Showing posts from April, 2008

On the Significance of Bob Rubin Being a Citi Consigliere

I read somewhere that about 70% of non-sport content in the US papers is PR generated. The New York Times interview with the former US Treasury secretary Robert Rubin that I mentioned below is the proverbial "Exhibit A" in that regard. Laudatory adjectives abound: “elder statesman”, “Yoda” (the wise ass from the Star Wars), “corporate and political wise man,” “consigliere” and, in conjunction with Alan Greenspan, “Olympian duo”.

Olympian duo.

Rubin and Greenspan.


The only way to top that would be to include Larry Summers in the mix and call the trio “The Committee to Save the World.” And the only way to top that would be to add Curly and Moe to Larry and call the bunch “The Committee to Restore Dignified Conduct”. And do that in earnest.

I am not being facetious.

Take “consigliere”; we learned from the article that “people” in Citi went to Rubin to “get a dose of wisdom.”

As popularized and defined by the Godfather movies, the function of a consigliere in a crime fami…

Anatomy of a Crisis: The "Credit Woes" of the Summer of '07 – Epilogue

I had planned to write an epilogue to the “credit woes” series. Then I read the New York Times’ long interview with Robert Rubin this past Sunday in which he was quoted as saying: “I don’t know of anyone who foresaw a perfect storm.”

I suppose this statement is correct in the sense that Bob Rubin does not know me. So as the epilogue and for the record, here is the final page of Vol. 3 of Speculative Capital, The Enigma of Options. The book was published in 2006. The text was written in 2005. As they say, you can check it out.

The role of speculative capital in the creation of the credit derivatives market cannot be overemphasized. Speculative capital is the conceptual rainmaker of this market. It is its underwriter. It brings the credit to the trading arena and ensures its staying ability there by “grooming” it in accordance with the needs of the market. The most outstanding handicap of credit in the new environment is the long time horizon. The traditional credit analysis is “through t…

A Philosopher of Our Time

Nassim Taleb is the man of the hour, sought after by the press, on demand as a speaker in financial seminars.

The sudden fame comes from the success of his most recent book, The Black Swan. Like Taleb’s previous book, Fooled by Randomness, The Black Swan is about the unpredictability of the unknown. For the longest time, everyone thought that swans were white. Then, some folks in Australia came upon a couple of black swans. The popular belief was wrong. One never knows.

Taleb is a self-proclaimed “philosopher of chaos.” No, not a statistician; mass characteristics of random phenomena does not interest him. That was the concern of a more optimistic era when philosophers and mathematicians were looking for, and therefore discovered, order in chaos.

Taleb is interested in chaos, period. And cataclysmic chaos in that, say a thermonuclear accident or an economic collapse; mere mishaps won’t do. (He never tells us why sighting a few black swans entails a calamity .)

That alone would make Taleb …

Anatomy of a Crisis: The “Credit Woes” of the Summer of ‘07 – (10)

I said overnight the technicalities grow in importance. In fact, the important technicalities are always present. The next day, they merely come to the surface.

At 8:30am the next day, the term of the loan ends. The investor is due its $10 million (with the accrued interest). When it is paid, the collateral would be released. This is called unwinding. But where would the $10 million from? We only have $250,000. That is the given of the situation.

Our clearing bank comes to the rescue. As part of its function as the tri-party repo agent, it sends the investor the $10 million and takes the possession of the security as collateral. This is a temporary arrangement. The bank is making a “daylight” loan to us – paying for the security on our behalf – until a new investor is found (before 4:00pm.) When the new investor sends $10 million to the bank, the bank takes the money and transfers the possession of the security as collateral to the investor. Another overnight cycle thus begins.

Here come…

Present at the Destruction: Further Evidence From the Marketplace

A few days back I wrote about the collapse of the insurance business model in the US. I pointed out that the traditional business model is breaking down under the strain of newly developed forces.

Today’s New York Times had a front page article on the multifold increase in the co-payment for expensive prescription drugs. I am quoting selected passages from it as bullet points. The meaning and context is not altered.
Heath insurance companies are rapidly adopting a new pricing system for very expensive drugs, asking patients to pay hundreds and even thousands of dollars for prescriptions for medications that may save their lives or slow the progress of serious diseases...

Insurers say the new system keep everyone’ premiums down... But the result is that patient may have to spend more for a drug than they pay for their mortgages, more, in some cases, than their monthly income…

The system, often caller Tier 4 … is the fastest growing segment in private insurance ... Five years ago it was vir…

Anatomy of a Crisis: The "Credit Woes" of the Summer of '07 – (9)

The “structure of capital and financial markets” is a standard course in every business school. It has a set agenda, designed around descriptions and definitions such as: what is a stock exchange, how corporations raise money and the difference between money markets and capital markets. (The students, like their teachers, rarely appreciate the last point, which is why later in the position of power in financial institutions they think nothing of funding capital market instruments with a money market product such as commercial paper. I mentioned this earlier and will return to it again in some detail because the point needs emphasizing.)

These technical descriptions are at some level important. But they are irrelevant to us. In the context of the discussion of a crisis centered around liquidity and credit risk, the most critical thing we must know about the structure of markets is the function of the tri-party repo market. For that, we need to know the role of broker-dealers and their …

Present at the Destruction

If you live in the US, you are familiar with the Geico lizard. Thanks to saturation advertising on TV, Internet and in the print media, there is no escaping the talking reptile that pushes Geico car insurance with an Australian accent.

The hook is lower premium–music to ears of the mortgage-ridden US drivers in the age of high gasoline prices. But how could Geico charge less, spend millions on advertising and still make money? What gives?

Credit the company’s business model, most unorthodox for an insurance company but of the kind that these times simultaneously demand and create.

Geico refuses to pay the claims. Of course, it cannot do so openly and directly. So it opts for the next practicable solution: it discounts the claims with a vengeance. The damage to your car is $1000? Geico offers $150. If you refuse the offer and sue, the company fights through repeated appeals until the time and expenses of litigation wears you off. This is done openly. So the contingency-fee lawyers are als…