I Love My Blackberry But Free Market Says I Should Love IPhone.

I don’t have an iPhone because I don’t want it. I’m content with my Blackberry. I resent the idea and the subtle implication that I need things today that I didn’t need yesterday, like some fancy new app. The other day I received a phone call from my mobile company telling me that now that Blackberry is bankrupt I should switch to any other phone. What do you have? I inquired. Touchscreens, the young kid on the other side said. But what if I don’t want a touchscreen? He didn’t have an answer other than to subtly emphasize the point that I live in a stone age. That pisses me off. I think that’s the biggest folly of supply-side economics: they don’t give a fuck about what you like, they tell you what you should like. This is where the glorified free markets system break down. It shoves products on me that I don’t want, and denies me the products that I like. At some point in the business cycle companies won’t care to deliver a quality service to its customers. They will morph into a business model that functions by collecting more and more fees while providing less and more shittier service. Do you think the recent Comcast Time Warner merger will cut your customer service waiting time or your cable bill in some way? Please!

Still, even that business model is more benign than the business model of financial services companies. After all no one forces you to have a phone or a cable. But we are all joined at the hip and taken for a ride, whether we want it or not, when it comes to SIFIs (Systemically Important Financial Institutions). Lefties, in the form of Krugman and Simon Johnson and the assortment of occupiers, have been talking about it for years. But it seems that some conservatives, with a knack for facts and simple analysis, begin to be troubled by such an unrestrained capitalism. What if capitalism collapses under its own weight, they wonder. Does that mean that, gasp, Karl Marx was right?

Goldman Strikes Again

Remember how in 2010-2011 commodities’ prices went up and many (namely inflation hawks) thought that finally, finally (!) inflation is here? Turns out it was just Goldman.

Matt Levine’s Article on Derivatives Accounting Explained in Plain English.

Matt Levine of Bloomberg wrote 2500 word article the other day describing, in detail, some new tricks banks are beginning to use to evaluate their derivatives contracts. It’s a great read for someone who’s exposed to that world but indecipherable to a regular. I wanted to translate this article into plain English.

Back in the day, before the crisis, Libor rate was a gold standard for many things: interbank lending, funding, discounting future cashflows of derivatives contracts. Fresh-faced analysts used to plug in that risk-free rate into their Excel spreadsheets valuations models and worry about other things. Well, those days are gone. Matt Levine in his Bloomberg article explains how it is being dealt with today, at least in JP Morgan, although others may follow suit too.

You see, before, doing valuations on your derivatives contracts you used tools called CVA (credit valuation adjustment) and DVA (debit valuation adjustment). But ignore these fancy words for a moment. In plain English CVA means an adjustment for a risk that a counterparty won’t pay you. DVA means an adjustment for a risk that your own credit deteriorates. To describe DVA concept in extreme but understandable terms, imagine that you owe $100K to Russian mobsters, but you die of a heart attack (it’s a metaphor for your credit worsening), so you (or your estate) book a gain on your DVA. Mobsters book a loss on their CVA. Matt Levine is correct for using the word “creepy” to describe DVA: why would you care if your own credit deteriorates, isn’t it the other guy’s problem? Well, it is, but as a bank you have to reflect such deterioration in your books. But CVA and DVA are not offsetting each other, so from what I can discern from the article Jamie Dimon wasn’t too happy about having to explain these counterintuitive discrepancies on earnings calls. In fact it does sound kinda weird: “Our credit deteriorated so we booked a gain, and the next month when our credit spreads improved, we booked a loss.” I know, weird, isn’t it? But that’s how it works in the banking realm.

But what if you didn’t die, but your business has suffered some temporary setbacks? You book a little gain on your books, on the money that you owe the mobsters and go out and find someone who will lend you the money at some interest rate. That’s where the new concept of FVA (Funding valuation adjustment) comes in. You don’t fund yourself with risk-free rate anymore. Libor-shmibor! Everyone knows you’re in some kind of trouble, so they will charge you extra. These days 3-mo Libor is not considered a risk-free rate it once was.

If Libor is not risk-free rate then what do you use? You use some kind of spread over Libor. JPMorgan apparently uses its own 50 bps CDS spread as a funding valuation. That means when they calculate how much it costs them to fund they add 0.5% (50bps) to a 3mo Libor rate. Note that if their credit worsens that 50bps will become, say, 70 or 80 which would make their funding more expensive and will be reflected in the books as a loss, offsetting the accounting gain on a credit deterioration. But this way Jamie Dimon or Marianne Lake won’t have to explain, again and again, how they booked a gain if their credit worsened. Yeah, it’s worsened, but it also became more expensive for us to borrow. FVA in some sense offsets DVA. So it’s a wash. You can be dead or in trouble but your books are perfectly balanced!

Nothing scandalous here, just a neat new concept of accounting tricks explained.

My short run at WPT at Borgata.

So I played in this WPT (World Poker Tour) event in Borgata yesterday. I was running good catching a flush and getting some value from the guy. He got crippled after that hand. I took a few nice pots further, building up my stack to about $55K (from the initial $20K).

The blinds were 600-1200 (with 200 antes) when I get dealt QQ on the button. UTG min raises to $3000, a maniac reraises him to $8000, I reraise to $20K (40% of my stack, so I’m pot committed), Big Blind goes all-in, but he’s short stacked and I cover him, so I’m not worrying too much. The original UTG raiser, who got more chips than me, goes all-in too.

Here I made a fatal mistake, because I didn’t stop and think. He got a pretty strong message from me when I 3x his raise and he still thinks that what he has is better than mine by pushing all-in, knowing full-well that, with 40% of my stack in I’m likely to call. Here I should have paused. But the thought in my head was: “You reraise me, motherfucker?! I have Queens!!” Obviously, well, everything obvious only post-factum, he wanted me to call. Which I did, and walked into a major buzzsaw: my QQ vs BB’s KK vs UTG’s AA.

But the hand that gave me the greatest pleasure was against that maniac. He basically raised every pot, no matter his position. I called one of his raises with 66. The flop comes AA2. He bets half a pot, I pause a little for some posturing, and raise him, indicating an Ace. He thinks and folds. It’s the greatest feeling when your play back at a bully succeeds, even if you had to semi-bluff. I think my sixes were good, though, even if he called.

Happy 70th Birthday Jimmy Page.

Jimmy Page turned freaking 70 today.

My favorite Page’s showpiece is White Summer/Black Mountain Side. That is not to say I don’t appreciate the violin bow stuff. But this is 8 minutes of pure transcendence.

The Burden of the 1%.

BERNARD: But sometimes, Willy, it’s better for a man just to walk away.

WILLY: Walk away?

BERNARD: That’s right.

WILLY: But if you can’t walk away?

BERNARD: I guess that’s when it’s tough.

– Arthur Miller, Death of a Salesman

Wealthy Manhattanites reel from dull predictability of highly structured lives.

There’s this magazine, Departures – a great read if you care about what’s on the 1% wish list. The magazine comes free if you have an American Express platinum card. If you don’t have an American Express platinum card, there’s a good chance you’ll find this magazine in a bathroom of your rich friend, right by the toilet seat. Open any random page and the amount of bullshit will blow your mind. “Are you still waking up to a traditional alarm clock and showering with ordinary municipal water? That’s so old school,” begins one article. You are in luck: The showers infused with vitamin C, lighting that optimizes your circadian rhythms and task-specific aromatherapy will soon be available to some lucky health-obsessed and, well, solvent Manhattan dwellers.

The burden of the 1% is lack of alpha and lack of adventure. If you represent a market niche for that vitamin shower but have read Hemingway in your youth, you sense that something is not quite right. You sense some hard-to-nail-down dissonance. As a former member of the 1% I know the feeling. I was there myself. Back in the day, when I was a mid-level Wall Street employee I wasn’t exactly lacking the thrills at work. Back then the volatility resembled a wild bronco. I had to clear 3-4 points bid-offer just to break even. That’ll keep you awake at night. I’m not complaining, after all I was well-paid. I’m just showing off my battle scars. To a Wall Streeter everything is a battle or a game, you know. Then, when you’re off work, your life is a sterilized and predictable routine: gym, healthy eating habits, domestic help. Eventually, this dichotomy – dirty combat at work/decontaminated existence outside – becomes mentally draining. If you’re able to block those creeping thoughts about the nature of your existence, you’re lucky. I wasn’t that lucky. Like many others, I’m sure, I looked for rationalizations: there must be some purpose in all of this, some meaning. But there was none. It’s just one of those bullshit jobs with a good payoff. We were not really funding any businesses or providing liquidity. I refuse to believe that those still employed in those areas don’t realize that – they are way too well-read and overeducated to not appreciate the predicament. So many are looking for some mental release, for a justification. Because we are good, dammit! We are all good people just doing our jobs.

When you’re used to your career trajectory moving up at a 45 degree (or steeper) angle, you are at a loss when it inevitably begins to flatten; you’ve groomed yourself for battle after all. Your built-up ambition doesn’t slow down in correlation with the diminishing opportunities. It doesn’t just disappear. And then what? At some point acquiring luxury items stops bringing satisfaction. At some point your life becomes about seeking the next thrill. Mine did. Like in some vile videogame you must move to the new level, new quest – this time searching for meaning, validation, benevolence or adventure. Adventure is hard to come by in Manhattan, unless you are a homeless drug addict or a street hooker or, well, poor. One can search for meaning on various charity boards, the other may find refuge in drugs or alcohol. I’m indifferent to most drugs; I’m partial to coke, but it makes my nose bleed. Marathons are pointless in my view. I consider charity – a common mental refuge of the successful – to be just a contrived display of benevolence, a self-promotion tool. I like gambling though. But my point is this: outlets for a real adventure are limited for the top 1%. But that pent-up demand – to be someone beyond the P&L, beyond the “number” – is palpable among the Wall Street/hedge fund crowd. They can’t sit quietly in the room and enjoy the spoils. They must do something. That desire is not necessarily bad, it just has nowhere to go. To exacerbate the problem, there’s no alpha today, no volatility. Hedge fund managers feel emasculated. They are basically reduced to extracting value from others, relying on insider tips, bullying everyone down the food chain and engaging in insurance scams. I guess that explains Bernanke hatred: he took away the hedge funds’ thrill rides. There are very few opportunities today to show the world what a top dog you are. And it sucks having to think of yourself as a swindler or a bully. Ask any credit trader to describe what he does for a living and more often than not you’ll hear self-deprecating: “Oh, I’m just a monkey pulling a lever,” followed by a sheepish giggle. The reason for this faux humility is that he himself knows that what he does is bullshit, a high-paying bullshit. You would never hear something like this from a doctor or a teacher.

That’s where pretentious bullshit comes in. It takes many forms. Sometimes it comes in the form of a fake adversity. The popularity of various races “for the cure”, marathons, charitable trips to Haiti, underground Wall Street fight clubs speak of that furtive need. All of a sudden, the 1% want to be regular folk, or at least find what they think is regular folks’ experience: physical challenges, dangerous situations, scarcity of resources. That credit trader fake display of modesty is often followed by a story about how they flew to Vegas with the guys for a weekend and got into a drunken fight in a nightclub. They seek adversity so that they can “overcome” it and then tell stories. But in our sterile Manhattan/Greenwich cocoon we are just grasping at straws. Local businesses got smart about those repressed desires: they structure their businesses to look like they serve a bunch of destitute laborers. Ralph Lauren store in West Village sells those Boardwalk Empire themed clothes that will make you look like you just came from a Depression era stock footage. Naturally those clothes cost a small fortune. Trendy restaurants must contain words like “farm”, “kitchen”, “shack” or “mission”. Or how about those cronut lines in Soho? People stand in line for 3 hours to get a freaking pastry! Those are not exactly working folk standing in line for a piece of bread. Why do they do that if not for that rare sense of accomplishment? Or have you tried to get into Momofuku Ko? You have to know a guy who knows a guy who can get you a reservation, but even then you won’t be able to find the freaking place. You’ll be going up and down the 1st avenue block trying to find the goddamn door. It makes for a good adversity story though. Going to Per Se or Daniel does not sound like much of an adventure. I guess in the end it’s not so much about the product as it is about the process.

That’s the cruel predicament that the 1% got themselves into. The well-off work hard to eliminate the chance, the spontaneity in their private lives and then spend enormous amounts of money trying to recreate it in a controlled environment. Nassim Taleb, the author of Black Swan and Antifragile, calls this kind of phenomenon “touristification”. Even their thrill seeking time will be planned and scheduled and will have a private guide. Even when you travel to, say, Cambodia, all you gonna end up doing is riding in an air-conditioned car, occasionally stopping in some indigent villages to take pseudo-National Geographic pictures of dirty barefoot kids. While tracking gorillas in Rwanda you’ll have an option to stay in the slums for a night and lend a helping hand to orphaned children. Or if you really want to immerse in the lives of destitute there is a new trend in luxury “shanty town” vacations. Options include a $26 tour of Cape Town where you can experience feces in plastic bags being thrown at you (without plastic bag is extra?). Think about stories you’ll be able to tell back at your desk and at cocktail parties! And yet, you’ll still feel restless.

There’s a cure for that restlessness. I hate to sound pious but you can become a better person for real. The only way to help the poor and the destitute is to stop doing what you’re doing. It’s not like you have to do it. Stop trying to devise new ways to extract value from the rubes. Stop charging public pension funds million dollar fees for some questionable services. Fuck HFT, fuck CDX IG! You are looking for excitements in all the wrong places: it’s a world of diminishing returns for as far as I can see. Take the money you already have and retire or find another line of work. Some are doing it already. Seriously. It’s unorthodox, I know. What’s that? Leaving the industry will prevent you from funding your philanthropic foundation that helps poor people? Perhaps when you stop fleecing people in the first place they won’t need your mercy after all. Stopping this bullshit is what really matters. Walking away from your line of work is the real adversity, the real-life adventure that you so desperately seek. Think of it as if you’re throwing the ring of power into the fires of Mordor.

I understand that for many it may be all too real. People have families, bills, lifestyles to maintain. One can’t just walk away from all of this unscathed. Oh, well. I guess that’s when it’s tough.

Growing Inequality Can’t Be Cured by Charity.

It’s very hard to make a connection between one man’s actions and the other man’s suffering due to those actions. For a hedge fund manager it’s difficult to link his actions to a suffering of a small town teacher. His thinking goes: I exploit market discrepancies, I make money and pay taxes, I donate to charity. He may even think: I am genuinely a nice guy and I really want to help. It’s hard to trace the root of the problems back to himself and his colleagues and industry peers. That would require the rethinking, perhaps painful and unwelcome, of his entire existential premise: is he as good for the society as he thinks he is? And if he’s honest with himself, he will realize that the answer is not necessarily yes.

I wrote recently about how hedge funds these days, rather than engage in honest betting on markets are instead seeking to extract value at the expense of the communities, bully others for value or simply seek rent opportunities. None of those activities produce anything of value; they strip value from the existing caches. Then they use various tax loopholes. And then they donate to charity, being under the illusion that it can cure social ills and because, you know, they are not monsters.

That’s the model we’ve had for some time.

But here comes the danger. In another illuminating Bloomberg article (Bloomberg columnists are really on a roll, finding their mojo recently), we’re risking societal breakdown if we continue on the present course. This sentiment has been widely explored on the pages of my blog, but this article summarizes my thoughts in a concise and trenchant manner. Over the course of history many societies have reached this point. Many got out of this rather unscathed, if they embarked on the policy of alleviating the social and economic discrepancies (New Deal), many others have experienced a more painful chain of events.

I want to stress, again and again, that helping the poor does not turn us into Commies and socialists. It merely helps smooth out such transitions, it is in the very interests of those hedge fund managers. Blaming the poor, the unemployed and food stamps recipients on the lack of alpha is disingenuous and counterproductive.

Offtopic. Pasty White Guy Sink 4 3-pointers in One Minute.

Pasty White Guy, also known as Rich Boatti, my fellow board member of ACT NOW, can play some serious hoops. He will be on Olbermann tonight.