Girl Power

The other day a senior White House official, Kelly Sadler, made a comment about ailing Sen. McCain: “It doesn’t matter. He’s dying anyway.” Sadler was referring to McCain’s advanced cancer in the context of his opposition and thus a possible ‘no’ vote on a confirmation of another woman of questionable morals, Gina Haspel, Trump’s nominee for CIA director. One wonders: how can a public official or just any human being display such a lack of basic decency? What is it that has the capacity to make us into such assholes?

A moment of self-reflection brought back the memories of my early days on Wall Street. Back in a heyday, long before the shit hit the fan, there was a feature in the mortgage bonds called ‘prepayment penalty.’ Prepayment risk was one of the several risks of holding a mortgage bond. Still innocent about the ways of Wall Street, I couldn’t initially grasp what exactly was the problem when the borrower pays off the mortgage early. I was quickly disabused of my naivete by a shrewd and seasoned co-worker: that risk meant that a bondholder would have to reinvest that money at a different, probably lower rate. So naturally, the bondholders wanted to get compensated for carrying that risk. Thus Wall Street, he enlightened me, came up with a brilliant solution: prepayment penalty paid by the borrower. With this observation he accomplished two things: he revealed how the real world works, and how still unprepared I was for being a player in that world. As this new piece of info sinked in, I gazed upon the buzzing trading floor in embarrassment at my own inadequacy: these were all killers and I didn’t think like a killer.  This is how you were supposed to think: if a borrower is late on his mortgage – he pays a penalty; if he’s early – he still pays a penalty. You get to write these rules, you get a chicken for dinner every time. It’s almost like these masters of the universe WANTED the unwitting borrower to make a mistake; no, worse – in a cruel twist they also wanted to punish him for a prudent individual conduct. Why? Because this way they collect more fees. Of course, this industry would soon forget how it sought to punish a borrower for his attempt at paying off his debts and would blame the whole thing on him being a shiftless deadbeat. But that reckoning was still years away. At that moment, I was determined to become a killer like them.

Where am I going with this? Once I learned about this clever mechanism I didn’t feel outraged. It didn’t cause any internal conflict. What it produced instead was a self-satisfied chuckle, a realization that I was on the other, winning, side of this trade. It felt like an initiation into a special club. That it was I who, directly or indirectly, stood to benefit from all those poor schmucks who played by the rules written by ‘us’. Yes, at that point I have considered myself to belong to ‘Us’, the winners. I mean I was smart and worked 14-hour days and took plenty of abuse to get there, so, surely, I deserved it. In a set up like this it was just a matter of time before a disparaging word or a caustic comment towards the losers would slip off the tip of my tongue. I became a good cog.

Women like Kelly Sadler – also a good, loyal cog, blond and pretty and useful to the regime in many capacities, are often predisposed to not understand a toxic dynamic happening before her eyes, because her current status and a future lobbying career depend on not understanding it. She can smell that power the way I could smell that money.

The moment of initiation into a special exclusive club is the moment you lose your internal moral compass. Grateful of the rare privilege you want to prove being worthy of the membership. In the company of powerful men the misfortunes of the distant others is an odd topic to bring up. At best it will create suspicion about you having the right qualifications, about you having an understanding of the mission at hand. At worse, you’ll risk expulsion. Smart club administrators seek to invite new members from humble origins, minorities, women. They know those will be the best, most ruthless and most dedicated defenders of the club’s mission. The sense of belonging, of a need to belong, will trump the sense of right and wrong in most people most of the time. And indeed, throughout the history, women, especially white, privileged women, have been the loyal foot soldiers and defenders of the worst atrocities.

Kelly Sadler’s comment, put in that context, is a logical and totally predictable occurrence. She wasn’t thinking about McCain, or his family or even about how this will sound, should it ever come out, to an outside public. All she did was channel what everyone in that room was thinking. Judging by those standards she’s proved worthy of the membership.

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The Fallibility of Men

“Since we are dealing with Men, it is inevitable that we should be concerned with the most regrettable feature of their nature: their quick satiety with good.”

This is a comment J.R.R. Tolkien made about his new but quickly abandoned book “The New Shadow.” He wrote only 13 pages of it and decided it wasn’t worth writing further. Why? He thought that the story could progress only in one way: the men who are restless and discontented with peace and prosperity will seek new battles and adventures and will destroy the peace in the process. That triumphant moment when the good defeated evil at the end of The Return of The King would only last a brief second before men would bring turmoil to their own kingdom. There’s no need for Orcs or Dark Overlord – men will do it all themselves.

I’ll get back to the fantasy world later.

Last week a former RBS trader pleaded guilty to defrauding investors. It’s not big news in and of itself. But it’s a great illustration to the point I’m trying to make.

Adam Siegel was a young star at Bear Stearns back in the day. He became an MD while still in his 20s. When Bear collapsed in 2008 he jumped to RBS with a bunch of his colleagues. After the crisis RMBS/CMBS trading was on the decline so to make any kind of money in that business one had to become resourceful. And he did. His new business model involved shaving a few beeps off his counterparties. Nothing fancy really. In 2014 one of his colleagues pleaded guilty in the expanding probe and Siegel himself was placed on leave. What does he do? Goes home and rethinks his life? Ha, no. He jumps yet to another shop – Fortress – to join yet another Bear alumni Michael Nierenberg.

This story is a great example of the kind of restlessness of men that Tolkien was talking about. Life gave Siegel plenty of opportunities to retire, to abandon the game – his first employer collapsed, the other suspended him – and yet he’s incapable of walking away. Instead he jumps from one sinking ship to another, probably self-congratulating himself for his agility and perseverance.

For guys like him the worst punishment is not jail time or a large fine. For guys like him the worst punishment is being excluded from the game. Now that he’s pled guilty and is on bail, I assume that, at the very least, he’s banned from using his Bloomberg. Oh, man, denying a Bloomberg access to a trader is like denying crack to an addict. He wishes nothing more than to be able to check some quotes. If you told him that for the rest of his life he will never trade again, never hustle a client again, you would put him into a severe, suicidal-level depression. It would be an equivalent of a concert pianist breaking his fingers. Life is over.

Back to Tolkien and to a Man’s ‘satiety with good.’ Good, the way Tolkien understands it, is a boring concept to a modern-day American. To Tolkien good is content and idleness. To Siegel and to any ambitious American (and what American is not ambitious these days?) good is dissatisfaction and action. We are like Nicky Santoro who, after getting himself banned from every casino in town, keeps devising new schemes to stay in the game. “I gotta do something, I gotta do something,” Nicky tells Ace. “They ain’t getting rid of me. I’m staying here. Fuck’em.” In our current zeitgeist such tenacity and perseverance is considered virtuous.

But what if we can’t abandon the game because the game itself gives us comfort? What if it is the unfamiliarity of a new route, the lack of familiar structure that we fear? What if it is the quiet that we’re scared of? Life offers us many exits from our routine, but we can’t take it. If we truly loved the game the way we claim to – the kind of game we imagine we play: competitive, ruthless, favorable to the best player – then we should welcome any chance to “step out of the comfort zone”, as numerous self-help books advise us. But we don’t. For our trader Siegel to step out of his comfort zone would be to abandon the industry and, I dunno, coach Little League. He won’t do that voluntarily.

The funny thing is, while at the game, we often dream of freedom from “all this shit.” Numerous movies and TV shows have explored this human need. But, alas, as soon as such freedom is within our reach, we pull back, horrified. We are all masters at what we do, all right. But it’s better to practice our mastery in familiar waters.

But God speed to Adam Siegel. I wish that, if he avoids jail, he reunites with his P&L soon. Things can always get worse when ambition is denied an outlet. It’s not like he’s stiffing public workers or municipalities, right? And what’s a few basis points between friends?

The Folly of The Big Short

Before I get to critique, and there will be plenty, I have to give the movie credit where it’s due: it does an excellent job describing the convoluted structure of the products to a layman. The movie is good at describing all the details of the trade that up until now were the province of finance bloggers. Everything about the swagger and the conferences and the various participants is true. SEC was toothless and uninterested at doing their job; rating agencies didn’t want to ruin their profitable relationship with the banks; the traders are young, white, haughty and male. They even mentioned the ABX index – an obscure but important gauge of a subprime market back in the day. The pivotal moment did indeed come during the ASF in Vegas in January of 2007. The subprime market, measured by the ABX did fall about 2-3 points during the conference. It was an unprecedented move, as the index usually moved about a few ticks up until that point.

But that’s where the movie’s merits end. The first thing that I found hard to believe is how the shorts – that is the guys who shorted the market – are portrayed. You see, when you’re short and the market goes down the last thing on your mind is who’s on the other side of the trade. It’s the truth that is founded in our own fallibility. But the narrative makes all kinds of efforts to make us like the protagonists. We are told that they are brilliant oddballs, unlike the stiff Wall Street suits represented by Goldman and Deutsche bankers. I have difficulty reconciling this depiction with their actions. When you make money – that kind of money, hundreds of millions, billions – you celebrate. You’re exhilarated, even gleeful. Your longshot bet just paid off! You don’t give sermons, like Brad Pitt’s character, in a half ass attempt by screenwriters to make him look human, about how the little people are about to lose their homes and jobs. That just isn’t believable. But here we are led to believe, rather clumsily, that these guys care about the downtrodden because they are shown saying a few high-minded words to their underlings.

Second, if we have established, like the writers would like us to, that these guys actually have scruples and principles that the bad greedy bankers supposedly didn’t, then why didn’t they abandon their positions and the industry in disgust and went to live on a ranch somewhere? Many of the real life characters are still somehow involved with the industry – trading commodities (like water) or running their funds.

Third, the idea that aside from 6-7 prescient people described in the movie no one has known about what was coming is a big stretch. I understand it from a dramatic perspective of a movie, but if the film advertises itself as a serious unbiased version of events then we are not getting the full picture. We are told that no one bothered to look at loan level tapes except for Michael Burry and that’s just not the case. I mean you’re telling me that thousands of investment banking analysts, who have been crunching numbers and loan level files from subprime lenders day and night, didn’t notice that the quality of those loans was becoming worse and worse with every tape they received? That they didn’t see those low FICOs and NINJA documentations and high LTVs? That it is only those few heroic outsiders who bothered to do that? That’s fantasy realm. Every trader worth his money, and there were plenty of brilliant guys (and I’m not necessarily talking character, I’m talking professional acuity) on the trading desks, will know what it is he’s trading. The problem wasn’t that people were oblivious; the problem was that many had perverse incentives not to know. And for those who knew, it was the timing and the scope of the collapse that was a big unknown variable. And, as we saw in the movie, people got burned by being short too early.

The audience’s ire is redirected from the guys who actually shorted the market to the guys who facilitated it. Surely, the guys who facilitated it – the banks, Greg Lippmann, Wing Chau – are not without blame, but let’s not let the hedge funds off the hook. Before Michael Burry and Co. decided to short the mortgage market there wasn’t even a product available on the Street that would enable them to do so. It had to be created specifically for them as we see during the course of the movie. It was that demand for shorts that drove the issuance of shittier and shittier CDOs – so that there were something to bet against. Without that demand, perhaps, the housing collapse would be contained. They use the world’s old trick of blaming the prostitutes but not the clients.

The bigger story that got swept under the rug is why and how it was possible. This should have been a story about the realm with no rules, or the rules that are written by players as they go. When we’re told that those new products, those weapons of mass destruction are created on the fly, as the demand appears, this pivotal piece of info is presented as merely a passing link to a more audience-friendly story – the good old story of stupidity and greed. The viewer will leave the theater thinking it’s the greedy bankers’ fault, which is a convenient, simple and a rather tired notion. A takeaway here is that if one is greedy and wears a suit he’s evil, but if one is greedy but is a barefoot, unshaven, drum-playing oddball then it’s ok. It’s as if we’re steered away from pondering on what’s wrong with the entire system.

Furthermore, movies of that sort usually have some redemption in the end. There’s no redemption here. Screenwriters want us to be angry. Well, that goal was achieved. A layman will come out of that movie angry at the suits – the S&P, SEC, the bankers, but not the outsider financial cowboys. But that doesn’t absolve one from making a moral judgement. I think a movie, especially a movie exposing such spectacular misdeeds, has to carry a moral message, and this one fails to do that. What’s our takeaway? That the only recourse we have towards greedy bankers are even greedier and shrewder hedge funders, whom, after the dust settles, we will be asked to celebrate, simply because they exposed the fraud? But it is the very process of exposition, like in quantum mechanics, that made the experiment have an outcome that otherwise, without that exposition, would be very different – limited and less severe in scope. Without them, the betting process would stop at the very first level – the level that Selena Gomez played at the Blackjack table. There would be no second or third order of betting, there would be no CDOs and CDO^2. But they – the hedge funders, the shorts – opened the floodgate of a shit lake that otherwise would be contained. They are the observers of a quantum experiment that without their actions would have a very different, less severe outcome.

We are given a lot of shocking information and then left to make our own judgements. For the industry (Hollywood) that likes to give us sermons in easily digestible tidbits this is puzzling. The narrative is good at building up outrage but then, as we are shaking in our seats with rage, it stops short of making a coherent conclusion, as if the screenwriters and Michael Lewis were afraid to make a judgment after every appalling detail that they’ve given us. As such it’s just another good ol boys’ heist movie, masquerading as social commentary. The only moment in the whole movie where they come close to the truth is when an S&P executive played by Melissa Leo, herself a corrupt player, tells Steve Carell that his positions make him a hypocrite. That’s about it.

I’d like to conclude with a quote from Yves Smith’s recent blogpost, (which is a must read, btw):

“Lewis’ desire to satisfy his fan base’s craving for good guys led him to miss the most important story of our age: how a small number of operators used a nexus of astonishing leverage and camouflaged risk to bring the world financial system to its knees and miraculously walked away with their winnings. These players are not the ugly ducklings of Lewis’ fairy tale; they are merely ugly. Whether for his own profit or by accident, Lewis has denied the public the truth.”

Yet Another Example of a Modern American Business Model.

This recent article in The Atlantic gives another great example of how our current economic system is tweaked to serve the few at the cost to the many.

In a nutshell, what happened is the homeowner had a loan with BofA, which he refinanced in 2009. The new, modified terms of the loan allowed him to avoid defaulting on it. Because the loan was insured by FHA, BofA has received the full payment from FHA and transferred the loan to the government agency. FHA then sold this loan, at a deep discount, to a hedge fund. In 2011 that homeowner finds out that the modified terms (and the reduced monthly payments he was paying) are being disputed by the new holder of the mortgage, Oaktree Capital, and that he now actually owes the full back payments (the original payments of the unmodified mortgage) if he wants to avoid foreclosure. Now, before we even move further with the story, I want to dwell on it. There’s too much to unpack here. Yes, yes, I understand this is business, and the businesses are not non-profits, and this is just an unfortunate situation for this one particular guy, and nothing illegal transpired and why don’t we just move along, because the firms that provide credit and liquidity to the markets are the arteries of the economy and let’s not get hung up on the one guy who got caught under the wheels of commerce. But I don’t want to move along. I want to understand why a guy with a mortgage, who follows the rules, is completely defenseless against such turn of events. What recourse does he have if a bank transferred his loan to FHA (a government agency), and FHA, instead of adhering to its principals of building stable communities and promote homeownership, discards this loan, at a discount, to the least scrupulous guys on earth – the hedge funds? What do you expect those hedge funds to do – to help this poor guy figure out how to keep his house? No, helping the guy is what the charity is for; but this is how we make money.

FHA selling loans to hedge funds is indicative of what happens when a government agency is forced to have a bottom line. This loans sales program came about under intense pressure from Congress – a legislative body deeply allergic to any kind of spending. This dysfunctional convergence of forces – legislation that is adamantly against spending, a government agency forced to fend for itself, and vultures looking to profit – as always has to be sorted out by the little guy who played by the rules.

Why and how have we allowed businesses to evolve to such a grotesque form – a form where their bottom line supersedes the rights of the ordinary citizens? The homeowner was doing all the right things, things that are routinely praised as guarantors of success by the conservative and neoliberal cheerleaders – he modified his mortgage terms and was adhering to those new terms. Then, out of the blue, some third party comes in and tells him that those terms are null and void and please pay up now. If this is capitalism, if this is free markets, how can one still insists, with a straight face, that this system is better than socialism? How is it better? What protection an average schmuck has against such unaccountable and wanton market forces? What did he do wrong?

This is a great illustration of how broken this whole system is. The big underlying problem is that to survive one has to cut corners and to make deals, often semi-legal or borderline illegal; or, better yet, to write laws that will make legal what would otherwise be illegal. FHA selling loans to hedge funds and washing its hands off of underwater homeowners were totally legal. Still, wheeling and dealing is a realm of the privileged. If you’re some guy who cuts corners by selling loose cigarettes on the street corner you’re gonna end up dead. But when the suits cut corners then we routinely get a talk about a sacred and untouchable ‘bottom line’, that has somehow evolved into the ultimate argument bludgeon.

And final philosophical point. Guys at Oaktree are not fools, at the end of the day they know what they’re doing. I know the type well – this is the bare-legged, super-fit guy you see running in Central Park during the rain or snowstorm, preparing for a marathon or an Iron Man, because he read in a self-help business book how overcoming obstacles makes one a winner. This is the guy who, when his daughter asks him “Daddy, what do you do?” pauses for a second, and then, snapping out of a momentary embarrassment that he’s not a firefighter or a pilot, explains, mostly to himself, that he’s a little cog that makes the big wheels of finance turning, the efficient mover of capital, the engine of the economy. This is the guy with a self-awareness (today’s hedge funders are all about meditation and mindfulness), but also a void that he can’t fill – neither with marathons, nor with underground fight clubs, nor with ostentatious charity. And it weighs on him. It weighs on him bad. And he can’t find an escape. 20 years from now, when he sits in some new-agey condo on the beach or a high-tech cabin in the Colorado Mountains, wistful and restless, it will dawn on him what a joke his entire life has been. But it will be too late.

Our Cult of the Underdog.

In a modern-day America, a good modest origins story is as necessary an attribute of a public figure’s self-identity as a Birkin bag is a necessary attribute of an Upper East Side trophy wife. As political season heats up and the candidates elbow each other to ingratiate themselves with the little guy, we should ready ourselves for the bi-annual onslaught of personal hardship stories. But come to think of it, the underdog story is a permanent American staple, election season or not.

Election year, however, offers a great insight into the power of such narrative, where political candidates, most of whom were born to uninspiring circumstances ranging from middle-class families to political dynasties, compete for ‘the shittiest childhood’ spot. There’s a problem there, as the candidates, raised in the postwar, economically prosperous America weren’t exactly subjects to a Great Depression or a WWII level upheaval. Here, lacking a true personal hardship story, they pivot to the story of their immigrant parents and grandparents, as if the suffering of ancestors is somehow a proof of one’s own hard life. How was it hard? Was he a barefoot 12-year old forced to work in a coalmine to feed his family? On genetic level? Damn, if only one could buy a crappy childhood!

To admit privilege, to admit the possession of power or influence, is to put oneself into a weaker argumentative position and to invite criticism. The privileged know this even if on merely subconscious level – they never miss a chance to tell a self-deprecating story. This strategy kills many birds with one stone, it deflects the critics and endears the narrator to an economically struggling audience.

In real life we’ve all met manifestations of such underdog mindset when we heard a successful person boast about how hard he worked to get where he is (usually a soapy immigrant story), and then, without missing a beat, complain about how it’s tough to live in a world where his tax dollars support all kinds of riff-raff. You see the trick here? While he’s eager to convey his success story he’s careful to mask it in a certain degree of martyrdom.

Positioning oneself as an underdog is a low-risk, high-reward strategy. Kim Davis, a Kentucky public official who refused to issue marriage licenses to gay couples knows this. Her ostensible underdog bona fides, validated by the stint in jail, were cemented at the moment of her release, in a surreal but too delicious to watch spectacle. The visuals of the event – the Eye of the Tiger soundtrack, the politicians jockeying to insert themselves into a photo-op with a bunch of country bumpkins, the crosses, the main character’s triumphant posture, arms in the air, akin to a pastor about to deliver a sermon to her flock, her husband in denim overalls and the scarecrow hat – were just too awesome. A fiction writer would kill to conceive and write a scene like this. But the scene was real and unscripted and thus powerful – there was no hint of irony in the entire show. Clearly, Kim Davis fancies herself to be a scrappy Rocky Balboa defeating, in an uneven and bloody fight, an all-powerful Ivan Drago. And that gives her power. She would not have that power if she merely performed her governmental duties, because a government official cannot be an underdog. What’s also interesting here is that one doesn’t even have to put up any sort of a real fight to achieve the accolades. These days one can achieve the glory of David fighting Goliath, without doing all the work. You don’t have to defeat the Goliath, you just have to bait him, make yourself into an underdog and take a stand, and next thing you know there are TV cameras and politicians and a cult following. Whether you’re in her camp or not you watched that scene in awe. The genius of that scene is undeniable. It could not have been conceived and executed as preplanned. It was a sporadic, organic display delivered in the most dramatic fashion to the hungry, rapturous audience. Somewhere, Karl Rove is biting his nails in envy.

As much as this Kim Davis’s kind of underdoggery is entertaining and attention-drawing, it can’t do much harm. 6 months from now we won’t even remember who Kim Davis was, like we don’t remember the outrage surrounding Rachel Dolezal a few months back.

It is the low-profile underdogs that worry me. It is the true elites with power, pretending to have none, that can do real harm. The greatest cache of low-profile underdogs can be found on Wall Street or among the billionaire ranks. I would argue that, among these elites, a quest for a personal narrative is as strong a motivator as monetary rewards. A smart billionaire with politics and a gospel to spread knows that denial of power is a power in itself. Acknowledgment of being in privileged position, of possessing power, would then require some kind of stewardship, a responsibility. But denial of power frees one from responsibilities. What kind of stewardship and responsibility can we expect from the majority of Wall Street players and hedgies who, with multi-million dollar paychecks, with an army of lobbyists, with a direct line to and an ear of lawmakers, still insist on describing themselves as ‘scrappy kids from Brooklyn’ – a tired metaphor, sure, but still a dominant sentiment among the finance crowd, doggedly resistant to self-reflection?

Such resistance – to the acknowledgement of one’s membership in a power elite – reveals a deep desire to be free from responsibility, to remain a child in essence, to be an immanent, passive participant, who merely reacts to events unfolding before him. Again and again, in the aftermath of the crisis, we heard one bigwig after another, defend themselves with “I didn’t know nothing” and “beyond my control” fables. They knew that to be in charge is to be accountable. To be perceived as a winner, to be transcendent, is to invite all kinds of unwelcome scrutiny. But when you’re an underdog you can use it as a shield from critics and a niche from which to attack others. Folksiness and bootstraps stories are immune from attacks by nosy journalists and Vox.com eggheads. It’s a smart positioning. One has to be a Trump to revel in the spotlight and the “winning.” But Trump has a rare quality of not giving a fuck, unlike many self-conscious “winners” on Wall Street, who feign modesty and shroud themselves in ‘poor me’ stories. Is it any wonder then, that the public, correctly, perceives them as the biggest douchebags?

Former Goldman Prop Traders Can’t Survive in the Wild.

Turns out Goldman traders are not at all what they’re hyped out to be, once they are deprived of their Goldman platform. Many went and started their own hedge funds and failed. One guy even managed to lose 7%. 7%! In this market! I guess he was long gold. How else one loses money in this market.

I’m almost disappointed. It’s as if Dr. Evil from bond movies turned out to be just an old grandpa with a cat – no handlers, no masterplan, no secret weapon. Once stripped of their magic lever that Goldman provided them they can’t walk on their own.

T’fy, blya! Such a major disappointment.