The Bald, The Beard & The Ugly (Inside Job, The Movie)

This was posted back in November 2008, and published in StarBiz as well. Well, they finally made a movie of the subprime mess. It was superbly done, I must say. Matt Damon was the narrator. I loved the many interviews, especially the ones fronting for the bad guys twitching and lying through their teeth ... Funny thing was, the bad guys are not just your usual suspects, they included many economist professors of high regard.

To watch the movie and to read my dated posting, I think I should have made the movie myself... lol.

I was watching the uncomfortable grilling by the US lawmakers on Ben Bernanke and Henry Paulson on the US rescue plan. Pity those two guys. They are trying to fix a problem which was inherited and they have to suffer the embarrassment of trying to persuade the lawmakers to approve the funds.

But who really are the culprits that brought about such a calamity? I shall try to ascribe blame to the relevant parties. But please note, it’s a highly subjective issue and everyone has a different opinion. Here’s my two cents worth (and rapidly diminishing two cents in value):

The blame game:

30% - Management of Investment Banks & Mortgage Lenders

They were greedy and overpaid. They had thrown risk management out the window. When the going is good, they pocket more than their fair share.

Paulson (left) and Bernanke could have tried to reverse the damage in their early days as they basically inherited a huge problem.– AP

The worst punishment they got was to walk out the door with nary an apology. The vast amount of liquidity in the system and the thirst for mortgages prompted them to “invent” new fangled instruments to package these loans and resell them, with little regard to the leverage effect.

Lenders kept pushing adjustable-rate and subprime mortgages, while investment banks bundled millions of risky loans and resold them to investors.

It was when these investment banks started to buy these same instruments that they really decimated their capital.

15% - Alan Greenspan

He will continue to deny it was his doing, but since 2001, he advocated lowering interest rates and continued a strong money supply growth policy.

That prompted the public to buy properties and even speculate in them. Greenspan was well known for lowering rates aggressively to counter any crisis €“ the query was that by doing that markets were never allowed to adequately correct the imbalances.

This led to the credit explosion.

He must have noticed the deterioration in the credit market back in 2003 and 2004 or was just plain blind. But he hadn’t warned lenders of using the “non traditional mortgages” now seen as a precursor to the credit crisis which unravelled as early as December of 2005, shortly before Greenspan resigned.

The excessive liquidity in the system was not just owing to the Fed’s measures. Major central banks were guilty of pumping vast amount of money supply into the system. Back in 2004, Greenspan opposed tougher regulation of financial derivatives, and actually praised adjustable-rate mortgages and refinancing for homeowners.

35% - Ratings Agencies

They are the unwitting culprits. (I am being nice here). They rated loans and bonds based on these mortgages AAA status, which caused many buyers to believe in their assurance that they were buying solid AAA papers.

The ratings agencies again acted too late to downgrade these papers €“ long after the damage is done.

They had earlier accorded high ratings and analysis which fuelled interest in these instruments to be hawked to unsuspecting investors. It is also this that led the investment banks to boldly pile up these instruments.

What kind of value-added analysis are the issuers paying these rating agencies for? It’s obvious that the analysts knew that a bulk of the packaged loans consisted of subprime.

Were the fees too enticing? Were the ratings agencies trying to curry favour with the banks? If these agencies cannot do their jobs without fear or favour, then how can investors rely on these ratings?

Maybe the US should empower the government to rate bonds, especially if the government requires certain kinds of fund managers to own only officially-rated bonds.

15% - The Regulators

The financial markets and the various instruments have their respective regulatory units.

You may include the Fed, the CFTC (Commodity Futures Trading Commission), the SEC (Securities and Exchange Commission), FDIC (Federal Deposit Insurance Corp), even the FASB (Financial Accounting Standards Board) into the fold.

They are supposed to regulate and oversee the markets and the financial instruments.

But where was the voice of reason? The last six years’ housing and subprime mortgage bubble and bust had little to do with excessive government intervention.

Instead, they had all to do with the lack of any basic sensible government regulation of the mortgage market.

They should have instituted new guidelines and rules to govern these CDOs (collateralised debt obligation), credit default swaps, and the leverage aspect of financial firms and their capital at risk.

Even now, they are mainly silent.

5% - US Treasury chief Henry Paulson & Federal Reserve chief Ben Bernanke

They could have tried to reverse the damage in their early days as they basically inherited a huge problem.

But only now, they are talking about having proper mechanisms to regulate derivatives and new instruments. Sigh.

There were institutions and people appointed to do these jobs; it’s just that they did not do their jobs properly. I am still waiting for some of the culprits to be prosecuted for what they did or didn’t do.

At the end of the day, it appears that what some of them didn’t do would be more punishable.

“But what about the American borrowers/homeowners,” you ask? Shouldn’t they too shoulder some of the blame? I left them out of the above equation for various reasons listed below:

a) I do think there should be an element of “personal responsibility” but it seems to me that they are already paying the cost of their foibles. Many have had their homes foreclosed, they have lost their deposits and payments made on these loans.

It seems to me, they are THE ONLY group that has actually “really lost” materially and has been punished.

b) The bailouts do not really bailout the end borrowers. They simply extend the life of the companies.

Maybe the bailouts will allow the companies more time to foreclose these properties in an orderly manner. Very few of those will be able to renegotiate their existing loans on decent terms to allow them to continue to fund their mortgages.

Most of the loans were priced at a time when property values were at least 30%-40% higher than now. Perhaps, it’d be better to declare bankruptcy than to continue to reconfigure the loan?

c) The public are not equipped to regulate themselves. That is why there are agencies created with “capable people” to regulate and monitor the markets.

You cannot expect the majority of borrowers to understand in detail CDOs, credit default swaps, or whether the brokers are leveraging themselves to the hilt.

You instead get assurance from top ratings agencies that brand certain papers as top notch grade. Who will really pore over hundreds of pages in a report, examine if these debt papers/bonds consist of thousands of small mortgages spread out over the country or how to value the price trends and affordability ratios of borrowers?

d) The public often acts in herd-like mentality and like most people, they are driven by the pursuit of wealth.

They see people making 50% in two years from speculating in properties and they, too, want to be part of it. Then they apply for loans, and were probably even more shocked that mortgage lenders were more than willing to lend to them.

The markets are often characterised by bouts of insanity; if you stir them up with enough incentives and carrots, people will act irresponsibly.

The regulating agencies are there to ensure an orderly market and to quell excesses. The people cannot do it themselves.

The ones who got out early will think they are very smart. The ones who got hit will think they were unfortunate victims. Both are wrong in their perception of their actions, financial decision making and brain power.

Both groups are closer to each other in every aspect than they would care to admit. It’s like a game of financial musical chairs “ the winners and losers are those who act the fastest/slowest when the music stops“ not how smart you are.

PS: In case you haven’t figured the headline out: The bald, the beard & the ugly are Paulson, Bernanke & Greenspan.

p/s photos: Ema Fujisawa (my date in Tokyo)

Alpha Males On Trading Desks & Testosterone Overload

Its a well known fact that alpha males dominate trading desks. High testosterone levels beget high risk behaviour, which also somehow correlates to a lack of manners and a high propensity to use vulgar language. High risk tends to lead to high profits during good times, money leads to inflated egos, inflated egos lead to a distorted vision which enlarges their penises in their own eyes. Inflated penises lead them to think they can fuck and want to fuck every moving female in sight. Inflated penises lead to a substantial blood loss to the brain, thus reducing brainpower to deduce things like morality, integrity and humility. And that's my Phd thesis on why we need more women on trading desks.

The interrogation of the lions of British banking, many of whom have lost their jobs, began on television on Tuesday before the financial overseers of the British Parliament's Treasury Select Committee. And in line with the usual maths of the financial world, 18 of the 19 key people in the room were men.

"Clearly, something needs to change," said Howard Archer, the managing director of European Forecasting and Analysis at IHS Global Insight in London. "You can argue that the men have made a right mess of it, and now the ladies should have a go."

As the global financial downturn deepens, the first rumblings of a gender revolution are under way in an industry long controlled by men. Banks, hedge funds and other financial organisations that have led the international economy's downward spiral are overwhelmingly male-dominated. The regulators and legislators assigned to oversee the financiers are also mostly men.

"There are quite a lot of alpha males with testosterone steaming out their ears," said Stuart Fraser, one of the top financial sector officials in London.

In Britain, women account for just 12 per cent of corporate directorships of companies on the FTSE 100 stock exchange index. In the US, women hold 17 per cent of the corporate directorships. "Maybe if we had more women in the boardrooms, we might not have seen as much risk-taking behaviour," said Hazel Blears, one of two female members of the cabinet of the Prime Minister, Gordon Brown.

Harriet Harman, the minister for women and equality, blasted the banking world for "discrimination and harassment" against women, including using lap-dancing clubs for corporate entertainment.

Amid the debate about whether the financial crisis would have happened, or been as severe, if more women had been in charge, there are signs that more women will be taking part in the global rescue.

Iceland, which suffered a humiliating economic collapse, has turned over key levers of finance to women. It now has a female prime minister, and women lead two of its major banks. The Prime Minister, Johanna Sigurdardottir, 66, has vowed to exercise "prudence and responsibility" as she cleans up the male-dominated system that sank the national economy.

"Men, especially young men, made a mess of things," said Kristjan Kristjansson, the Prime Minister's spokesman. "There is a strong discussion that women would have taken a more cautious approach in the financial sector. You could call the financial sector almost like a men's club."

Einar Mar Gudmundsson, an influential Icelandic writer, said: "These financial vikings who made the country bankrupt were in a way like little boys playing with toys." He said he would like both men and women to be involved in reconstructing the nation's financial sector.

In France, Michel Ferrary, a professor at the business school Ceram, recently conducted a study that concluded that French companies with the greatest percentage of women in management have performed the best during the crisis.

For example, he said, BNP Paribas bank, whose management team is nearly 39 per cent female, has weathered the crisis far better than Credit Agricole, where women make up just 16 per cent of managers.

John Coates, a researcher at Cambridge University who once ran a trading desk on Wall Street, recently conducted a novel survey that analysed saliva from 17 male traders in London's financial district. Coates concluded that traders made the highest profits when they had the highest levels of testosterone in their spit. The downside, he said, was that elevated testosterone also led to riskier behaviour, a formula for disaster as well as profit. "If you had more women on the trading floors, you would probably eliminate some of this instability," Coates said.

For three hours on Tuesday morning, four elite bankers sat before the Treasury Select Committee: Tom McKillop and Fred Goodwin, who ran the Royal Bank of Scotland, and Andy Hornby and Dennis Stevenson of HBOS. One after another, under often hostile questioning from the politicians, they apologised for presiding over bank collapses that have cost billions in taxpayer-funded bail-outs.

The legislators accused the bankers of being "arrogant" and "in denial" about their responsibility for the crisis. "It's an old boy's network," Sally Keeble, the committee's only female member, said after the hearing. She said she was most disturbed that the top echelons of British banking seemed to rely on a "cozy consensus of like-minded people" unwilling to listen to those who might challenge their views.

John Thurso, also part of the committee, said: "If there were more women, there might have been more of a reality check."

The Washington Post

p/s photos: Cristine Reyes