President Sarah-Joe McBamacain

I have not yet made a final decision as to my vote in November. I am leaning towards McCain, mainly because charisma turns me off. Charismatic leaders make me nervous for the same reasons crowd dynamics make me nervous. Beautiful oratory and a strong personal aura operate to leapfrog the listener's analytical firewalls. What is being said becomes less important than how it is being said. The political system on a national level pre-selects for candidates who are skilled in marketing themselves as a product to the greatest number of people. It is the Microsoft Windows phenomenon. Windows is not the best operating system and it never was. It is, however, the o/s that gives the greatest number of people the greatest number of features they want at a price they are willing to pay. Same for presidential candidates. This election is unique in recent memory because the next president will be put in charge of this Titanic of an economy, handed a plastic spoon and be told to bail us out. Options will be limited; a tax cut here means a cancelled program there. A new program here means a revenue requirement there. Any extra cash we had behind the sofa cushions and the car seats is being employed in Iraq and the financial system bailout. Servicing the national debt will require significant belt-tightening, or increasing the money supply (i.e. printing more of the stuff). Our foreign policy is going to be reactive to Russia and China and must be devised to prevent the perception of American weakness. What I am saying here is that the next President has a very limited financial and diplomatic arsenal with which to address huge problems of domestic and foreign policy. The next President is going to have to be the best crisis manager since WWII. Rhetoric is irrelevant, debates are irrelevant. This is why I am disappointed in Obama this morning. When you are bailing the Titanic with a plastic spoon, you better get to work quickly.

Sorry, I'm confused

McCain has asked Obama to postpone the presidential debate so that the candidates might do their duty as Senators and spend some time on the financial crisis. Obama has declined, and said that it was his idea in the first place. I am generally of the opinion that politics, like theatre, requires the temporary suspension of disbelief. But this exchange stymies logical analysis. If it was his idea, why won't Obama take the initiative in outlining the path the candidates can take together to address this pressing problem? I, for one, despise these debates. We already know who the winnner will be on rhetorical points. Both of these guys are interviewing for a job. When interviewing for a job, most people tell the interviewer what they think he wants to hear, and make promises they really want to keep in the realization that reality and attendant circumstances will severely curtail what they are able to deliver. In the face of a real problem requiring real and immediate solutions, Obama would rather debate - playing to his obvious rhetorical strength. I find this disappointing and it does nothing to convince me that Obama has the chops to deliver on all of his lofty (if somewhat vague) promises of change. If you are going to pledge deliverance, you have to chart a clear course. So if you want to claim it was your idea to meet McCain and work rather than talk: great. I believe you. But then why refuse to follow through?

Sytems failure

What's all this talk about a "failed business model"? Wall Street's securitization business model worked perfectly: For a substantial fee, redistribute risk to willing investors. As data on the risk improves, tranche it even more finely and redistribute it again. The most sophisticated investors take the greatest risk and reap the greatest rewards. Worked fine. What failed Wall Street and the commercial banks was their credit- and market risk management systems. What failed the public was the impossibly archaic regulatory environment. Risk correlation was incorrectly assessed and insufficiently tracked. In order to facilitate underwriting mandates and instill investor confidence, underwriters and mortgage originators kept risk that should have been priced appropriately and placed with investors. The proper pricing of risk was second fiddle to underwriting fees and league table standings. Risk controls were routinely over-ridden by business managers in the interest of short-term gains. Institutional greed was not the problem; rather, the institutionalization of poorly structured compensation packages to business units provided incentive to mislead risk managers as to the true nature of the risks being underwritten. Every day, the mismatch between controllers scrambling to keep up with ever more complex transaction structures became more imbalanced in favor of the business units. This situation is mirrored in the inability of regulators - SEC, FSA, et al - to fully comprehend the severity of potential losses on financial institutions' balance sheets. FAS and IAS guidelines were and are incoherent on the issues, leaving crucial reporting items open to interpretation by accountants (who, like the rating agencies, are paid by the financial institutions!). The sudden realization that risk was not being correctly represented in public filings and reports will be reprised when the credit derivatives market starts to wobble. Right now, the Fed and ECB are trying their level best to stop this from happening, but the credit derivatives market is a $70+ trillion behemoth with immense potential for damage. And the beautiful thing is that no-one knows where the risks are highest, as exposure under credit derivatives is poorly reflected on balance-sheets as a result of pitiful and vague accounting rules. The fun has only just begun.

Make up your minds!

So the story now is that the investment banking model that has generated hundreds of billions of dollars (and pounds and yen) of revenue over the past couple of decades is so deeply flawed that it needs to be abandoned? Goldman Sachs is reorganizing as a bank holding company? The thinly veiled truth is somewhat different. The model worked until the investment banks overleveraged themselves. The model itself was not flawed - it simply was stretched to the point that an unanticipated stress in the system snapped it. The investment banks remaining after the Lehman meltdown saw the writing on the wall and realized that in the coming regulatory environment, they were not going to be able to generate the profits they had been used to. So why not poke the taxpayer in the eye and take part in the bailout, and put themselves in position to have their liabilities guaranteed by the FDIC? They did the math and figured out that taking cheap deposits and engaging in reduced investment banking and securities underwriting is the best way to maintaining the maximum level of shareholder value and personal income. The cost of holding additional capital is partially offset by the low cost of attracting deposits and the benefit of FDIC guarantees versus having to purchase their own insurance (in the form of derivatives or bond insurance) on their balance sheets. So GS will buy WaMu or some other regional with a banking license (M&T? Fifth/Third? Wells Fargo?) and become just like Deutsche Bank or UBS in its prime. MS has already sold a share in itself to MUFG, but that is unlikely to be the last chapter.

I didn't know we had $700bn

Here we have been having a national debate for the past almost 20 years about the cost of universal healthcare - or at least universal access to healthcare. Not to mention the underfunding of Social Security and a revamping of Medicare/Medicaid that is so spectacularly complex that it now encompasses a phenomenon called a "donut". I intend to hang myself before I have to figure that one out. Against the backdrop of these - and other - ongoing national policy debates, the government has to admit that it can come up with $700bn. That's $700,000,000,000. If we have had that kind of money all along, where has the political will been to use it to fix other pressing problems? This post is not an argument against the rescue of the financial system. The proper functioning of the credit markets is crucial to the health of the US economy and each individual citizen. I am just utterly amazed that we can afford it. Every mother who has had to use the emergency room as a primary care facility, every senior who has had to cut back on medication, every long-term unemployed person who has seen his or her benefits run out should be out on the street with a pitchfork and a torch hunting for their Congressman and Senator. For decades we have been told that while healthcare, Social Security and other social programs are indeed crucial and deserving, there just is not the money to fix them. Turns out there was the money to fix them, just not the political will. Now of course the money will not be there because it will be used to shore up the financial system - a necessary and absolutely justified measure - but that is not the point. As an aside, it will be interesting to see if any one in Congress has the chops to lard the bailout bill with pork.

ex nihilo nihil fit

"A perfect vacuum with a gaseous pressure of absolute zero is a philosophical concept that is never observed in practice."

Absolute emptiness, absolute zero, the cosmological "nothing": impossible to observe as it does not exist. Philosophically a mind-blower, for sure. But consider this: the experiment proving that maggots do not appear spontaneously is by definition flawed. Since the absence of everything cannot be attained, the environment in which maggots did not appear on meat was simply one of an infinite number of possible environments in which maggots do not "ex nihilo" appear on meat. But conversely, there must be an infinite number of environments in which they do. Anything is possible, material objects can appear and disappear at will (whether they are in a box with Schrodinger's cat, or not). Which is how I am going to explain a whole range of phenomena from disappearing socks, checkbooks and cookies (you are off the hook, kids) and the appearance of grey hair, car dents - oh: and fruit flies.

Off to make dinner

I have been riding out the market meltdown at home (NO! I am NOT unemployed. I just can't make any money in structured product right now. If you can, call me. We should talk). As a result I have been making lunches and dinners and doing the shopping. I do not think enjoying these tasks emasculates me. But I would have to be absolutely sure what "emasculate" means before I confirm that.

How?

I am going to send the link to my blog to a few friends. And to some people who aren't my friends (this is an experiment: will all addressees now think they are in the friend category?). The theory is that this will lead to a viral spread of my blog-link. Viral in the good, internet meaning of the word. Not the one where it manifests itself as an incurable disease and kills millions. Unless that second option makes me rich and famous. Or at least rich.

Why?

My wife - let's call her "Jill" - thought I might consider writing a book. Well, I have often thought I have a book inside me. I have alas! concluded that it will stay there, for the good of all mankind. And womankind. And polar bearkind. And besides, what if it should turn out to be gas? The only thing I have not been blamed for is global warming, and I intend to keep it that way.

But I do have a lot of one-off thoughts I have either written down or wish I had written down - or written down and then wish I had not. This blog will be an experiment, as most blogs are. I intend to write as I think - sometimes in formal, stilted English that gives away the fact that I grew up abroad, and sometimes in very profane colloquial language that will remind those who know me that I am a pig.