Showing posts from February, 2008

Finance as the Discipline of Faith

Here is the economics columnist of The New York Times, Paul Krugman, on the cause of the recent financial crisis (Feb 15, '08):

Why has a crisis that began with loans to a limited group of home buyers ended up disrupting so much of the financial system? Because, ultimately, it’s more than a subprime crisis; indeed, it’s more than a housing crisis. It’s a crisis of faith.There you have it: if only people had faith. The fault, dear Brutus, is not in our stars, but in ourselves.

A neo-liberal New York sophisticate is turned into a new born Christian – or is it Jew? – under the onslaught of events whose cause he does not recognize much less understand.

I will return with Part 3 of the "Credit Woes”.

Anatomy of a Crisis: The "Credit Woes" of the Summer of '07 – (2)

i) A nomadic capital with the need for rapid deployment under varying circumstances needs a new organizational shell to operate; the old mutual fund structure, where the type of activities must be specified in advance, would not do. Hence, the rise of hedge funds, where prospectus and offering memorandum give virtually unlimited discretion to the managers to engage speculative capital in spontaneous opportunities anywhere they arise.

Hedge funds are the organizational/legal form that speculative capital assumes in the market.

ii) Flexibility of its own structure is not sufficient for rapid execution; speculative capital needs accommodating market conditions as well. To that end, it adopts the derivative structure – long the narrowly used tool of farmers and commodity producers – to its own temp. Derivatives are the ideal vehicles for “linking” one market with the other.

Derivatives are the functional form that speculative capital assumes in the markets.

iii) Speculative capital does not …

Anatomy of a Crisis: The "Credit Woes" of the Summer of '07 – (1)

In the summer of 2007, financial markets in the US and UK suffered a heart attack.

The events leading to this seizure have been covered in detail from many perspectives but always within the same prescribed framework: the crisis as the culmination of a series of unfortunate events set in motion by (choose your emphasis) greedy traders, irresponsible lenders, foolish borrowers, sleeping-at-the-switch rating agencies and feeble regulators.

The focus on the human element makes for good storytelling and has an evangelically uplifting bent that is appealing: If only the bad guys were to be replaced with good guys – something definitely in the realm of possible – the wrongs will be set right. The fault, dear Brutus, is not in our stars, but in ourselves!

Such takes on the crisis are not inaccurate; they are irrelevant. The subject matter of finance is not people; it is capital in circulation. It is silly to point out that “ultimately” things happen in markets because people take actions; capit…

Two Views From the Top

Here is what Gary Crittenden, Chief Financial Officer of Citigroup, had to say about the losses Citi suffered in CDOs, courtesy New York Times:We have a market-risk lens looking at those products, not the credit-risk lens looking at those products. When it in fact was a credit event.The bank, we learn, was “caught off guard”.

Here is what John Thain, the CEO of Merrill Lynch, had to say about the losses Merrill suffered in CDOs, courtesy Financial Times:There were a number of failures. First on the risk management front. This was really focused on the management of the risks of the trading desks because actually the credit risk management, particularly on the leveraged lending side, was very good but on the market side it wasn’t.According to the Citi CFO, the problem was the lack of attention to credit risk.

According to the Merrill CEO, the problem was lack of attention to market risk.

Both men are talking about the multi-billion dollar losses their institutions suffered trading the sam…

Bankruptcy as Strategy and Tactic

In an article about the recent credit squeeze, Financial Times (February 5, p. 20) reminded us:
Several years ago, Hicks Muse and Kohlberg Kravis & Roberts each wrote cheques to acquire Regal Cinemas. They then loaded an additional $1.8bn in debt on to the company. The movie chain could not service all that debt and filed for bankruptcy protection.

Distressed debt funds paid 60 cents on the dollar for the debt, acquired control of Regal from the two private equity firms and eventually reaped windfall profits on the investment.These few sentences make the modus operandi of buy-out firms clear as day light. Take control of a company and saddle it with a large debt that it cannot service. That is the tactic. The strategy? To drive the said firm into bankruptcy. The aim is "to reap windfall profits," for all concerned, including the lenders. All is calculated, methodical and systematic.

On this subject, the liberal columnist of the Times, Paul Krugman, has not one word to throw…

O Judgment!

That in the midst of the current market mayhem my first post on this blog is about a Supreme Court case could reveal a thing or two about me. So consider this a self introduction.

The case in point is the just decided STONERIDGE INVESTMENT v. SCIENTIFIC-ATLANTA. The editors in The New York Times and Financial Times gave it prominent coverage, so I reckon they understood its importance. But I have not seen any commentary and the case cries out for a commentary.

The facts are not in dispute. I quote from the ruling:
Charter, a cable operator, engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations ... The fraud included misclassification of its customer base; delayed reporting of terminated customers; improper capitalization of costs that should have been shown as expenses; and manipulation of the company’s billing cutoff dates to inflate reported revenues.
In other words, you name it, they did it. As for details:
In late 2000, Charter execu…