Trader’s Narrative

So basically a small group of bankers (Summers, Paulson, Rubin) that saunter back and forth between private and government jobs, along with regulators (Greenspan, Bernanke, Geithner, SEC, etc) - who don’t really regulate - created a situation where the US taxpayer would foot the bill when the bank’s had finished their shenanigans. Check out the interview with William K. Black, the article about Brooksley Born’s attempt to regulate the CDS market, and other similar articles. Oh and by the way, Fannie and Freddie are about to pay $210 million in bonuses.

Those are just a few picks from the past week’s reading list at news.tradersnarrative.com. Follow the link below to get much, much more:

• FASB’s Mark-to-Market Ruling
• A Few Drops Don’t Make the Glass Half Full
• Geithner’s Plan is worse than nationalization
• Fine-Tuning Candlestick Trading: Combine Moving Average Techniques
• The Regulatory Charade
• One Secret to Life Success
• MIT Blackjack Team perspective on the financial crisis
• 6 reasons I’m calling a bottom and a new bull
• I helped build the bomb that blew up Wall Street

And remember to check regularly since there are new links added everyday.

Lawrence Summers Comments on Jobs, Economy:

Final days of the Hedge Fund Operational Due Diligence book giveaway. Follow the link and submit your email for entry into the draw. Yup, that easy.

Here are just a few picks from the past week’s reading list at news.tradersnarrative.com. Follow the link below to get much, much more:

• The Quiet (Lobbyist Lead) Coup
• Eternal Struggle: Stocks vs. Bonds
• Fast Money, Ratigan Jumps Ship (off to ABC?)
• Should You Your Watch Your P&L While Trading?
• Roubini Likes Geithner’s Plan (!)
• The Why’s & How’s of Pyramiding (the good kind, not the ponzi kind)
• Doug Kass: Raise Cash as Rally Pauses
• Simple Flow Chart of Geithner’s Financial Bailout Plan
• What does one TRILLION dollars look like?

And remember to check regularly since there are new links added everyday.

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

The insistence of AIG to pay $450 million in bonuses dominated the news today. There are a few things that can unite Republicans, Democrats and even libertarians. Well, pretty much every sentient carbon based lifeform in the US is seething.

While the villains of the hour are clear, it is important to remember that at this critical junction in US history, we also have quite a few heroes. Take for example, Beth Israel Deaconess Medical Center. While we want to (rightfully) vilify AIG, we also should to celebrate the heroes.

So how can the Obama administration prevent AIG from awarding taxpayer funded “bonuses” to a handful of AIG executives and traders for nuking the global economy?

Before AIG can be held accountable, the US government needs to grow a pair. Or as the Italians call it coglioni quadrati - literally, square balls. Here are just a few humble suggestions for the Obama administration:

• use the government’s 80% ownership stake to force executives to “voluntarily” give up the bonuses
• introduce a very special tax that would target the bonuses - they get paid but they are then taxed 100% right back to the taxpayer
• buy out remaining 20% - in effect, nationalize it temporarily, then clean house before flipping it
• “leak” the names of all the executives that are clawing for bonuses
• give AIG immunity from any lawsuits that may result by withholding bonuses
• hire some Wall St. type corporate lawyers to find loop-holes
• as a last resort, or just for shits and giggles, send Dick Cheney’s death squad after the lot of them

I’m sure there are other, more creative solutions, so let me know yours.

So the Fed gave $2 Trillion to some banks but won’t name them. Remember that? Bloomberg is suing them to get the information, Congress is asking and being rebuffed. But the WSJ got the scoop!

That and more, in this week’s reading list at news.tradersnarrative.com:

• Fed Using Enron Style Acctg to Bailout Wall St.
• WSJ Names Names: Who Got Secret Fed Money
• (Expected) SEC Fee Increase in April
• Tricks of the VIX
• When Will the Bull Return?
• Credit crunch tent city haunts California
• Investment Banks receive $50 through backdoor
• USO Finds Itself at the Mercy of Traders
• Dispelling Myths About Stocks in the 1930s

And remember to check regularly since there are links added regularly throughout the week.

This is a response to Smith’s essay in the Wall Street Journal on February 7th, 2009 titled “Greed is Good“. In the essay Smith, a former partner at Goldman Sachs argues that bonuses are a necessary part of compensation on Wall Street and that changing this would damage the competitive nature of firms as the best and brightest would leave for greener pastures. Smith uses exhortations and an anecdote from his own past to make his case:

I was … horrified to learn that my annual take-home pay would be limited to my small salary, which accounted for about a quarter of my previous year’s income. Fortunately the partners decided to pay a small bonus out of their capital that year to help employees like me get by.

This was 1973, a time of tremendous economic shock for the average American. What Smith conveniently leaves out is just how much his salary was. I’m willing to bet that even without the bonus (that he did end up getting) he wouldn’t have had to rely on food stamps like many of his fellow citizens.

Of course, the problem is that unlike the story he recounts from the 70’s, current investment banks are not private partnerships but public enterprises which have a fiduciary responsibility to their shareholders. When you look at the amount of shareholder wealth that has been nuked and compare it to the billions that were paid in ‘bonuses’ to generate these losses, you get a glimpse into the lopsidedness of things. Oblivious to reality, Smith expects Wall Street firms to act as if they are still private partnerships when in reality they are public.

We seem to be living in an altered reality: one where a $700 billion ‘blank cheque’ can be written to corporations based on nothing more than the flimsy support of vague promises on 3 pages, while a similar amount for everyone’s benefit has to run the gauntlet of Congress and go on for hundreds of pages in detail. One where banks claim that bonuses are needed to keep ‘talent’… yes, the very same so called ‘talent’ that replaced Wall St. with a giant maw. One where capitalism’s banner is raised proudly when the money is flowing in but where it is hastily lowered and stowed away for CEOs to play the mendicant. One where a person receiving welfare has to jump through hoops and tolerate intrusive government involvement in their personal lives but where banks rage against even the smallest concession when receiving billions of tax-payer’s money.

Camel-Birds
The best analogy to describe this is a Persian parable that I grew up hearing when I would make excuses to evade sacrifice or hard work. As preamble, in Farsi, the word for an ostrich is shotormorgh, a composite of two words: camel (shotor) and bird (morgh).

The story goes that an ostrich was approached and asked to help carry a load. It balked saying, ‘How can you ask this of me? Can’t you see I’m just a bird?’. Then it was asked to fly and take a message for a faraway town. To which it then replied, ‘What? you ask me to fly even though you can see clearly that I’m a camel?’

This insistence to have it both ways has become a hallmark of Wall Street. Just recently there have been a spate of hedge funds that have decided to simply shut down when faced with large losses. Prentice Capital and Tontine Associates are two of them with losses of 88% and 60% respectively. Rather than work hard at earning back the money they lost to clients and reach their high-water mark, they want to start a new fund and start to earn 2/20 commissions right away. Heads, I win - tails, you lose.

As far back as 12 years ago the Bank of England saw the inherent problem with a system that compensated employees for profitable risk-taking, but refused a consequence for any potential losses. Daniel Davies, a senior economist at the Bank of England wrote in 1997:

Employees’ contracts almost always involve limited liability; they may share profits from favorable trading outcomes but it is difficult or impossible to make them compensate their employers for losses…

The recommendation was to stretch out the time period for bonuses but it was firmly rejected by the City who saw it as intervention and an attempt at regulation. Of course, now these same laissez-faire disciples have no problem demanding that the taxpayer rescue them. The Royal Bank of Scotland is 68% owned by the UK government and yet, they are fighting tooth and nail to keep their bonuses.

Heads, I win - Tails, you lose
But beyond this paradox the lesson here is that greed is not good. That may be an odd thing to read on a blog about trading but I say that because, in fact, anything taken to excess will, eventually, create its own downfall. This is a truth that is self-evident. To all, that is, that choose not to ignore it. The rampant excess, hubris and sense of entitlement on Wall Street would make Caligula blush.

The obvious answer is if you want a market economy, then you take your losses along with your profits. If you want to bask in a performance based compensation, then you can’t be compensated as a star when you are the biggest loser. These watershed moments are what underlie cultural shifts. It isn’t just coincidence that the number one movie in the US is Slumdog Millionaire a story of a poor young man triumphing in a society where the rules are written by the wealthy, not the sequel to Wall Street.