Wall Street

Jedi Master has spoken

Many of you know my stance on taxes – I don’t think that progressive taxation is the end of the world. But when one of the richest men on the planet says that he and the ones like him are not taxed enough there must be something to it. Buffett Tells ABC Rich People Should Pay Higher Taxes Or as Fox News would conclude – a hidden socialist agenda.
I read a book about Buffett recently. His genius is simplicity. The way he succeeds is he gets the same information as everyone else – from annual reports – but he knows what information is important. He just knows how to ask the right questions. All of those Efficient Markets Theory apologists that question his record are a bunch of Ph.Ds that claim to know the future by looking at the charts of past events. There are still a bunch of those being employed by big banks to this day as market technicians. But in essence, they are no better than astrologists.
Despite having grown up in a very conservative family (his father was a member of the John Birch Society) he nonetheless learned to think for himself and has become known for his support of progressive causes throughout his career. But he does not let any sort of ideology guide him. All that matters is economic sense and right now that means to lower taxes on middle class and raise them on the top 1%. That also means that without Uncle Sam coming to rescue in 2008-2009 there would be no Ford, GM and Citi anymore and millions more would be unemployed. Pretty Good for Government Work

Of course, our fiscal conservatives love to point out, in horror, to France and Germany with their constant strikes that paralyze railroads and airports, etc. implying that this is what we’re going to turn to if we raise taxes on the rich, but, frankly, it’s like comparing apples and oranges: the unions in this country are so neutered that the only thing they can do these days is give concessions to the employers. Unions Yield on Wage Scales to Preserve Jobs Trust me the strike in this country would be suicidal for workers and unions. Employers would just move operations elsewhere. The diminished union influence is, in my opinion, one of the primary reasons why middle class is disappearing here. The top 1% controls about 23% of the wealth in this country. And the rest are living paycheck to paycheck while voting Republican and fearing Socialism.

Obama keeps tax cuts for the rich

First of all let me congratulate those destitute 1% of the population who were scraping by paycheck to paycheck and who can now breathe a sigh of relief. I heard so many frightening stories about how the 3% increase of their tax rate will slow the economic recovery. Now these 3% will sure trickle down to the rest of the population. But enough sarcasm – I’m really happy for them. Maybe now they will finally stop complaining that Obama administration treats them unfairly. From my previous posts you probably know that the abundance of complaints and general thinness of skin (real or assumed) on Wall Street (who else is in the top tax bracket?) is my favorite topic. The amount of wimps in the top bracket is breathtaking. Makes you wonder how is it that they made it to the top?

I think it all comes down to the fact that being viewed as a victim has become fashionable in this country. It’s a foolproof PR strategy. Moreover, it’s convenient – you get to blame a third party (Obama, government, stiff regulations, communists, etc.) for all of your misfortunes.
Obama, unfortunately, got himself in the position where he’s damned if he does and damned if he doesn’t. One part of the country thinks that he’s in bed with Wall Street, the other part of the country is convinced that he’s out to destroy capitalism, and media doesn’t bother to notice the controversy. For their own convenience certain news sources can criticize Obama for having too many Goldman guys in his administration (alluding, of course, that he’s conniving against the working man) and in the same breath accuse him of socialistic tendencies. I fault Obama for not fighting back hard enough against this nonsense. He’s in dire need of some pit bulls and a Fox-like echo chamber with talking heads. If there’s one thing I admire about the Republicans is that they are masters at propaganda. Their mantra that repetition makes it true really works: death panels, Obama’s Kenyan birth, middle class tax increases – all of it stuck.

Now that Obama kept Bush’s tax cuts do you think that he’s going to be thanked by the business community? Fat chance! Investors Show Obama No Respect in Global Poll as Profits Surge As I described above it’s convenient to always be pissed off about something. Investors made money this year, profits surged – but they’re still not happy. If they are not pissed off at Obama they really have no one else. They need him as a human receptacle of all kinds of misdirected anger. Especially now that the Congress is Republican.

To Obama I say – may the force be with you!

The Foreclosure Situation

Given the recent development on the foreclosure front here’s my 2 cents and a possible solution.
How can a trust with tens of thousands of individual loans in it dispute each one of those defaulted loans one by one in court? This isn’t going to happen. And it’s not because it’s too long and too costly – there are ways around that, but because trusts can’t prove that they own those mortgages, they don’t have the paperwork needed. To go forward with foreclosure en masse would mean some abrogation of the sacred contract. Also, if the house has several liens on it, as happens in most cases, the potential buyer, who’s hunting for a cheap foreclosed home can’t be 100% sure what exactly he’s buying. It can turn out that he’s going to be second in line, after the primary mortgage holder claims to own the property as these two unfortunate guys found out. I mean what reliable source or a database do you check to know what it is that you’re buying with a foreclosed home? I think foreclosure has a risk of becoming a four-letter word.

What it can mean is foreclosure market will be dead for a long time, because bargain hunters will be spooked by the legal uncertainty. In reality it would look like the whole country will be plagued by haunted houses that no one can sell, buy, move into, bulldoze to the ground and not even touch with a ten foot pole. Wouldn’t that signal that the new construction will be hot again? People have to live somewhere. Just a speculation on my part.

That’s just one of many problems. The other one is sloppy record keeping.

Even before the mortgage meltdown, the servicing industry “was plagued with problems,” such as servicers charging unauthorized or excessive fees and making false or unsubstantiated statements about how much borrowers owed, says David Vladeck, head of the bureau of consumer protection at the Federal Trade Commission, which has brought several recent cases against servicers.

WSJ Article

I read a few articles in the past few days and to my horror I found out that no one is really insured from being foreclosed upon in this unceremonious manner, even if you’re current on your mortgage! That is because most of those small lenders that originated your loans are non-existent right now, those loans are long gone from their balance sheets into the trust without proper documentation being transferred into the hands of a new owner or lost altogether. In this case how do you prove that you paid all your mortgage bills on time? You have your records, sure, but they have theirs! Prove that your records are correct! These robo-signers are a sort of indiscriminate roulette that can pull your own mortgage out of some system purely by mistake and make you in default. “Because it says so on the computer screen” – you will be hearing when, puzzled, you call your mortgage servicer trying to clear the little misunderstanding. You will be speaking with some clueless person who will be immune to your logic and calls to reason, because I suspect they all are being trained to not understand questions for which there are no standard answers from the manual. What recourse do you really have in situation like this other than going to court?

The solution. With such clusterfuck in the foreclosure process and a high unemployment rate the solution begs for itself. Just like in early 2000s a bunch of no name lending companies popped up here and there I can see a huge market for foreclosure specialists. The business model would look like this: A small company gets a list of the prospective foreclosures from the trust or from the sponsoring bank and hires high-school drop outs for $10 an hour to phone the properties on the list. If somebody still lives there and pays mortgage or at least is working out a payment plan – those get dropped from the FC process. If no one answers the phone, the bank is given the green light to proceed with the FC. I mean this is a rough idea, perhaps those employees have to do visits to the property and follow some guidelines, etc. but you get the idea. Then they send the updated list back to the bank, which, in turn, proceeds with the wholesale robo-signed foreclosures. It’s a sort of quid pro quo: if banks want to speed up the process and bypass the paperwork requirement they have to pay to make sure that no current homeowners end up on the list. Isn’t that a reasonable requirement? This way we kill many birds with one stone: the FC proceeds at a reasonable speed (not as fast as it is right now, but not as slow as it would under the judicial review); a bunch of unemployed people get jobs (and maybe, as a positive side effect, even pay their own mortgages); politicians can move on something else, like fighting socialism – everybody’s happy. I think even Republicans can support something like this – after all it’s good for business.

ABS East 2010. Time of disconnect.

The annual securitization industry conference has just concluded in Miami. I attended it mostly due to gracious gesture of my former colleague who got me a free pass at the very last moment. Since I’ve been out of industry for a year I had to get current on recent developments. My second reason for going was anthropological, of course. I wanted to get a general feel of the market participants.
I will get very specific with terms during my observations, but I will make the best effort to explain terms to the uninitiated. This is not, after all, a financial blog.

But first things first. The biggest topic of discussion and concern at the conference was government and legislative actions. After attending a few panels and listening to speakers from different camps I came to sad conclusion that Wall Street, Government and regulatory and legislative bodies are a beast with more than two hands and naturally neither hand knows what the other is doing. First, let me describe the participants. Each panel consisted of specialists in that particular area of expertise. If it was a regulatory panel – there were people from some government agencies, FDIC, OCC, etc. If it was a research panel – it had a bunch of analysts on it, and if it was a traders’ panel – you guessed it! Normally, at this sort of conferences, I would just skip the lectures all together and hang out by the pool or at the bar with salespeople, but this time I wanted to make full use of the conference pass acquired through the kindness of others. I had to go listen to the panelists in order to refresh my memory on things and get the feel on the state of current affairs. So the uncertainty about legislative maneuvers was on everybody’s minds. Because this is not a specialty industry publication and it’s not even a market blog I will not delve into the specifics about deals and bonds performance. (Those who are interested to know about trade ideas can ask me specifically, but being in a generous mood I put a few at the end of the post). I will try to make it into a 3d party observation from 10,000 foot view.

“It’s not the product, it’s the macro.”

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Wall Street and Charity

Still Stuck in Denial on Wall Street

This article in today’s NYT stirred old memories and current sentiments. And you know how much I like to write about Wall Street, so here it is.
First a disclaimer: I love Wall Street the same way I love a casino. It’s Disneyland for adults, it’s a fun place to be. It’s like a sandbox with geeks, bullies, jerks, alphas and omegas making toy trades.

I decided to explore why it is so hard for guys on Wall Street to see themselves as villains or at least to be honest about their role in the crisis. They still insist they are the good guys who are being unfairly treated by Obama. Beaten like a piñata for no reason.

I remember how at the very beginning of my Wall Street career I tried to justify my work to myself, give it some meaning, although I was unable to explain what it is that I do to folks back home. Then after some time I gave up the idea that I’m doing socially useful work, even marginally. But I knew what I was doing and I didn’t pretend to be someone that I’m not. I was there for the money, I was no longer under the illusion that my occupation will somehow make the world a better place. Money is what makes young ambitious kids endure long hours jerking off stupid spreadsheets, when their peers are actually feeding the hungry in Africa or teaching kids in Harlem. But then, after a few years something starts to bug them. They start thinking: it would be nice to make all that money and actually see the results of your labor that have made a difference in society, a change for the better. (Notice that here I’m giving them the benefit of the doubt. I award them human qualities. I truly believe that people genuinely feel the need to voluntarily share the reasonable part of the windfall with less fortunate at some point in their lives. But someone who proofread this story for me felt that charitable impulses are to be displayed strictly in public, checks to be written when cameras are clicking, otherwise what’s the point? But that person is a hopeless cynic.) Wall Street loves to participate in all kinds of charities, fund raisers, etc. It is hard for any individual, even a Wall Street type, to see himself doing something that lacks meaning. It is important for a sane person, especially after he made tons of money, to feel like he’s making the world a better place. And since he could not get other than only monetary fulfillment at work he either a) gets active in charity or, if he’s a sociopath, b) keeps clinging to the belief that he’s a nice guy who helps small businesses get funding and keeps the economy going. You know, it’s nice to make all that dough and be seen as a nice, caring, charitable person who helps little neighborhood cupcake bakeries get capital by day and donates money to special needs children by night via industry social. All right, I won’t question the motives of bankers who do charity in this post, I will assume they are doing it from big heart and generosity. I’m simply questioning their approach to their primary profession. And I think the answer is that for some it’s hard to admit that creating and trading mortgage-backed securities and credit default swaps did not really fund that cupcake store down the street.

Now, if you think that I’m writing this to pile up on greedy bankers you’re wrong. I have no problem with bankers being greedy and conniving and shrewd. If they weren’t then there would be no money to be made. That’s their business, that’s what they do. If they want to feel good about themselves they should donate to charity and that’s that. But I don’t want them to pretend that what they are doing during the day is noble. My problem with Wall Street is that they still see themselves and insist on everyone seeing them as innocent sheep. Does that guy in the article, Anthony Scaramucci, honestly believe that what he’s doing is simply helping small businesses get financing? He’s either naïve, which I doubt, or he finds himself in the position where admitting to himself that all these years he participated in the biggest fleecing of America would make his head explode. I think guys like him have no avenue, other than charity, to make them feel good about themselves. I find it disingenuous when they pretend to be nice and fluffy vegetarians who get pushed around by big and nasty Obama. All I want them is to acknowledge that this is what they do, they eat what they kill, and not hide under the ‘nice guy’ guise. As you probably inferred from my writing is that I’m in the “no illusions about what we did” camp. What we did, what I did wasn’t nice. It was fun, though, it was breathtaking at times, frustrating at other times, but it was never boring. I too gave money to charities, partially because I genuinely felt the need to share and partially because I got to dress up and socialize and have drinks and nice dinner. I know. (You see, I come from a humble, plebeian background – free food, or at least that’s the way I looked at it after I wrote a check, can still be a factor for me to attend any event). At least I’m honest about it, and a guy like Scaramucci isn’t. Before you protest and call me names answer this one question to yourself: Would you do your job for $50,000 with no bonus? Would you be a quant, a structurer, a trader, a salesperson or a spreadsheet whacker if that was the pay? Or would you rather go work for the UN or be a teacher for $50K?

So go and make your money the shrewd way, give to charity to make yourself feel better but please don’t pretend to be a Ghandi. And if you feel like you’re being beaten like a piñata, take it as a man. Many millions of unemployed and those who lost everything would love to be beaten with that kind of stick.

Republicans for Regulation

It turns out Republicans don’t favor free markets at all. Only they could come up with a legislation like this one.
On Strategic Default

Basically, they are trying to punish borrowers who, while being deeply underwater, are defaulting strategically – that is stop paying mortgage while staying in the house and spend money on other things. Things like going out to the restaurants, shopping, investing money in their small businesses, etc. You know, the normal things that help the economy rebound and keep the Republicans happy. I must also add and this is important – that while doing it, home borrowers are not actually breaking any contractual obligations. Default is an option. It’s the ultimate free market at work, just like the founding fathers have prescribed. But Republicans are not happy.
Frankly, it’s hard for me to guess why they are upset, because here we have people making rational economic decisions, which leaves me with only one option – they are upset with immoral behavior. Which they in turn seek to legislate. I can not put it better that this University of Arizona law professor.

I wonder if Congress might consider a similar measure mandating that any corporation or bank that strategically defaults on a contractual obligation is not entitled to any tax breaks or other government assistance, including any future financial bailout. The point is, of course, that business and banks strategically default all the time when it is in their economic interest to do so.

Why no similar move by the House to punish strategic default by banks and corporations? It is interesting that House Republicans are generally opposed to most regulation of corporate activities—preferring to leave the market to self-regulate—but have acted with House Democrats to regulate the economic activities of average Americans. This is yet another example of the double standard in America—one set of rules for Wall Street and another for Main Street—but this time the House is actually codifying this double standard.

Unfortunately, this kind of moralistic grandstanding by the House does nothing to help the millions of struggling underwater homeowners who have seen their retirement security disappear. Instead, it worsens the impact of the best bad choice they have to save themselves from financial ruin, which is to strategically default and let the banks have their homes—which, by the way, is a perfectly legitimate option under the terms of the mortgage contract.

The Left customarily criticizes conservatives for being too beholden to raw capitalism to the detriment of society as a whole. They are approaching it from the wrong end. They should criticize the self-proclaimed “capitalists” for not being capitalist enough. Because, (and it’s becoming a tired adage) it’s socialism for corporations and capitalism for the little guy.
However, it feels like Republicans didn’t just do it on their own accord. It does feel like it has an imprint of an invisible hand of Wall Street. The whole situation has a flavor of a strong player at the poker table losing a big pot to some schmuck who doesn’t know how to play and instead of saying ‘nice hand’ and moving on, he’s calling for a floor manager. Think about it – the big wigs on Wall Street got beaten in their own game and by who! To put it simply the scammers were being scammed, and they didn’t like it. The other team played dirty for once and won. But I thought it was understood among the players that it’s part of the business, a so-called leakage. That’s why I am very surprised to find moralists on Wall Street – out of all places, for Christ sake! Now I’m truly expecting the next logical move by Republicans – putting equal penalties for default on corporations.

You’re only as good as your last trade

There was a great article in this weekend’s New York Magazine that echoed some of my earlier posts about Wall Street.
Obama is from Mars, Wall Street is from Venus

It’s rather long so I will put out a summary, quote most memorable passages and comment on it.
More under the cut

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Masters of the Universe

Wall Street. My favorite topic.

I’m sure many of you have seen this letter. We are Wall Street

Listen up little boys. If you are who you say you are, that is you eat what you kill, why am I hearing you crying like children and calling for mommy? If you’re as tough and smart as you think yourself to be, then you will make money under any circumstances. If you only can make money when the market goes up then you’re no different from the Joe Mainstream for whom you show such disdain.

You’re embarrassing your profession with this letter. True predators hunt in all kinds of weather and don’t blame the gazelles for not cooperating. If circumstances change they either evolve or die – they don’t turn into their prey (as you intend to do). If you exercise just a thought of teaching or mowing lawns, then perhaps that means you’re in the wrong profession to begin with, because true carnivores don’t try on a zebra costume when the going gets tough. They grow sharper teeth or develop faster legs or adjust hunting strategies. If you can make money under Bush and can’t make money under Obama it doesn’t say anything about Obama – it says a lot about you. If you think government is inept – you make one bet, if you think government is smart and anti-business you make another bet. If you think things are bad under Obama and stimulus is not working– why don’t you short the market for example? If you think otherwise – why don’t you go long? If you don’t know what the government is going to do – stay flat for a while. The rules of the game have changed – deal with it. It shows that that you’re a one trick pony or worse – a crook with the loaded dice. Try making money the old fashioned way – by making calculated bets, adjusting for political risks and anticipating the government moves, and not complaining about government joining the game. You’re used to sitting at the poker table and seeing fishes and thinking that the way it’s supposed to be. Now a few sharks joined the table and you object! Masters of the Universe my ass! Pathetic wimps! And please stop crying. If I want to hear more wailing I’ll listen to Eddie Vedder.*

*I love Pearl Jam, but Eddie Vedder does indeed wail.