Sunday, 29 August 2010

The Conspiracy Theory – 3: The Mother of All Conspiracies

Truth precludes contradictions. That’s the meaning of explanation. Explanation, whether of a murder mystery or events in the world of finance, is the resolving of contradictions surrounding a narrative.

Take the charter school initiative which I said was being driven by speculative capital. So there are a few hedge fund types behind the charter school movement. Does that constitute the takeover by speculative capital of the country’s education system? Putting it differently, is the push for the expansion of charter schools “the same” as creating the CDO market? Schools are not sexy and exciting ventures the way more well-known speculative capital-driven fields such as derivatives and structured finance are. Maybe school privatization is one of those won’t-hurt-to-make-a-few-extra-bucks-on-the-sidelines ventures of a few entrepreneurs. How do we know it is the full frontal assault of speculative capital on public education?

The question contains the nucleus of the answer. We tell the difference between the two from the scale of the attack; the larger the scale, the more contact points with the old system and, therefore, the more “ironies” and contradictions. What sort of ironies and contradictions, you may ask? Look at this story from the Financial Times of July 29:
At the annual convention .. of the American’s largest teachers’ union, the body’s president accused Mr Obama ... of spearheading the most “anti-educator, anti-union and anti-student” administration he could recall.

To a degree that almost no one anticipated 19 months ago, Mr Obama … had alienated the largest single historical provider of cash and volunteers to the Democratic Party – namely the teachers’ union.

Yet Mr Obama’s reforms, which have been taking place at the state level and often in the teeth of union opposition, have brought about what even critics concede is the most rapid school reforms America has seen in a generation.

And it has all been spurred by an astonishingly small sum of cash. Under [the] “Race to the Top” programme, Washington has offered states the prospect of a share of $5bn in prize money for those that carry out the most thoroughgoing reforms of their schools ... In their quest for a slice of these “competitive” funds – so names because the money bypasses the rigid formula funding methods by which Washington’s spending is normally allocated – a majority of state governments have fallen over backwards to amend the way they run their schools.

The teachers’ unions, meanwhile, have been left gasping at the speed with which their objections have been overruled, often by Democratic-run state governments. “The effect of Race to the Tops has really been a very pleasant surprise,” says Robin Chait, an education expert at the Centre for American Progress, a liberal think-tank. “Nobody would have expected that you could leverage so much change, so rapidly, with such a small pot of money.”
Let us see now. The president of the nation's largest teachers’ union calls the Obama administration the most “anti-educator, anti-union and anti-student” administration he could recall.

How could that be? Obama, a community organizer, a Harvard Law Review editor, a law professor who speaks in long sentences being more anti-educator, more anti-union and more anti-student than, say, Bush and Cheney?

In itself, that is difficult to explain. Then we learn that the teachers’ union has been the “largest single historical provider of cash and volunteers to the democratic party.” Given the role of money in U.S. politics and the historical links of teachers’ union with Democrats, the Obama administration’s hostility towards the union becomes downright impossible to explain, especially in light of the non-confrontational, consensus-seeking approach of the administration to all matters large and small.

There is more.

According to the article, “Mr Obama’s reforms [have taken place] “in the teeth of union opposition, by an astonishingly small sum of cash”, a mere $5 billion that in Washington calculus amounts to small change. “Nobody would have expected that you could leverage so much change, so rapidly, with such a small pot of money,” an education expert says.

How many “ironies” did you count in this story, things that did not make sense or were out of the ordinary?

Some unknown persons, obviously in the position of power and authority, placed the $5 billion earmarked for privatization out of the “strict” federal budget allocation process – quite a feat to pull in itself, no matter how small the sum. Some unknown persons compelled the Obama administration to take a stand against its most powerful and generous backers. That, too, is quite a feat; imagine a Republican president taking a stand against the Chamber of Commerce. Then, someone wrote the language of the cynically named “Race to the Top” program in such a way that all 50 states would fight each other and bend backwards to get their hands on a meagerly sum. The meagerly sum was then leveraged many times to spectacular effects. There was strong arming at the state level, too — in all 50 of them. In New York, for example, where the state representatives were cool to the idea of charter school, their salary increase was tied to, i.e., made conditional upon, their approval of the expansion of charter schools.

At the individual level, these are all conspiracies, in the sense that unbeknownst to the general public, they are plotted and executed to benefit a select few.

But those are not the conspiracies I am talking about.

Step back and look at the chessboard of national politics. Who – or what – could accomplish all these feats in a spectacularly short period of time? Which force is it, stronger than the teachers’ union attacking the system simultaneously at the state and federal level, leveraging a small sum into multiple effects, circumventing the federal budgetary allocation process, forcing the state governments to change the way they run their schools and making the FT editors to describe all this as “reform”?

And, yes, and positioning its teachers as hot and sexy commodities in town, the next “masters of the universe”?

The force is speculative capital, the latest offshoot of finance capital, which continually expands to take over the functioning mechanism of all areas of social activity, including, gradually, those of the government. From Vol. 1:
In the absence of government authority, the only remaining source of discipline was private finance, which stepped in and assumed the role of regulator. Governments achieve stabilization through decree; finance capital does it through arbitrage ... In the absence of government regulation, arbitrage-induced equilibrium is the regulator of markets.
The destruction that follows is through and through. First, by speculative capital pervading all areas of social life, and then, when the takeover is complete and “there are no options”, by destroying the arbitrage relations, i.e., the social relations, that gave rise to it.

The willful ignorance not to see this is the true conspiracy of our age.

I will return with the Epilogue.

Saturday, 14 August 2010

The Conspiracy Theory – 2: Vanquishing Ironies, Making Sense of Chaos

It is a common belief in the West that chess was invented in Iran.

Like many common beliefs in the West about the East, the belief is wrong.

The Iranians know that chess is an Indian invention. Legend has it that it was sent to the king of Iran by the king of India as a gift and a puzzle. The Indian challenged his Iranian equal to decipher the game. There were rumors of war between the two countries and the gift was meant to show that Indians knew the art of war.

The Iranian king summoned his wise men who managed to figure out the game. A pleased king asked them to name their reward. They wanted one grain of wheat on the first square of the chess board to be doubled in the next square and so on until all squares were full. The king was disappointed at their modest request and ordered the treasurer to comply. A week later the treasurer came back with the news. You know the story; it was lots of wheat. It must have been the wise men's way of showing that they had truly understood the game.

Why credit Iranians with the invention of chess, then? Because the expression checkmate comes from the Farsi Shah Maat, meaning the king [is] perplexed, confused, unable to escape.

Word origins can provide useful clues to the past, but they must be used in conjunction with other historical, geographical and cultural facts – and common sense; words alone will not do. Checkmate comes from Farsi because Farsi language and literature had a strong influence in lands from India to today's Turkey. Even today in the Taj Mahal you can order tea for two by asking for “do chai”, which is Farsi, as is the name Taj Mahal. But that does not mean that either the people or the place are Iranian.

Here is the proper way of using the origin of words in conjunction with other facts to make a judgment!

Chess is an Indian game and the proof comes from a Farsi word. You see, the bishop piece in Farsi is called ”feel”, which means elephant. There are no elephants in Iran. Iranians do not suffer from undue modesty. They would not have designed a game with the most powerful tactical piece after an animal that did not exist in the country. That would not have occurred to them. Chess had to be created by people who were familiar with elephants and their role in the theater of war.

In return, the legend goes, the Iranian king sent backgammon to India.

But how did the Iranians solve the puzzle? I believe they must have been told of the purpose of the game and the role of king. Absent that information, it would be impossible to unlock the mystery of chess even by observing it being played.

One could of course easily establish that the bishop moves diagonally and the knight in an L pattern. But why they were being moved in one particular manner in one game and a totally different manner and order in the next would remain a mystery. The movements of chess pieces, especially in the initial stage, have no discernible purpose, seem unrelated and at times even seem irrational; think of the occasional sacrifice of a pawn or a rook. What makes the moves consistent is the objective of the game, which transcends individual moves at the same time that it drives them. In fact, we can speak of consistency only if such larger objectives exist.

If you look at hundreds and thousands of chess boards mid game, all pieces have logic for being where they are. The winning side's positioning, though, more closely corresponds to the game’s objective. It was in that sense that Russian chess master Botvinnik said that the game of chess was a search for Truth.

When there is consistency there has to be rationality and rationality lends itself to human understanding. That's how the Indian puzzle must have been deciphered.

As with the game of chess, such is real life. But the correspondence is not exact. In real life, there is more than one player. More importantly – and this is the critical difference between social dynamism with the moves on a chessboard – the individual “pieces” are free men who strive to do what is best for them. They neither know nor believe in a grand objective, which, to their mind, contradicts the individual’s free will.

But while there is no a priori or consciously planned social objective, there is something else at work that functionally serves the same purpose. That something is the social milieu, produced by the interaction of an untold number of individual initiatives, group economic activities, legislations, legal rulings, government programs as well as social, artistic, literary and religious works. This milieu changes due to human activities; everyone knows that “society changes”. The change, however, is not random or haphazard. It has a direction, which acts as the equivalent of the checkmate objective in chess: it provides the motivation for individual moves and thus, directs them. Only the individual actors do not know it. So they move according to what they think is best for them only to be entrapped and, not so infrequently, “taken”!

From the viewpoint of the individual, then, social life is full of contradictions, ironies and unpleasant surprises; everyone will tell you that life isn’t fair. Hence the assortment of helpers, explainers, gurus, advisers – charlatans, mountebanks, knaves and fools – to make sense of it for us or help us overcome it – always at the personal level. Just browse the “self help” section of any bookstore or follow your local and national politics.

The chaos and randomness on the chessboard of social life gives way to clarity if we know the force that drives the pieces. We would then not only know why things are the way they are, but where they are heading; force is a vector and one of its attributes is direction. All the contradictions and ironies disappear.

I will return with the final part of this series.

Tuesday, 10 August 2010

Bad Photographer, Meek Subject, Telling Picture

In today’s New York Times I came across this picture of Bernanke. The Chairman of the Federal Reserve Board is sitting in the middle of an empty hallway next to some elevators, sheepishly looking at the camera.




The Times credited one Mary F. Calvert with the picture. She no doubt went for the powerful-man-alone-in-the-hall-of-power effect; that Citizen Kane stuff, you know. Even the security guard was removed from his post!

My advice to Ms. Calvert is to keep her day job; she must have one. Her unpardonable error is not so much poor staging but the lack of attention to lighting – that Alpha and Omega of the art of taking pictures. The light from the window behind Bernanke creates a halo around his head. But that contradicts Bernanke’s sheepish posture and look, which is not that of a saint but of a mark. Eleventh-century Russian icons looked more alive!




Why does a man with the power to move the world’s economies obey so absurd a “sit” command and agrees to be photographed on a chair in front of elevators? Too polite to say No? Yielding to the judgment of a seemingly professional photographer? Not being aware of the situation at all?

I have already written about Bernanke’s personality traits. They are the character traits of functionaries and palan doozan. Such men are in positions of power precisely because they obey – unquestioningly and every time.

But obey who – or what? Who calls the shots?

The answer is, in the particular point in history we are living, speculative capital.

I will return with parts 2 and 3 of Conspiracy Theory to elaborate.

Monday, 9 August 2010

The Conspiracy Theory – 1: Judging a “Narrative”

Last Tuesday, the Wall Street Journal published a letter by Franklin Raines, the ex CEO of Fannie Mae. (I don’t provide a link because the WSJ charges for access to its articles). Raines had written to protest and correct the errors and misrepresentations of a hack job, of the kind that the Journal frequently publishes about Fannie Mae and Freddie Mac. Referring to the two companies, he wrote:
The losses which crippled the companies were caused by the purchase of loans with lower credit standards between 2005 and 2007. The companies explicitly changed their credit standards to regain market share after Wall Street began to define market credit standards in 2004 ... So the cause of the financial problems for Fannie and Freddie was bad decisions, not their government sponsored status.
The Journal’s rabid ideologues used the letter to go on the editorial rampage againt Raines. In a half-page article titled Rewriting History at Fannie Mae they began: “If you want proof that the Washington establishment had learned nothing from the 2008 financial panic, look no further than the nearby letter from former Fannie Mae CEO”. The Journal complaining about “rewriting history” is a thief shouting “thief!” when his hand is caught in someone else’s pocket.

Raines is not a stupid man. His wondering about “whose narrative” on Fannie/Freddie demise was going to prevail showed his awareness of the role of propaganda and its influence in the way events are reported and recorded. But the same wondering also betrayed a sense of resignation and defeat, as evidenced by the fact that his letter was weak and unconvincing. Raines blamed management decision for the agencies’ problems, akin to blaming gravity for an airplane crash. But why did the people who had successfully run the two companies for many years suddenly become bad decision makers?

Fannie’s ex CEO touched upon this point. He noted that “the companies explicitly changed their credit standards to regain market share after Wall Street began to define market credit standards in 2004”. So something happened in 2004. But he did not elaborate. Perhaps it was the space limitation or the letter was heavily edited. My guess, though, is that Raines finally was defeated. He came to accept his adversaries’ narrative of the events. In that, he is a man of our time, made to talk, think, vote and act against his own interests and beliefs.

Two years ago I documented the deliberate destruction of Fannie Mae and Freddie Mac in a 3-part series. I urge you to read them here, here and here. The destruction was given a go ahead in a conspiratorial meeting in 2001 that was reported in no other than the Wall Street Journal:
A coalition of chief executives from more than a dozen large financial institutions has decided to press for reform of Fannie Mae and Freddie Mac … The decision to seek a review of the way the government-sponsored mortgage giants conduct their business was made two weeks ago at a meeting in Amelia Island, Fla., of the Financial Services Forum … The group, an intentionally low-profile organization of chief executives from the country’s biggest financial companies, backed the successful effort to repeal laws separating the banking and securities industries … Tensions have risen in recent years between the mortgage companies and other financial-service concerns amid fears that rapidly growing Fannie and Freddie would diversify and take business away from other companies.

A few days after this meeting, the WSJ began attacking Fannie Mae and Freddie Mac — and never stopped. The paper has published well over 100 news stories, commentaries and editorial pieces on the subject, not to mention a barrage of negative and accusatory quotes from officials of every stripe, especially Alan Greenspan, about the systemic dangers of Fannie and Freddie and the need to “reign” them.

The incessant attacks softened up Fannie/Freddie and forced them to loosen their lending standards; their strict lending standards had stood in the way of the indiscriminate mortgage lending that was necessary for feeding Wall Street’s CDO machine.

This critical point is now all but forgotten. So is the fact that even the severely weakened and demoralized Fannie and Freddie proved pivotal in stabilizing the falling mortgage market in 2009.

The readers of this blog know these facts. Yet, for every reader of this blog, the WSJ has thousands, if not tens of thousands of readers. In the age of Google, when the number and frequency of the references to a source is taken for its authenticity, Raines’ question about the way a particular narrative comes to be accepted as a fact deserves serious consideration. Consider, if you will, this cross examination in some imaginary court:
OK, Mr. Saber. So there was a meeting of financial executives in 2001. Let us also grant you the point that they actively set out to destroy Fannie Mae and Freddie Mac. But how do you go from there to claiming that what actually happened was the result of this so-called conspiracy? Remember that many of those same executive were burned in the crisis.

As for Alan Greenspan, everyone knows the obscene manner of his speech, although he no doubt considered it sophisticated and politician-like. The point is that everybody can dig a few quotes from him for and against any topic under the sun. So he spoke against Fannie and Freddie. So what?

The proof of conspiracy must be made of sterner stuff.
Is it, then, possible to prove an ongoing conspiracy in the Fannie/Freddie affair – and beyond, in the realm of finance?

The answer is, yes, it is. We only need to define prove, not to manipulate and weaken its meaning but, on the contrary, strengthen it by giving a precise description. Proof is the presentation of Truth. In light of it, all inconsistencies and ironies surrounding a narrative vanish at once, as every chess player knows.

Sunday, 8 August 2010

The Cause of the Financial Crisis in Two Words

The other day I was thinking: ask any knowledgeable observer what caused this financial crisis, and you'll probably get a long, rambling explanation with anywhere from four to ten villains, their identities largely depending on the speaker's ideological/philosophical bent.

But what if that person was allowed only a word or two to capture the essence of the problem? What would the best word(s) be?

Some might say "greed." But that's no good. Greed's a given on Wall Street. If anything, greed is the grease that makes the wheels move over there. The greedy may have become greedier, but this still doesn't supply a satisfying explanation for the whole mess that paralyzed our financial system.

My two words (you're welcome to suggest your own), which provide a prism through which I think most of this crisis can be understood, are simple:

Mispriced risk.

Now for the walk through. First, the obvious stuff. Peel off the outer layer of any CDO and you'll find plenty of mispriced risk. What about that super senior tranche rated AAA, while it rests on mezzanine slices of crappy mortgage securities? Way mispriced.

The infamous Gaussian copula that aided the creation of AAA gold from subprime dross? That's a handmaiden to mispricing. And the credit raters: they're right at the center of the rampant mispricing, slapping AAA labels on stuff they didn't understand as they grubbed around for rating fees.

How did the credit crisis get so large? Mispriced risk. If a AAA corporate bond yields say 3.2 percent, and a AAA chunk of a CDO yields 3.5 percent, what are you going to buy (assuming you trust the ratings, and AAA implies the same level of risk, no matter the security). So money will start pouring into the new AAA category that promises the same low risk but a higher return.

What about credit default swaps? Consider a big issue there: many were sold much too cheaply, considering the dangers they were insuring.

Again: mispriced risk.

What was at the heart of the seize-up in the credit markets in 2008? Remember, the shadow banking system froze up. Counterparties to repo transactions wanted much bigger haircuts on collateral they were taking for overnight lending. Why? Fear of mispriced risk on the collateral. In other words, that collateral purported to be AAA might actually be some variant of C.

You could even argue that excessive leverage ties back to mispriced risk. Why is a bank willing to take on so much leverage? Because it thinks its overall risk is actually fairly small. Just look at the "value at risk" metric, and its widespread adoption, and how it lulls Wall Street into a false sense of security.

For their part, regulators failed to do a number of things that would have helped correct the epidemic of mispriced risk. They failed to insist on greater transparency that would have flushed some of this risk out into the open. They failed -- actually, didn't even attempt -- to reduce the complexity of financial instruments that artfully conceal risk. They simply abdicated their duty to police the financial system as instruments that mispriced risk created a vacuum, sucking in huge piles of cash because investors were enticed by the prospect of a free lunch.

The financial crisis, explained, two words: mispriced risk.

Thursday, 5 August 2010

Taleb With a Telling Anecdote on the Regulatory Mess

Nassim Nicholas Taleb weighs in on the regulatory mess in our financial system through a curious tale of being approached while at Davos with the following (legal) proposal to avoid FDIC regulations:
[He] tried to sell me a peculiar investment product. It allowed the high net-worth investor to go around the regulations limiting deposit insurance (at the time, $100,000) and benefit from coverage for near unlimited amounts. The investor would deposit funds in any amount and [the] company would break it up in smaller accounts and invest in banks, thus escaping the limit; it would look like a single account but would be insured in full. In other words, it would allow the super-rich to scam taxpayers by getting free government sponsored insurance. Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.
Got it? I left out the name of the salesman for this scheme for shock value, because it was none other than ... Alan Blinder, a former Vice Chairman of the Federal Reserve Bank of the United States.

So, in case anyone was left wondering, government officials apparently don't feel any regret/guilt/sense of impropriety about crossing over to the other side -- going from regulator to regulatee -- and profiting off the knowledge/connections gained while enforcing financial rules.

But Taleb makes one other must-ponder point dear to my heart:
... the more complicated the regulation, the more prone to arbitrages by insiders. So 2,300 pages of regulation [i.e., the current financial reform bill] will be a gold mine for former regulators. The incentive of a regulator is to have complex regulation.

Second, the difference between letter and spirit of regulation is harder to detect in a complex system. The point is technical, but complex environments with nonlinearities are easier to game than linear ones with a small number of variables. The same applies to the gap between legal and ethical.
I've repeatedly said on this blog that the answer to our financial system's regulatory woes is not a rules-based approach of trying to anticipate every situation, of trying to plug every hole, of trying to cover every contingency in this or any other possible world. It's impossible to do. We need to look at more flexible solutions, such as principle-based regulation with teeth. We're foolish to head back down this path of growing a new regulatory bureaucracy that is doomed to fail as smart financiers parse out endless loopholes.

Monday, 2 August 2010

Top 5 Sexiest Rib Cage Tattoo Designs For Women

Rib side tattoo is definitely the most recent sexy thing in the tattoo world because women and girls are searching for methods to express their personality and feminine beauty through body art. The rib cage is positively an attractive and beautiful location for a female to get tattooed since it displays the natural curves and shape of her body. They are even highlighted with guaranteed designs that are form fitting and naturally flattering to the rib side of her body. Here are the top 5 choices when it comes to tattoo pieces on the rib cage for girls.
A girl can never go wrong with flowers as they are naturally beautiful and form fitting for her body. The language of flowers always speak about what is important to a female's heart and what she believes or wants to express. The most sought after floral designs on the rib side are cherry blossoms, lotus, lily, rose and Hawaiian flowers like orchids, hibiscus and plumeria.

Butterflies

A butterfly, no matter how common it is will always be on demand because it can never fail to relate to what a girl is going through in her life. Whether it be about change, transformation, freedom and beauty, a butterfly can always transcend this meaning. It can be a single butterfly or it can be groups of them fluttering on the side area of girl's body. With their stunning colors and intricate line details, the butterflies are absolutely a great piece of tat art on the rib cage.



Stars

Star tattoos are very flexible and versatile and they always look interesting. They can definitely make a girl shine especially if they are tattooed on the rib with bright colors like yellow, red, blue and orange. It should be noted too however, that they can look pretty well themselves if they are inked in plain black colors. That is just the magic of star tattoos, no matter how simple they are, they never fail to make a statement of their own.

Quotes

Lettering tattoos composing of words from quotations, poem, line from a movie or a book maybe or verse from the bible are really the hot items these days in the tattoo world. And the rib cage is certainly topping the list for this kind of tat theme as its an area of the body that is ample enough to accommodate certain lines that are meant mostly to be inspirational and motivational.

Fairies

Fairies are dainty and magical creatures that has always been a part of a girl's childhood memories. They have seen them in fairy tale books and movies where they are portrayed as this beautiful being that grants wishes and makes dreams come true. They can also be expression of a girl's naughty and fun, flirty side who just wants to have fun and be free


Sunday, 1 August 2010

Epilogue –The Goldman Case: The Insanity of the Rational

If the securities laws in the U.S. were consistent, there would be no Goldman case. A consistent body of the securities laws would be based on a scientific understanding of finance and the legal and the economic definition of a “security” would match. Since neither a CDO nor a CDS is a security, matters related to them would fall outside the jurisdiction of the SEC.

But the law is muddled. The Securities Acts (of 1933 and 1934) and their various amendments do not define a security (because they could not). Rather, they confer the status of security on select products and contracts by declaration, by designating them as such. A note is a security because the statute says so. So is a stock, for the same reason. How about a “product” such as a synthetic CDO that is not named in the statute? That is referred to case law, to be decided in light of the various definitions and tests for a security that courts have established over the years.

But judges could shed no more light on the meaning and the definition of a security than economists could. In fact, they have made the darkness opaque by their case-based improvisations which have led to contradictory rulings. The Supreme Court itself took up the question of what is a security at least 10 times in the past 65 years. In what must be a record, each time it reversed. That is, in every case, it rejected the interpretation of the court of appeals which was naturally based on the last interpretation of the Supreme Court itself.

I showed in Vol. 2 that to define security, we must begin with capital and its various forms. A security is the evidence of ownership of notional (fictitious) capital. There could be no security without capital outlay, which is why CDOs and CDSs are not securities. They are bets and fall under contract law, not securities law.

In reality, the securities law, with all its contradictions and inconsistencies, exists and applies. Goldman could not question the jurisdiction of the SEC, because its offering memorandum said that the CDOs were notes, and the note, as per statute is a security.

In the mean time, the SEC charges, pertaining to Paulson’s role in selecting the securities, whether that role was clearly disclosed and whether IKB and ACA were sophisticated investors, fell into the uncertain areas of law and perception. Neither the SEC nor Goldman could risk a trial that could go either way, and had to settle, which they did. That was the end of the case legally.

But there point to be made it, philosophically and socially.

Philosophically, the case gives an excellent opportunity to understand the meaning of Hegel's famous declaration that history is rational.

In this statement, Hegel is not rationalizing or justifying the unjust and criminal acts of the past. What he means, rather, become clear if we understand the meaning of “rational” in Hegelian usage. What he means by the word is something whose history of development can be logically explained – logical in the sense of how “one thing led to another”. The securities law is inconsistent and irrational in the common usage of the words because the statutes and various rulings and interpretations contradict one another. But these shortcomings are rational in the Hegelian usage of the word because their history – how the existing and therefore, “real”, tangled mess came to be – can be satisfactorily explained, as I did in Vol. 2. I will return to this point later.

Let us now look at the case socially.

In what is undoubtedly the most profound statement in Western philosophy – it is the irreducible minimum of the core Western thought, including Karl Marx’s conception of value, and more pointed than “man is the product of his product” – Jean Paul Sartre writes that the future comes to man through things in so far as it previously came to things through man. Man creates things which then compel him to act in a certain way. A machine demands to be used.

The tripartite relation – man, thing, future – is the formula of social change. It applies with equal force to conceptual creations, which is the form the “thing” takes in the realm of finance. Given the man and the thing, the relation affords us a look into the future, not deterministically or pictorially, but logically.

We are familiar with man’s use of the mortgage CDOs and the resulting economic/financial crisis that hit many countries across the globe. But that is not the full story and the impact goes further – and deeper. The mortgage CDO market, you see, has gone bust, but the CDO model, the CDO idea, is around and demands to be used. Our man will gladly—in fact, insistently—comply.

A few words about the “man” are in order here.

Sartre’s man is the abstract man. He stands for history. That is why we understand his motive for creating things.

A CDO, by contrast, is a specific product. To understand our man’s insistence – even his compulsion – for continuing to use this destructive tool beyond the realm of finance, we need to know more specifics about him.

Delving into the man’s personality is not inconsistent with my oft repeated emphatic remark that the subject of finance is not men but capital in circulation. The aspects of man’s personality that are of interest to us are precisely the ones that are shaped by speculative capital; they are none other than the way of operation of speculative capital that it instills in men.

In several places I have explained this subjugation of man to speculative capital whose most noteworthy aspect is narrowing the man’s range of activities. From Vol. 1:

Because speculative capital dominates the financial life of the society, it elevates the men who have internalized its modus operandi to the position of power. These men with limited freedom of action then become palan doozan at the helm.

So, no, it is not inconsistent with the dialectical approach to finance to want to get closer to men in flesh and blood who do speculative capital’s bidding. In fact, it is necessary for understanding their motivations and manner of thinking. And the best way to learn about them is to go to their natural habitat. That would be inside the Wall Street Journal, which had a recent article about the ways of Goldman mortgage traders. It was an enlightening piece:
Young traders in Goldman’s mortgage unit were told to take a cue from Tom Brady, the New England Patriots quarterback regarded as methodical and cool under pressure ... For a group filled with Red Sox and Patriots fans—and led by a Texas A&M University graduate who traveled back to his alma mater for football games—the analogy struck a chord.
Manliness, then, was the order of the day—tough, macho men, “cool under pressure”, qualities that the trading room apparently needed. Note the Journal’s allusion to the Patriots and the Red Sox, both New England teams, implying that many traders were Harvard or MIT graduates. These were not only tough men but smart men, men with qualities, which they showed. From the same article:
Goldman Sachs Group Inc.’s mortgage traders ... made markets in more than just bonds during the real-estate bubble.

They also cast bets on a White Castle hamburger-eating contest.

In December 2007, after the firm distributed multimillion-dollar bonus checks in part thanks to bets on a mortgage meltdown, about 10 Goldman mortgage traders, surrounded by dozens of cheering colleagues, wolfed down the burgers, according to attendees. Bystanders wagered cash on how many burgers the traders could eat.
One of the “in” things in Versailles in the dying days of the monarchy was for the men to engage in sex with several women in front of the king and his courtiers. The men with the most endurance were recognized.

Modern day macho traders have neither the means nor the uninhibited playfulness of the Versailles paramours. So, they go down one rung, to what every advertiser knows to be a convenient substitute for sex: food. They stuff themselves with junk food.

But I suspect that like all modern men, they got the “correspondence” of sex and food all wrong. Rumi was probably closer to the truth. In one of the few occasions that he departs from the decorum, he compares overeating – the throat that will “take in anything” – to the vagina of a female donkey.

Who is the real man, then? “Man is one who finds fault with himself”, wrote Sa’di. Note the depth of this observation, with the implication of “watching oneself to correct for errors” that John Berger considers to be the hallmark and meaning of genius.

Returning to the mortgage traders, did they stay cool under the pressure, as inspired to do so by their sport heroes? The same article, again:
Joshua Birnbaum, a Goldman trader from Oakland, Calif., played a major role in the short, or bearish, bet that led to nearly $4 billion in gross profits for Goldman, these people say. In February, Mr. Birnbaum, then in his mid-30s, briefly lost his cool and slammed down a phone receiver, these people say, when a more senior bond trader insisted on unwinding some of his trades to cut risk.
The “February” is February 2007, when the credit indices had already fallen sharply from their high and there were rumors of trouble in two Bear Stearns funds. These were the mortgage funds whose failure several months later was the harbinger of the coming financial collapse. Our man is nonchalant, and throws a tantrum when told to play it safe. According to the article, he took it easy in the summer, vacationing in the Hamptons, learning French. At the end of the summer, having thoroughly relaxed, he was ready for a big play:
Months later, Mr. Birnbaum argued to the firm’s top brass that Goldman should buy as much as $10 billion in subprime assets, according to an email, even though a plunge in risky home loans was roiling credit markets.

There is “an extraordinary opportunity for those with dry powder,” he wrote in a late August email to Goldman Co-Presidents Gary Cohn and Jon Winkelried, among others.
In late August 2007, the crisis in the credit markets was in full swing; the markets had gone down steadily since the beginning of the year and the phone slamming incident. Within two months, the CEO of Citigroup would be forced out after the bank posted $11 billion in mortgage related losses. By then, no one who followed the markets or read the papers had any doubts that the worst was yet to come. From the Financial Times, August 1, 2007:
The ratings implied by the credit default swaps for Bear Stearns, Goldman Sachs, Merrill Lynch and Morgan Stanley, for example, have fallen to “junk” status this month – although in reality they all carry investment grade ratings … The disparity reflect[s] investors’ awareness that many institutions have significantly larger embedded losses and risk exposures that they have acknowledge.
The hot shot trader interprets all this to mean that the time has come for “bottom fishing”. He pushes for a $10 billion investment in subprime junk, a recommendation that, if accepted, given the leverage ratios of broker dealers then, would have wiped out the firm. On the plus side, he had a discriminating taste:
A healthy eater with a daily workout regimen, he wouldn’t touch the food at a McDonald’s despite being famished after a long flight that July, recalled Kyle Bass, a friend and hedge-fund manager, in an interview at the time. Mr. Birnbaum also avoided participating in the burger-eating contests.
You have the picture now. Imagine a Harvard or MIT MBA who has been consistently wrong over an extended period of time about the most devastating financial crisis in the past 100 years and yet, will slam the receiver on you if you second guess his trading idea. A repeat offender, in other words, a perfect antithetical specimen to Sa’di’s idea of a man.

No match in heaven was ever more harmonious or binding than the one between this man and a CDO.

A CDO is a segregation vehicle. It turns a pool, i.e., an average, of mortgage bonds into a caste system: this is super senior, this is the mezzanine or the middle, and this is the bottom of the barrel, the toxic waste to be written off.

In that regard, a CDO is similar to linear programming, only linear programming is a mathematical method with strict rules and produces numerically incontestable results: there is only one “best” way – the optimum way, it is called – of flying 20 airplanes between 15 cities so that the profit will be maximum, or costs, minimum.

By contrast, everything about a CDO is arbitrary. The number of bonds, the type of bonds, their maturity, ratings, number of tranches – they are all in the discretion of the manager. To describe and convey these layers of arbitrariness so that they are understood and agreed upon by all the parties, long legal documents must accompany any offering of the CDOs.

That is the relation, then, between man and the thing he creates. The thing has the imprint of the man, the way he sees the word: mostly rabble, some in the middle, and the few with discriminating taste at the top who would starve rather than “touch the airplane food”. They are th VIPs or super seniors. A perverted, albeit pointed, example of the identity of knowing and being!

That this man is the instrument and personification of speculative capital goes without saying. Speculative capital is capital engaged in arbitrage. It profits from the differences, the “spread” between the high and low. When no such difference exists, it moves to create one. A pool of mortgages is not arbitrageable, so speculative capital, in the personas of hot shot traders, financial engineers, structured finance specialist and alike divides it into the “super senior” and “toxic waste” tranches. Arbitrage could then proceed.

Because arbitrage is self destructive – it eliminates the opportunities that give rise to it – speculative capital is self-destructive. But that statement must be properly understood. Speculative capital does not destroy itself. If it were so, there would be no speculative capital. Rather, it destroys the conditions that give rise to a particular form of arbitrage. Because these conditions are, by definition, social, speculative capital destroys social relations and institutions supporting them. Think of homeowners, mortgage lenders, banks, mortgage investors and even rating agencies who were undone by arbitraging of the CP and mortgage markets.

But after each collapse, destroyer rises out of the ruins to move to the next “play”; en ma fin est mon commencemet is its leitmotif. And the next play could be anywhere. Speculative capital is nomadic and not bound to anyone market, location, currency or concept.

This limitlessness of speculative capital's “theater of operations” is a critical point because the destruction that follows its visitation and the collateral damage it leaves behind can now affect every part of the social system and not the financial markets alone. In fact, the latest such play is currently unfolding in the realm education under the guise of the fight over the “charter schools”.

The idea of charter schools is a simple one: the government pays you to take your child to the school of your choice, including private schools.

The idea started a couple of decades ago when the Hassidic Jews in a small village in New York pestered the state to fund their religious schools. The state, through its highest court, repeatedly refused, correctly pointing to the separation of the church and state that is the First Amendment of the U.S. Constitution. The Jews pestered more and then pestered even further until improbably they got their way. Or, perhaps, not so improbably, if you read the last post in this blog.

This is not a place to expound on the Doctrine of the Separation of Church and State in the U.S. Constitution that was championed by no other than Thomas Jefferson; Google the subject or read a simple explanation here and you will get the gist of the matter. Suffice it to say that the plain language of the text and the forceful manner in which it is stated categorically rules out the U.S. government support for any religious institution. Any reading to the contrary would be a repeal and not an interpretation of the First Amendment. Imagine the government of the Islamic Republic of Iran supporting and funding a whiskey distillation plant.

Yet, under the relentless assault, the Supreme Court – the entire the system, really – caved in. The public funding of the religious schools received a green light and soon became a fait accompli. Here is the result, in the front page of the New York Times:
“Eretz Yisrael sheli yaffa v’gam porachat!” – My land of Israel is beautiful and blossoming! … Aalim and Aalima are not Jewish … But at the Hebrew Language Academy, they fit right in ... The school’s organizers say it has been so successful that they plan to help create dozen like it ...

Charter schools are publicly financed but privately run, and in some cases attract substantial private support. At Hebrew Language Academy ... some backing comes from Michael H. Steinhardt, a retired hedge fund manager who has given away more than $200 million and is a supporter of Israel and Jewish causes.

Some civil libertarians have criticized the school, saying that it is too difficult to navigate the church-state divide, particularly around Israel, a country with explicit ties to religion. “Israelis themselves have a hard time around the question of whether Israel is a Jewish state or a democracy,” said Charles C. Haynes, a senior scholar at First Amendment Center in Washington. “Why would we want to involve a public school here in that question?”

Mr. Steinhardt’s daughter, Sara Berman, the chairwoman of the school’s board, said that learning about Hebrew and Israeli culture was no different from learning about Bastille Day and baguettes in French class. “This is a dual-language school, contextualized by a rich culture,” Ms. Berman said. “To say that you can’t learn about what it is like to go to a shuk in Jerusalem because it’s too complicated or tied to religion or politics, that’s just not the case.”
According to the Times, there are two teachers in each class, one of them always a Hebrew teacher. The food is kosher and students are taught “Eretz Yisrael sheli yaffa v’gam porachat!” Just like baguettes. And the expansion plans are under way, courtesy of the U.S. taxpayers.

Speculative capital exploits the arbitrage relations on the basis of conditions that it first finds them. Baguettes and kosher food are the same to it. In the Hebrew Academy model of public-money-for-private-education it recognizes an opportunity and moves to expand and exploit it; the presence of an inveterate speculator like Steinhardt is never coincidental or benign. But a full exploitation of this particular opportunity requires the destruction of the existing public school system. And so it is resolved. It is Fannie/Freddie's destruction redux under the banner of improving education through “charter schools”.

It is beyond the subject of this post to show every aspect of this front assault on the U.S. public education system. A few highlights will suffice. Read the following stories and keep in mind that, as I pointed out in Vol. 1, “hedge funds are the functional form that speculative capital assumes in the markets.”

The New York Times reporting “How charter schools became the ‘hot cause’ for New York’s hedge fund managers”:

Mr. Pertry, 38. and Mr. Greenblat, 52, may spend their days poring over spreadsheets and overseeing trades, but their obsession – one shared with many other hedge funders – is creating charter schools, the tax-funded, independently run schools that they see as an entrepreneurial answer to the nation’s education woes. Charters have attracted benefactors from many fields. But it is impossible to ignore that in New York, hedge funds are at the movement’s epicenter.

“These guys get it,” said Eva Maskowitz, a former New York City Council member, whom Mr. Petry and Mr. Greenblatt hired in 2006 to run the Success Charter Network, for which they provide the financial muscle, including compensation for Ms. Moskowitz of $371,000 her first year. “They aren’t afraid of competition or upsetting the system. They thrive on that.”
I bet they are not. I bet they do. I could not have said it better myself.

But what form does this obsession take in practice? How, in other words, do the financiers intend to “upset” the system? Under the heading “Charter School’s Unlikely New Cheerleaders: Financiers”, the same paper gives the answer: with a “laserlike focus in the political realm”.
When Attorney General Andrew Cuomo wanted to meet certain members of the hedge fund crowd, seeking donors for his all-but-certain run for governor, what he heard was this: Talk to Joe.

That would be Joe Williams, executive director of political action committee that advances what has become a favorite cause of many of the wealthy founders of New York hedge funds: charter schools.

Wall Street has always put its money where its interests and beliefs lie. But it is far less common that so many financial heavyweights would adopt a social cause like charter schools and advance it with a laserlike focus in the political realm.

Hedge funds executives are thus emerging as perhaps the first significant political counterweight to the powerful teachers union, which strongly opposed expanding charter schools in their current form.

But the money managers are drawn to the businesslike way in which many charter schools are run; their focus on results, primarily measured by test scores; and not least, their union-free work environments, which give administrators flexibility to require longer days and a longer academic year.
The clueless reporters think that hedge fund managers have embraced the charter schools as a “social cause”. Yet, almost despite themselves, they manage to covey the role of speculative capital in pressuring and shaping the political/legal system, about which I wrote in detail in Vol. 1.

The pressure goes beyond the states. It is applied with particular intensity and focus on the federal level because the wholesale dismantling of the country's education system requires the active participation of the federal government. Under the Bush administration, the code word for the “project” was No Child Left Behind. Under the Obama administration, it is a called Race to the Top. Here is how it works. The article in question pertains to Colorado, but as you will see, applies to virtually all states:
Democrats backed by the state’s largest teachers’ union nicknamed legislation overhauling Colorado’s tenure and evaluation rules the “teacher scapegoat” bill, and several lawmakers wept in public sessions during their monthlong battle to stop it. But other democrats joined with Republicans to pass Colorado’s law, the most comprehensive of a dozen similar bills passed around the nation this year, in part to increase states’ chances in a $4 billion federal grant competition. Louisiana, Oklahoma and New York also approved bills modifying their tenure and evaluation rules in the last week just in time to meet Tuesday’s application deadline for Round 2 of the competition, known as Race to the Top.

This flood of legislation, along with new rules in many states allowing for more charter schools, pioneering union contracts in several cities and a state-led effort to rewrite the nation’s academic standards, have made this spring a watershed period ... With states across the nation facing huge budget shortfalls, governors, legislators, mayors and educators in about three dozen states have been working to win Race to the Top money by bringing their school policies in line with President Obama’s education agenda.
Read the last paragraph again and summarize it: cash-strapped states are passing a “flood of legislation” to get their hands on the federal dollars whose conditions are dismantling their local education system.

In this regime, the government pays the students to go to the private, i.e., “charter”, school of their choice. Through various incentives, including tying the teacher's salary and job security to the reading score of the students, the hope is that the reading skills of the students improve. That, in any event, is the pitch. The test score is the equivalent of profit here, the only thing that matters. That is not surprising because the charter schools are run by the hedge fund managers.

The students who can leave are the lucky ones. They are the “super senior” tranche.

But the charter schools, by definition, cannot take all the public school students. Many will be left behind. Those are the toxic waste.

That is how the CDO model is applied to the education arena.

In a few places in this blog, I criticized others for confusing social and natural phenomena. Yet, as you have no doubt noticed, I occasionally use the natural expression of “with the inevitability of night following day” in reference to social relations.

Now, you see why and when. Take a public school of some size. Give money to those who could leave for smaller, better-equipped charter schools. What do you suppose will happen to those left behind – the students, who, for whatever reason, but mostly for financial reasons, cannot afford to move?

The answer is that with the inevitability of night following day, they are dead. May be not physically and immediately, but socially and gradually. They are the forsaken, the abandoned, the left behind. And they know that. There is no fooling oneself there.

The name of the program under various administrations? No Child Left Behind. The Race to the Top. There you have it.

But are these people sincere? Do they really believe in the merits and virtues of the privatization of education or are they mocking us?

The answer is that they are mocking us. For proof, we have to momentarily return to the Goldman case. (When did we really leave it?)

You no doubt recall that in addition to Goldman Sachs, a 28-year old trader in the firm by the name Fabrice Tourre was also charged with fraud. (I found it surprising that he was not included in the final settlement and was left to fend for himself.)

As part of the investigation, the SEC had subpoenaed his emails, some which found their way to the papers. One message was particularly revealing. In the beginning, referring to himself in third person as the last man standing, he wrote:
Seul survivant potentiel, the fabulous Fab ... standing in the middle of all these complex, highly levered exotic trades he created without necessarily understanding all the implications of these monstruosities !!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer will more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!
So he knows! Of course, being a trader, he cannot help taking credit for the ways of justifying his acts. What he writes about the efficiency of capital markets is not his justification but what is formally taught at every MBA program and every economic course in every major university in most of the world. And the man knows it is all bunk.

What a rogue and peasant slave I must have been to criticize official economics and finance, thinking that I was divulging something new. Yet, there he is, a pipsqueak of an engineer half my age who, in a few lines, does the subject more justice than I ever could.

Of course, if he knows that, then his more sophisticated, phone slamming colleague knows that. And if he knows that, then his boss, and his boss’s boss knows that. They all know it.

And yet, they do it. More to the point, they are allowed to do it.

And all is rational, all the actions capable of being fully and satisfactorily explained. The hedge fund manager who sets out to replace the existing education system with a privately run patch of schools because he will make money from it; the politician who toes the line because he gets campaign contributions from him; the parent who wants nothing but the best for his child; the educator who agrees test scores are the sole measure of educational success; the legislator who adapts federal standards to get his hands on federal money – the actions of all these actors in this theater of the absurd is rational.

Therein lies the madness.