high cotton so long dey don' know dey's toxic assets from a hole in d'groun'."

But little ChiknHank, he be hoot'n n holler'n:

"Oh no, Uncle Ben! Please don' trow me in dat bailout patch! You can string me from d'highest leverage; you can tar me wi' regulat'n pitch 'til d'Feds come home; you can e'en trow me in d'bellerin wi d'bears, or wi' d'bulls in d'china shop, but please, please! Uncle Prez, don' let big Uncle Benbird trow me in dat bailout patch! I been a Uncle Miltie freedman free-market capper since I wuz Nehi to a moon pie, an ah jez can't take it if yu'z t'let Uncle Ben trow me in dat bailout patch."

But Uncle Prez n big BenBird, dey be confalootin sump'n serious, 'til finally Uncle Ben he be done trow ChiknHank right sho'nuf inz de middle o dat bailout patch.

Den, der be a long quietude, 'sept fo little rustlin' and rump'n and grunt'n somewheys down in dat bailout patch, and d'wind blow'n up a whistlin' dixie and tryin' d'be chawin bubblegum at d'same time, til at last,

By n' by, little ChiknHank, he drag hisself up on a hickory stump rot beside dat bailout patch, an he commenz to combin' briers outa his feathery backside wi a bluechip bonus blip. Den he strut up his bad self an go agin to hoot'n n holler'n, but dis time wi' a dif'rent margin call:

"Ah'uz bow'n an bred for dat bailout patch, Uncle Ben! bow'n and bred!"

An little ChiknHank commenz t'slipp'n n slidin' 'long d'muddy trail awhistlin zippity do dah, an direcly he an Bro Timmy dey be gett'n de wallstreet barnyard boyz back in high cotton agin, and momnpops down on mainstreet nev'a knew what hit 'em wi' d'bailout patch an all dat toobigtofail smokescreen conflummucks.

Now by n by, Ole Uncle rOMBus come along an tell us chilluns de tale, an he say d'momnpops down on mainstreet nevuh knew what hit 'em, cuz, i guess, day gotz d'bigscreen tv an 32-ounce bigchillum drink to keeps 'em feelin like dey's in high cotton fo sho.

But all dat whoopfiz woobieshoobie aside, now der be no joy in unemployed, underemployed Mudville today, cuz Ole Uncle rOMBus done struck out, but hey! we all gotz to go some time an at leaz he tried t'tell us what be goin on down on d'plantation. Thank you, Uncle rOMBus.

Y'all come back now, y'heah? Mo tall tales to come fo sho!

Glass Chimera