Michael Lewis' "Beware of Greeks Bearing Bonds"

"THESE Guys are Good for $250k Apiece?? C'mon" *

Like a lot of people who come to Vatopaidi, I suppose, I was less than perfectly sure what I was after. I wanted to see if it felt like a front for a commercial empire (it doesn’t) and if the monks seemed insincere (hardly). But I also wondered how a bunch of odd-looking guys who had walked away from the material world had such a knack for getting their way in it: how on earth do monks, of all people, wind up as Greece’s best shot at a Harvard Business School case study?

--Michael Lewis, "Beware of Greeks Bearing Bonds"; (Vanity Fair, October, 2010)

It takes away nothing (OK, just a little) from Lewis' insight-filled take on an obscure group of Greek monks living in a remote Greek monastery called "Vatopaidi" to give away the answer.

Namely, the reason the monks warrant an HSB case study is, they amassed a real estate empire by learning comproming things about high-placed Greek officials, then leveraging that knowledge --plus possibly some bribes -- into a string of sweetheart government deals.

Not much more to it than that.

But how Lewis lays bare Greek culture, and in particular how it was perverted by the world boom in cheap credit, is certainly worth the trip.

Plus, lots of piquant Lewis-ism's like the following:

The monks eat like fashion models before a shoot. Twice a day four days a week, and once a day for three: 11 meals, all of them more or less like this. Which raises an obvious question: Why are some of them fat?

If you want to find out the answer to that one . . . you'll have to read the full article.

*That's how much Greece's $1.2 trillion national debt come to per person.

How to Read Vanity Fair

(Pretty) Picture Book

Before I bought the current issue of Vanity Fair (to read Michael Lewis' new article), I never understood why the cover included not just the featured articles, but their page numbers: because the cover is also the table of contents.

Or more accurately, it's one of two tables of contents; the second one appears literally 45 pages into the magazine, preceded by 44 pages of various beautiful people modeling lots of beautiful clothes.

Then, you discover that the interior table of contents is divided into pieces, with still more advertising squeezed in between.

Finally, somewhere around page 100 -- the actual articles begin.

It's annoying only until you realize that the editors have given readers a way to circumvent all those ads, via their cover/table of contents.

But I've got a guess, they don't (skip all those beautifully shot, fetching ads -- that is).

Next: Michael Lewis' article: all journey, no destination

Realtor Cognitive Dissonance

"Ten Showings, $10,000"

I hated discussing ideas with investors. Because I then become a Defender of the Idea, and that influences your thought process. Once you became an idea's defender you had a hard time changing your mind about it."

--Author Michael Lewis, quoting investor and fund manager Michael Burry in The Big Short (p. 56)

I've been using the long holiday weekend to do some recreational reading (yeah!), including the wonderful The Big Short by Michael Lewis (Thomas Wolfe and Lewis are my two favorite writers).

In my experience, something analogous to Burry's experience with investors (above) happens to listing agents, too: namely, in the course of pitching a home to prospective Buyers, it's easy to lose your objectivity about the home's value, and become convinced that it's worth the asking price.

Unhh-unh.

Unless the listing agent is buying the home, it's worth what someone (else) is willing to pay for it.

The Danger of Sitting Tight

That's why Realtors say, "ten showings, $10,000."

Translation: if ten serious, well-qualified Buyers view a home and all pass -- the home's (at least) $10,000 overpriced (make that 3% - 5% for a more expensive home).

So what's so bad about the listing agent thinking a home is properly priced when it's not?

They'll be slow to counsel a price reduction, which will (eventually) cause the home to linger on the market.

In turn, homes that linger on the market often need to be deeply discounted to sell.

Michael Lewis Deconstructs Goldman Sachs

SEC vs. Goldman Sachs

Confused about why the SEC sued Goldman Sachs for fraud, and what it means?

Here's about as succinct a summary as I've seen, from the inimitable Michael Lewis:

Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

That just changed.

--Michael Lewis, "Bond Market Will Never Be the Same After Goldman"; Bloomberg (4/22/10)

Brilliant -- and exactly right!

Worshipping Villains

Wall Street Self-Selection

The continued resonance of [Gordon] Gekko has “probably been the biggest surprise of my career, that people say that this seductive villain has motivated me to go into this business.”

--Michael Douglas, talking about his character, Gordon Gekko, in the 1987 film "Wall Street"; The NY Times (9/7/09)

“I can’t tell you how many young people have come up to me in these years and said, ‘I went to Wall Street because of that movie."

--Oliver Stone, "Wall Street" director; The NY Times (9/7/09)

It's startling to hear Douglas and Stone recount their startled reactions to the effect that their movie, "Wall Street," had on a generation of Wall Streeters: it inspired them.

In fact, Michael Lewis, author of "Liar's Poker," another insider's account of sordid Wall Street behavior, has reported the same phenomenon: instead of serving as objects of scorn and disgust, the villains in his book were embraced as heroes and role models.

And these are the people whose interests and morals are effectively steering U.S. financial policy??

"The Aristocrats" for Business Journalists

Michael Lewis on Goldman Sachs

"The Aristocrats" is one of those iconic (and very off-color) jokes that every comedian of a certain stature feels compelled to put their own comedic imprimatur on.

In fact, the movie of the same name is nothing but a collection of famous comedians telling exactly the same joke, in their own, inimitable styles.

Weighing in on Goldman Sachs is fast becoming the equivalent for business journalists.

Here is an excerpt from Michael Lewis' somewhat belated (but very worthwhile) take, written from the perspective of an imagined Goldman Sachs foot soldier:

The bozos at Merrill Lynch, the dimwits at Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns, even that momentarily useful lunatic Joe Cassano at AIG -- all of these people took risks that no non-Goldman person should ever take, in a pathetic attempt to replicate Goldman’s financial returns.

For too long we have allowed others to emulate us. Now we are working productively with Treasury Secretary Tim Geithner and the Congress to ensure that we alone are allowed to take the sort of risks that might destroy the financial system.

--Michael Lewis, "Bashing Goldman Sachs Is Simply a Game for Fools"; Bloomberg.com(7/28/09)

Read the rest of the piece . . . Lewis is superb.

On the Blogs: Reaction to the AIG Reaction

If you've been out of the loop the last 48 hours or so, the big finance-related news is the political firestorm precipitated by AIG's bonuses, and the Fed's decision to create $1 trillion in new money (by buying mortgages and mortgage-backed securities).

On the blogosphere, there is a quick consensus emerging that the the public, led(?) by Congress, is missing the point (or more accurately, the forest for the trees).

In this case, the $165 million in bonuses are the trees; the $170 billion -- immediately paid out to the likes of Goldman Sachs and Merrill Lynch -- is the forest.

Michael Lewis puts it this way: 'the complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently. I have no doubt that, by the time this saga ends, we will all know what happened to every penny of that $165 million in bonuses and each have our opinion of the morality of it. I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue.'

While the AIG bonuses are the latest political lightning rod, the real scandal is where all the money given to AIG ended up -- and why.

P.S.: thanks to Barry Ritholtz's The Big Picture blog for the cartoon at the top.

Insuring Against Dropping Prices

Want to Entice Home Buyers?
Insure Them Against Losses

Stock market investors who believe prices are low, but not certain they have bottomed, can hedge their bets by doing what is called "dollar cost averaging." By committing fixed amounts of capital at regular intervals, they are guaranteed to accumulate relatively more stock when prices are cheapest.

No doubt one of the problems exacerbating the drop in real estate prices nationally is that there's no equivalent strategy for prospective homeowners: you either buy, or you don't buy.

If prices are falling nationally at an accelerating rate, as the latest Case-Shiller numbers indicate, it seems safer to wait until it's clear that they aren't. Of course, when all Buyers simultaneously do this, a "buyers' strike" results. That causes demand to vaporize, and a further drop in prices becomes self-fulfilling.

Interrupting this cycle should be a high priority for the Obama administration. Once buyers return to the housing market, price equilibrium will eventually follow. And once the housing market stabilizes, it's at least possible for the U.S. (and global) economy to begin to recover, as well.

Fortunately, there is a relatively cheap, innovative way to make buying a house in today's harrowing economic environment less like a leap of faith, and more like dollar cost averaging: government-sponsored home insurance.

Although severely tarnished by its association with AIG, the concept of insurance and risk dispersion has great social utility. People now insure against any number of events -- death, illness, unemployment, fire, etc. -- where the odds of occurrence are low, but the consequences if it does are financially catastrophic.

Surely the prospect of one's home losing tens (or hundreds) of thousands in value would qualify as a financial disaster, at least for most of us.

"Sauce for the Gander"

The solution is to allow (require?) new homeowners to pay a recurring premium on an insurance policy, written by the government, that would defray a significant percentage of any realized loss on their home. (Does the government guaranteeing against loss sound familiar? It's essentially the same tack that the FDIC uses to entice strong banks to buy the assets of failed banks -- or the Treasury and Fed used to get JP Morgan Chase to buy Bearn Stearns.)

To ensure the proper financial incentives and deter speculators, such government-underwritten insurance should have three features:

One. Ten percent deductible. Buyers who face no risk of loss have no reason to behave responsibly. Indeed, it would be rational to buy as much house as you could, because the gain would be yours, while any loss would be made up by the government (apparently, only Wall Street gets to play that game). If instead the first 10% of any loss was borne by the homeowner, that incentive goes away.

Two. Profit-sharing. To further deter home buyers looking for a quick score, the home price insurance policy should contain a reciprocal quid pro quo: the government is your partner, 50-50, on any gain. In fact, Stanford University has long used a variant of this policy to extend cheap financing to faculty buying (very expensive) Bay area homes. Stanford's gains on the "back end" defray much of the program's expense.

Three. One policy per household, non-assignable.

One of the reasons credit derivatives became the world's biggest game of fantasy football (Michael Lewis' characterization) is because investors didn't have to have an insurable interest to play. As Lewis puts it, "[credit defaults swaps] are like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood." ("How to Repair a Broken Financial World," The NYT; 1/3/09)

The legal profession has long recognized the perils of such untethered speculation, and developed a concept, champerty, that prohibits uninterested third parties from buying stakes in other people's lawsuits.

The home insurance program needs a comparable policy: one person, one homestead, one home price insurance policy.

By its terms, government-sponsored home insurance would be self-sunsetting. That is, as risk-aversion in the housing market subsided, fewer people would feel the need for loss protection (and be willing to pay the associated premiums). In the meantime, many prospective home buyers clearly would be willing to trade a floor under their potential home losses for a ceiling (or at least a brake) on their prospective gains.

Critics will no doubt characterize such an insurance program as tantamount to fixing home prices, or at least setting a floor under them. In normal market conditions, that might be true.

However, the current housing market, characterized by paralysis and, at least in some markets, freefalling prices, is anything but normal. Under the circumstances, it is incumbent upon government to interrupt a particularly dangerous vicious cycle -- home price deflation -- before its momentum becomes even more difficult to break.