Really?

Ben Bernanke testified today that he, "did not anticipate a crisis of this magnitude", and that he, "should have done more". I was going to make an excuse for him because he is really an academic and has no practical market experience. He did however, as head of the Minneapolis Fed, have lots of experience dealing with banks. He is also a student of the Great Depression during which there was, no doubt, a similar liquidity crisis. So, you have to ask yourself, if a bike shop guy could predict that every bank president in the country would all try to jump through the same window at the same time and that they would all panic and stop lending, then how come Ben could not? Huh?

Not The Fun Kind

Readers know that I am not much of a fan of the way things happen, or not, in the US congress. I have also seen, up close and personal, what can happen to really good legislation and/or accounting guidelines when they are opposed by the banking industry. The latest example is the blockage of a credit card holders right not to be gouged by the card issuers, the biggest of which are Citi, Chase, BofA, Wells & etc. These institutions are the biggest recipients of TARP money and therefore, should feel some obligation to consumers and should try, in some minor way, to facilitate spending during the holiday season. But no! Once again, the ABA steps into the breech and puts the interests of the banks ahead of everybody else.

The system needs revision ... how can a senator from Mississippi have such a dramatic affect on people in the other 49 states? Thanks again Hammer - the members are moral cripples. The exact same set of circumstances are at work now that created the mortgage disaster. We've got a bunch of mental lightweights that don't have the courage to say no to the lobbyists controlling the destiny of this country. The weakened dollar rules! The inmates are in control of the asylum! Am I forgetting any cliches?

If you think for, even a nano-second, that members of congress and their elitist supporters can really relate to what is happening in this country, you are very sadly mistaken. On the off chance that they do, they, obviously, do NOT care and they are way too obtuse to be able to see in which direction we are heading.

THINK!

Why Blog?

Why do anything? Is it just me? Should I stop reading about what's going on in the world? Are members of congress (not the fun kind) as obtuse as they seem? Have WE learned anything at all from the events of the last nine years?

Let me try to explain - in 2000, we elected an administration that proved incapable of really understanding the consequences of its actions. This is a nice way of saying that people of average intellect should not have that much responsibility. Why? Because bosses tend to hire people who can not challenge them intellectually. Bosses that bully their way into positions of responsibility all have the same weakness - they know that they are in over their heads and they do NOT want anyone else to learn that fact. This leads to paranoia which leads to bad management because the people that get hired are not allowed to expose the stupidity of their superiors. The case with Bush and Cheney proves this point as does the Wall Street mess.

In spite of all that, we reelected them in 2004. This proved that the American electorate are as out-to-lunch as the people that we elect. So, we get what we deserve, yes? Yes we can. But we keep trying. As optimists, the last time out, we elected a president that talked the talk and walked the walk. However, he too seems to be in way over his head and he too has surrounded himself with people (there are some smart people in there, like Larry Summers) that do not appear to have the courage of their own convictions. That is, the advisors seem to have a good grasp of what's going on, but they can't stand in the way of the force that really makes things happen - money.

The last nine years have proved that the American people are victims of their own apathy, and we have gotten exactly what we deserve. That is, the administration and the congress are the beneficiaries of a system that is driven by money. Look at the healthcare bill. It is some 2,000 pages in length. Why, because it was not drafted on the Hill, it was drafted on K Street as is every piece of legislation. Each "interest group" gets its paragraph - this is the system - pay to play at its worst. This system has been in place for several years now and it really works. That is, it is a money machine for elected officials. Why do you think that the number of lobbyists has grown so much in the last several years? Could it be because members of congress are spending so much on getting reelected? They need those donations and so long as the system works (for them), it will NOT change.

Not to sound too cynical, but the only thing upon which there appears to be any agreement, is that we average citizens are pretty far down on the food chain. I wrote our congressional representative this morning as I have several times in the past. If I get a response, it will be automatically generated and it will tell me how much Michele cares about (fill in the blank) and that it is definitely a priority and she is on it! Here is a clip from UTube that, kind of, makes my point. One is struck by how out of touch these people really are. BTW, did you know that these speeches are made in an empty chamber? Listen and THINK!
Gangster Government

Rationality Defined by Morality

As the Lehman Brothers bankruptcy anniversary passed a couple of weeks ago, a number of articles appeared explaining what went wrong. Most of the stuff that I read missed the point in a couple of important aspects - one, that monetary gain trumps traditional morality and two, that academics do NOT have even the slightest idea of what makes markets move and three, that anybody can criticize anything after it happens ... predicting it before hand is the hard part.

CONTEXT:

I've tried to make the point that the MBS business underwent a very dramatic change that began four or five years ago. Traditionally, a mortgage was the most difficult loan for which to qualify - underwriting guidelines and documentation were established by Freddie Mac, Fannie Mae and HUD - which sponsored Ginnie Mae and administered FHA programs. Because of the strict lending practices, non-FHA/VA mortgages experienced historical default rates of less that 1%. The market had a few hiccups, in the post 1987 stock market crash, a number of S&L's had to be liquidated because they were much too aggressive in using "teaser rate" ARM's - but as a general rule, the market worked quite well. $100's of billions in mortgages were funded each year, and all of this amazing liquidity was provided through the miracle of MBS relying on variations of the CMO (see previous posts) and tapping into previously unimagined amounts of capital.

It is VERY important to note, that Fannie Mae and Freddie Mac, from a credit point of view, were considered to be bullet prof. Between them, they owned over one trillion (that's 1,000 billion folks) dollars in mortgages. To support their balance sheets, they held the paltry sum of roughly $10 billion. Stated another way, they employed leverage of greater than 100 times. In spite of that, they were consistently affirmed by the rating agencies in the highest category - AAA. Hold that thought, because everyone, from members of congress (not the fun kind) to the SEC to the rating agencies to the institutional investors that held Fannie and Freddie paper, were absolutely convinced that nothing could go wrong. Further, in the unlikely scenario that the mortgage default rate would experience a 1% jump, the government would intervene and prevent a Fannie/Freddie failure.

We know what happened, but what events facilitated the collapse? Answer, it's all in previous posts but, in quick summary: 1. congress relaxed the Community Reinvestment Act qualification guidelines, permitted the GSE's to buy CRIA paper, increased the maximum loan amount that the GSE' could buy while decreasing qualification guidelines overall, which permitted, 2. mortgage bankers to go "all in" in the origination of "new mortgage products" like sub prime, no docs, interest only and teaser rate ARM's (the ban on qualifying at teaser rates was lifted some time after it was imposed post S&L crisis) and 3. somehow everyone involved bought in to the argument that the single family housing market would continue to rise in price, regardless of affordability.

FURTHER:

I, a humble and lovable bike shop owner pretty far removed from the financial markets, saw this train wreck coming down the tracks. My 30 years in Wall Street led me to many conclusions. One is, that making money - for those that do - is the single most important aspect of their lives. Further, for true believers, you can never make enough and you, absolutely, deserve every penny and everyone else deserves less. Another is, most folks believe that there is an absolute correlation between making money and being intelligent. A third is, that congress will bow to the will of anyone that has the money to influence policy and that they will use their power to enable those supporters to continue to make money - keeping the circle in tact (if you haven't, you must read Catch 22, e.g., when the company wins, we all win). I could go on, but the point is, most of the people that were involved, from the mortgage originators to the realtors to the builders to the rating agencies to the lawyers to the regulators to the Wall Street types to the economists who bought into the charade, all were either too stupid to know what was happening or knew, but looked the other way. Their decision was, making money was more important than stopping the gravy train and avoiding a depression.

I knew, and I fretted, that if I really screamed about it, people would fear the worst and cause a run on financial institutions and bring about a depression. If I knew, the people involved had to have known. It's as simple as that - they had to have known, and they did it anyhow. They did not care about causing a depression because making money trumps all else and they ALL deserved to be rich - it's the American way!

THE POINT

When viewed under a moral prism, this whole thing stinks to high heaven. I think that most people understand that. What I don't understand though, is how the system is permitted to go on. How can we elect people who are so morally bankrupt? How can we NOT hold accountable the dolts who put us into this hole?

Regulatory Reform

Here's an interesting tidbit. It's the introductory paragraph of the US House of Representatives Committee on Financial Services mission ... their legislative role as mandated by law (it goes on to state it's supervisory role WRT the SEC and the GSE's; Fannie, Freddie and Ginnie - they dropped the ball on all fronts).

Just in case you all may not have noticed, each and every MBS as well as every CDO and every CDS MUST be blessed by an accounting firm in addition to undergoing a rigorous rating examination and an SEC filing. I'm guessing that this was written during the immediate post ENRON period giving congress and the SEC lots of time to ignore the run-away freight train that the MBS market became and that was facilitated by lax oversight.

Tell me, do you think that our representatives did their job? Do you think that they were (are) more interested in donations from the banks than in enforcing regulations? Our representative here in the sixth district is a member of this committee and has been all along. Read on!


Capital Markets, Insurance, and Government Sponsored Enterprises

The United States has the largest and most efficient capital markets in the world, providing the investment needed for businesses worldwide to grow and flourish. Since the 107th Congress, the Financial Services Committee has had responsibility for overseeing U.S. policy in the capital markets and for ensuring the transparency and integrity of those markets. Millions of Americans either directly or indirectly invest their savings and retirement funds in the capital markets. Unlike accounts at banks and other depository institutions, these investments are not insured by the federal government. In light of these facts, the Democratic Caucus has sought to promote policies that will provide the greatest possible investor protection and ensure all investors are treated fairly. The Committee also has oversight responsibility for the insurance industry and for a number of government-sponsored enterprises.

Sarbanes-Oxley Act Implementation

The collapse of Enron and revelations of accounting fraud at major public companies has profoundly shaken the confidence of investors in U.S. equity markets. To help restore the integrity of the markets, the Democratic Caucus promoted reforms that were ultimately adopted as part of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act included important reforms intended to restore auditor independence, improve financial disclosures, increase corporate responsibility, and enhance the ability of the Securities and Exchange Commission to prosecute securities fraud. For these reforms to be effective, however, they must be thoroughly implemented. The Committee’s Democrats will continue to focus on ensuring that post-Enron reforms are fully and effectively implemented.

Corporate Governance

The Sarbanes-Oxley Act included important corporate governance reforms to ensure that independent directors were truly independent and that auditors were responsible only to audit committees, not to management. More needs to done, however, to ensure that the management and the boards of directors of public companies act in the interests of shareholders. The Democratic Caucus will continue to press for additional reforms to reduce the conflicts of interest faced by managers, directors, and auditors.

Auditor Oversight

The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board to provide direct oversight of the auditing profession for the first time. The Financial Services Committee must exercise its oversight authority to ensure that the new Oversight Board provides the kind of regulation and supervision necessary to restore the independence and integrity of the audit profession. Committee Democrats will continue to push for policies that limit the conflicts of interest faced by auditors as a result of non-audit services provided to public companies.

Hypocrisy, isn't one of the best human traits?

Reform This!

There is quite a bit of discussion related to financial institution and market reform. It begs the question, is there a pill that will cure avarice? or another to increase the intellect of the people at the credit rating agencies? Here is a suggestion that I'm sure will be embraced by the people making the decisions ... let's have congress actually pass new regulations that are in the best interests of we, the people, not the people in the financial institutions that got us into this mess in the first place.

Evolution?

A while back, I was walking up a "mountain" side in California. I noticed one of those fluffy seeds that become wind born, like milkweed, floating away on a breeze. Though Kris and I were together, we were alone with our thoughts as we walked. Anyhow, the seed awakened a thought that had been with me long before this particular walk and persists to this day ... that is, what is the nature of intelligence and is it the sole purview of human beings? Relating to this question, I think that one has two fundamental alternatives; one, the biblical version of why things are or two, some version of Darwinism. As any of you who know me know well know, my opinion is, that religious texts tend to be rather dull works of fiction, not very plausible substitutes for a more rigorously scientific explanation of reality. In other words, it's a really good story and one that is easy to believe for those among us who possess the requisite faith (my personal feeling is, that the idea of an unseen being that made things happen in the eyes of an uneducated population, e.g., the god of lightening provides a plausible explanation for fire, is the seed from which most of the dogma has sprung). If anyone really takes the time to think about things, one has no choice but to see the contradictions in religious texts. That's really the point that I want to make - most folks really don't think - really think. It's much harder to think. I'd really like to be able to accept everything that I see as god's plan, but there are too many contradictions. Look at it this way; if man is made in the image and likeness of god and if man is as screwed up as he certainly seems to be, doesn't it stand to reason that god is a mess too? If my thinking is flawed though, the whole thing is a pretty good joke, an experiment in the creation of a being that is supposed to evolve to become god-like but lacks a decent role model.

So, why is man so suggestible?

Back to the milkweed seed and a plausible alternative to the bible. All things that have the ability to reproduce possess intelligence - reproduction takes some level of "thought". The whole survival of the fittest notion pretty much sums it up in terms that anyone can relate to. Think about migration and the way things move around ... pollen as an example. Did you know that ragweed produces 1,000 times as much pollen when it feels threatened with extinction? The point is, ideas seem to exist in some form of an ether. We all possess some level of this knowledge. This is the real original sin. It's that little germ in our minds to which very few of us have the desire to visit. It tells us that, yes, we all have that ability to be god-like but to admit it is to admit that we're pretty much failures because very few of us really follow what what we want to do or to be. So there is this fundamental escape from reality. The reality that we have created a reality that is governed by religious cults and politicians who do the bidding's of those who fund their existence. Religions housed the only books that existed thousands of years ago and, one way or another, they all told the same story and they all used the same hook - eternal life. It works, because we all have this fundamental sense that there is more than what we can see. There probably is, but it's not housed in heaven and hell, it's the ether ... it's where ideas reside.

I suppose that I could go on, but I have a short attention span and I want to make the following point again: the reason why we are in this economic pickle is that we don't think. A big reason why, has to do with the fact that so many of us have gotten behind the eight ball because of easy credit. So how did it happen? Who allowed it to happen? You all know the answers. So, are you going to do anything about it or are you going to re-elect the idiots that facilitated the whole mess? Huh punk, are ya?

Debt

I think that the following has some relevance: over the years, I have remembered a time when I was having a drink with a friend (at the Hi Lo lounge on Beacon Street in Boston - 35 cents for a shot and a beer - as the name implies, very classy joint) when the TV caught my eye. Lyndon Johnson was making a statement related to how happy he was to keep - in a time of war, mind you - the federal budget below $400 billion. As I have reflected on this moment over time, the $400 billion figure has become less and less believable. I thought about it again this morning as I read an article about Ben Bernanke getting nominated to a second term as Fed Chief, which drove me to look it up. I was actually right. At Sept. 30, 1968 federal debt outstanding was $347.5 billion ... today, it's $11.7 trillion, 33 times higher than in 1968. Further, in 1968, outstanding debt was approximately to $2,300 per US citizen ... today, it's about $39,000. The population has about doubled, but debt outstanding has gone up by 3,336%.

All of this is a bit abstract and the really smart economists will argue, that as a percent of GDP the number is really not that bad. Guess what? it is that bad and it's getting worse. As an example, OMB just released the estimate for the federal deficit ten years hence at $9 trillion. I'd be willing to bet that that number is about equal to the 2020 GDP - and that's just the deficit!

Golly, don't the members of Congress really inspire confidence? In Michelle we trust!

Barney Frank to the Rescue!

The following is the text of the draft of the framework for the legislation that will attempt to regulate the "derivatives market" in the US of A. I present it as it is and add no commentary ... for the moment. When I figure out what it says, I let you know. Keep this in mind though, markets are living, breathing creatures that tend to move in relation to each other. When disparities exist, they will be taken advantage of. This is the essence of arbitrage and the reason why some people make millions while the rest of we mere mortals suffer in economic obscurity. Oh, by the way, if you think that any regulator, congressman or member of their staff, senior manager in a Wall Street firm or federal regulator has the ability to comprehend how a credit default swap actually works, then you are very sadly mistaken.

Never lose sight of the Golden Rule ... he who has the gold rules! especially in Washington DC.

July 30, 2009

Congressman Collin Peterson, Chairman, House Agriculture Committee
Congressman Barney Frank, Chairman, House Financial Services Committee

Description of Principles for OTC Derivatives Legislation

Robust Oversight of Dealers and Markets
Depending on the underlying asset on which a derivative is based, either the
SEC or the CFTC, or potentially both, will oversee the regulation of OTC derivative
dealers, exchanges and clearinghouses.

• Clearinghouse Regulation: Clearinghouses will be robustly regulated. Primary
oversight authority of the CDS clearinghouse, ICE Trust, will be shifted from the
Federal Reserve to a market regulator after a period not longer than six months
from the date of enactment.
• Trade Reporting: All OTC derivative trades must be reported to a qualified trade
repository.
• Regulatory Approval: Requests for approval as a clearinghouse, exchange or
electronic trading platform must be acted on by the relative agency within 180
days.
• Regulatory Harmonization: The statutory and regulatory powers of the SEC and
CFTC shall be harmonized with respect to the OTC derivative market including
registration requirements for dealers.

Mandatory Clearing of OTC Derivatives
Derivatives must be cleared by an approved clearinghouse. Exchange trading and trading
on electronic trading platforms will be strongly incentivized and encouraged.
Exceptions:
• Appropriate regulator determines the product is not sufficiently standardized
to be cleared or no qualified clearing mechanism exists.
• One party in the transaction does not qualify as a “major market participant”
as determined by the appropriate regulator in consultation with the Financial
Services Oversight Council.

Regulators should have:
o Authority to prohibit or regulate transactions that are not traded on
exchange or cleared.

Strengthening Capital and Margin Requirements
Appropriate regulators will develop margin and capital requirements that create a strong
incentive for dealers and users of derivatives to trade them on an exchange or electronic
trading platform or have them cleared whenever possible.

• Significantly higher capital and margin charges will apply to non-standardized
transactions that are not exchange-traded or centrally cleared.
• Regulators can authorize use of non-cash collateral to satisfy margin
requirements.

Particular Attention to Speculation
At least two options will be considered:

1. Limitation on Speculation
Prohibition on any purchase of credit protection using a CDS contracts unless:
• The party owns the referenced security or (one or more) of the
securities in an index of securities.
• The party has a bona fide economic interest that will be protected by
the contract.
• The party is a bona fide market maker.
• Regulators will have authority to monitor market activity and impose
position limit where necessary.

2. Enhanced Oversight of Speculative Positions
Require confidential reporting to the appropriate regulator of all short interest in
CDS contracts by:
• OTC derivatives dealers;
• Investment advisers that manages in excess of $100 million;
• Other entities that are deemed “major market participants”.

In order to prevent abuse, the appropriate regulator has authority to:
• Impose position limits on market participants;
• Ban the purchase of credit protection using CDS by any non-dealer
that is not hedging a risk.

Protect U.S. Financial Institutions from Lesser Regulatory Standards in Other
Countries
• U.S. regulators will coordinate with foreign regulators on harmonizing OTC
derivative market regulation including recognized international standards with
respect to clearinghouses.

• The Treasury Department will be authorized to restrict access to the U.S. banking
system for institutions of any jurisdiction Treasury finds permits capital-related
standards that are lower than the United States or that promote reckless market
activity.

Role of Financial Services Oversight Council
• Resolve disputes between the SEC and CFTC over authority over new products
within 180 days.
• Resolve disputes between the SEC and CFTC over joint regulation of derivative
products within 180 days.

Enforcement
• Agencies shall have enforcement authority over products under their jurisdiction.
• Agencies shall hold enforcement authority jointly for any products subject to joint
jurisdiction.

Has Anyone Learned Anything?

I should never read the Sunday paper ...

When the price of a gallon of gas got over four dollars, like most folks, I assumed that it was in response to the laws of supply and demand. I tended to disagree with the people who were claiming that the commodities markets were being manipulated by greedy traders.

I was wrong.

I really don't know who trades commodities. I have a slight inkling of the size of the markets and some understanding of the structure of the CBOE and the New York Mercantile Exchange. I do know however, the fundamentals of a market. Right now, the fundamentals of the markets for energy, as an example, dictate that prices should be lower. That is, there is less demand for energy, especially for natural gas and gasoline. Why are the commodity prices higher then? Why are markets that are so deep - meaning that the size of the contracts traded and the number of companies on the exchanges that trade them, so many - as thin as they seem to be and the prices of commodities as easy to manipulate? I know why ... because nobody has learned anything from the mortgage meltdown and the greed that caused it is alive and well.

Hope you all have a swell summer of driving around in your SUV's.

How We Got Here

I can't shut up any more. When I started this blog, the first two posts were all about Fannie Mae and Freddie Mac and how they were headed into the abyss and how their management were in WAY over their heads and how people on both the origination (of new mortgages) and sell side, the Street, were way smarter than they were and that they were dupes and that Congress let the whole thing happen because they were way too obtuse to comprehend the magnitude of the problem if this house of cards was to fall - as it did. Anyhow, I deleted those posts because I was afraid that if anyone read them, it may cause a run on the shares of the GSE's. Little did I know that, not only did nobody read the blog, nobody cared that these "foundations of the secondary mortgage" market were so undercapatalized that a one percent increase in mortgage defaults would bankrupt them both. Not only that, but that they were getting in to a sector of the market that NOBODY really understood - sub-prime. Not only that, but they were increasing single loan limits and decreasing underwriting and qualification standards during a period of rampant inflation in single-family housing.

So, how could something that was so blatantly obvious, be allowed to happen?

Everything is allowed to happen because of the context within which it happens.

Here are some things to think about:

When is a lie not a lie?
How many of the mainstays of our society are really based on fact?
Can our leaders really be trusted?
I could go on but does it really matter?
and, How much should we dwell on things that have happened versus looking forward?

The state that we find ourselves in DEMANDS that we examine some of the milestones of the last several years. I've shown, in past posts, that one could easily make a connection between the attitudes of the people in the financial services sector and the attitude towards the American people as expressed by Dick Cheney that relates to being truthful. That is, so long as the perpetrator of ANY act believes that they are superior in any intellectual, moral or moneyed sense, they have a rationale to make decisions that effect other people and for which they can not be held accountable.

I didn't really express that thought very well, but:

It's all about money ... especially in Washington. Number one on my list is what is referred to as "The K Street Project", because it set the tone for what has happened for the last several years and showed members of congress that they too can easily get on the gravy train.

When Tom DeLay appointed himself Majority Leader of the House, the first thing that he did was to set about getting the K Street lobby firms to pony up contributions if they (and their clients) wanted to be looked upon favorably in the legislative process. DeLay understood the power of money. As a good member of Congress though, he also understood how things got done, e.g., the connection between votes and money for projects in member's districts. He really understood though, corporations have money and most voters do not. When one is motivated by money, one can conclude therefore, that corporations matter more than voters, AKA taxpayers. So, the K Street project was born. Step number one, decrease committee staff - the dedicated people who put in 60 hour weeks writing new laws on behalf of we citizens. With no staff to draft legislation, that task was handed over to K Street and any draft legislation had to be accompanied by contributions specifically aimed at the districts that would benefit from the legislation.

Since DeLay started this process, the number of registered lobbyists has increased exponentially and we now find ourselves in a situation where corporate America is creating the rules by which it is regulated.

Ask yourself this, how much does each Senator and Representative spend during each election cycle and just where does that money come from? Have you ever made a campaign contribution?

The American Bankers Association is one of the biggest contributors in Washington - golly, I wonder if there is any connection between that and the "bailout"? or the speed with which Morgan Stanley and Glodman Sachs got their National Bank charters and their bailout checks?

Next, and at the risk of sounding a bit paranoid, the easy financing of the last several years had a side benefit for those in Washington. That is, if Americans are so busy working and so preoccupied with paying for stuff that they really could not afford, they won't pay any attention to what's going on in Washington. Things like a war and who really benefits from it - hint, not the people that actually fight it. Things like torture and the abolition of habeas corpus. Think about it, there is an awful lot that our legislators have gotten away with in the last several years.

The whole selling of the Iraq war has served as a paradigm for the folks in Wall Street as it relates to "full disclosure". I refuse to believe that the people in the Street, the rating agencies and the law firms did NOT know that they were dealing with fire. They had to have known that the whole thing was going to blow up. Read what follows down this page ... it's all there.

A Pretty Decent History

Bloomberg News is a good source for poop on the financial markets. I found the story attached to this link to be, a very general, but good history of what allowed the whole mortgage meltdown to happen. Readers will remember that a less political version of this was presented last September 20 as well in my first posts. By the way, I and my two colleagues, at the company that we set up to provide the banks with a GAAP acceptable way of keeping the off-balance sheet vehicles off balance sheet, spoke with, basically anyone that would listen, but the SEC, staff people in both the Senate and the House, FASB and most of the banks. As I've tried to convey, the banks brought this mess on by gutting the new regs - as mentioned in the Bloomberg article.

It's now up to us to pick up the tab ...

Anyhow, here's the link: http://www.bloomberg.com/apps/news?id=20601170&refer=special_report&sid=aspN..hVXJC4

Credit Default Swap

Think about this number, $67,000,000,000,000 - that's $67 Trillion dollars in outstanding Credit Default Swaps. The GDP of the US, according to the BLS, at the end of Q4 2008 was $14.2 trillion. This means, that the Fed, the regulator of all US National Banks, allowed banks to get into a business that leveraged their capital by a factor that is way outside of what is considered within the acceptable guidelines of risk. Further, they did it with their eyes wide open ... when Citi's capital went below the regulatory limit of 3% in 1991, the only thing that kept them afloat was their $1 trillion interest rate swap book. That is, the Fed was too obtuse to comprehend how to unwind an interest rate swap book - CDS's, referenced to a mortgage-backed security are more complicated by a huge factor. IN SPITE OF THAT, THEY LET THE BANKS GO DEEP ENOUGH INTO THIS MARKET THAT THEY HAVE BANKRUPTED, NOT ONLY THE US, BUT ENTIRE THE WORLD BANKING SYSTEM.

Golly, don't you just love a deregulated market? Yea, but I like the way that things get done in Washington even more. I sleep extra soundly knowing that the regulatory framework of the entire US capital market is written by people hired by the firms that are the beneficiaries of lax regulation. Golly, thanks W, thanks Alan and an especial thanks to the Hammer.

THINK!

Who Knew?

I suppose that I shouldn't keep harping on this subject, but every time that I read that one of the banks is in deeper than anticipated, I keep coming back to the idea that the folks that got us into this mess either knew and didn't care or are just plain stupid (read my stuff from a few months back about how the banks work and how deals get done and who, if anyone, really understands how to analyze MBS).

The Sunday Times had an article about the Wall Street physicists. I didn't bother reading it, because I am aware that most recent PhD's can't get a job in academia and they can't teach because they don't speak English very well. But, if they can program and do regression analysis, then come on down to the Street and build some complex derivatives! The point is, these people are supposed to be smart.

This is the last time that I'll say this - none of these dopes really understand risk. They let very limited models make the decisions for them. This includes the rating agencies. When the models say that the risk of doing a deal is acceptable, then ratings are assigned and the deal gets placed (or financed and held).

In reality, any idiot could have seen this disaster coming. All that was required was to do the most basic analysis related to mortgage qualification, e.g., the process of stressing a borrower's income to make certain that P&I payments can be met. In addition, some thought should have been given to median income as compared to the median cost of housing in all areas of the country. Either of these simple calculations would have quickly revealed that the market was way overdone.

Think about it, if a humble and lovable bike shop owner can figure this stuff out, how come the professionals could not? HUH?

I want to know who is going to jail and when? I also want to know which members of congress (not the fun kind) got money from which members of the Wall Street/Mortgage Bankers Association/American Bankers Association/Securities Industry Association/and on and on trade groups, better known as lobbies.

Do you really think that the people who enabled this whole mess are actually going to fix it?

THINK!

The Real World

There was a great deal of discussion about the difference between the real world and the world of Washington, DC during the recently concluded election season. Implicit in the discussion is an us and them mentality ... right versus left, wealthy versus not and privileged versus not. When one takes the time to analyze recent events in the capital markets within the context of wealthy versus not and its twin, privileged versus not, one can easily come to an understanding of the attitudes that I have tried to articulate in previous posts. I'm getting the same vibe out of Washington now. That is, the folks in Congress are so far removed from the real world, that they are blinded to the absurdity of the course that things have taken since the first bailout last September.

I'll say this one more time - the folks in the banks and the Wall Street firms that have been the beneficiaries of the government's handout really think that they deserve the money. Further, they are blinded to the fact that they caused this mess. Further, the idiots in Congress are way too obtuse to comprehend that giving money to these dopes rankles people in the real world. There has been a ton of blowviating from both houses, but, in the end, the members are NOT in the real world and they would never dream of biting the hand that feeds them.

The following isn't really a good example of the above, but it does show how someone in the ivory tower of an investment bank can, in this case, write a book that is a how to on credit default swaps. If this guy was so good, how come UBS lost billions and billions in credit default swaps? You don't suppose that they knew the risk and went ahead and took the profits, firm in the knowledge that the Fed would come to the rescue? NO, nobody would do that, would they?

So this is a new book on CDS's published by Bloomberg Press. I won't comment on the contents, I think it speaks for itself. The following was lifted from the Bloomberg website:

DESCRIPTION OF BOOK

For traders trying to navigate the increasingly volatile credit default swap market, CDS Delivery Option provides worked-out examples, over 30 charts, a case study of Delphi, and detailed explanations of how the subprime crisis caused the credit crisis and the near collapse of the GSEs. The book includes detailed information on:

--how to value a CDS contract
--how to value the delivery option
--how contract value changes when the yield curve flattens or becomes steeper
--how contract value changes with bullish or bearish market moves
--how to figure out when to buy protection and when to sell protection
--how to hedge CDS risk
--when and how to unwind a contract prior to settlement
--when to hold a trade through delivery
--how to navigate a “squeeze” (when the notional value of contracts going through delivery is larger than the supply of the cheapest-to-deliver issue)
--when buying contracts can make their prices go down
--how to construct a basis trade
--how to find arbitrage opportunities
--how to analyze default probability and corporate debt
--when to settle via auction and when to settle via physical delivery
--which note is the cheapest to deliver

This book is an indispensable resource for all market professionals working in the CDS market.

AUTHOR

David Boberski is executive director and head of exchange-traded derivative strategy within Prime Services at UBS Investment Bank. Institutional Investor has named Boberski to its All-American Fixed-Income Research Team for his work in federal agency debt and interest-rate derivatives. Boberski is also the author of Valuing Fixed Income Futures.

TABLE OF CONTENTS

Part I Markets and Mechanisms
Chapter 1 Interest Rate Policy, Housing Prices, and the Credit Crunch
An Unspoken Assumption
The Music Stops in Home Prices
The Music Stops in Lending
The Music Stops on Wall Street
Fed in a Box

Chapter 2 The Crisis After Subprime
Agencies Born of Crisis
Contradictory Objectives?
The Golden Goose
Losing Focus

Chapter 3 The Link Between Credit Derivatives and Bonds
Caulis Negris
The Music Stops for the Agencies
The End Game for the Government-Sponsored Enterprises

Part II The Delivery Option
Chapter 4 Delivery Option: The Link Between Futures and Credit Derivatives
Assumptions Behind the Credit Default Swap Basis
Default Probability, Corporate Debt, and the Delivery Option
A Review of Treasury Futures Mechanics
Pricing Treasury Futures Delivery Options
The Fair-Value Method for Pricing an Embedded Option

Chapter 5 The Squeeze
Making Mischief
Distorted Economics

Chapter 6 The Cheapest-to-Deliver Option in Credit Default Swaps
Quantifying the Value of the Delivery Option
A Proof by Contradiction
Applying the Fair-Value Analysis
More Lessons from the Futures Market

Chapter 7 Delphi: A Real-World Example
Recent Developments: Destroying Value

Part III Contract Design
Chapter 8 Designing an Agency Credit Derivatives Futures Contract
Chapter 9 Bringing the Index to an Exchange

Part IV A Bear Market Case Study
Chapter 10 The ABX Meltdown
Index

EXCERPT

Chapter 4 Delivery Option: The Link Between Futures and Credit Derivatives

Credit derivatives, which began as a means of hedging the loan exposure of banks, have taken on a life of their own. Now they are used for many purposes for which they were not origi nally designed.

For example, some investors use derivatives to construct syn thetic corporate bonds. As current convention has it, this is done with two instruments: a credit default swap (CDS) and an interest rate swap. The credit default swap is a contract in which one party sells default protection to another. The interest rate swap is a con tract in which one party makes interest payments at a fixed rate and the other makes payments at a floating rate. One would create a basis trade by exchanging a corporate bond with a credit default swap bundled with an interest rate swap. If the credit default swap premium plus the interest rate swap yield are better than or equal to the yield on the underlying corporate bond, then exchanging the cash for the synthetic makes sense.

Assumptions Behind the Credit Default Swap Basis
The important question to ask is: Should a credit default swap spread be added to an interest rate swap when constructing a synthetic corporate bond? When one does so, one assumes that the factors affecting credit spreads will not also affect interest rate swap spreads. In other words, the assumption is one of zero cor relation. If this assumption is violated—in other words, if move ments in credit spreads are correlated with movements in interest rate spreads—then the above construction offers far more risk than is present in the corporate bond. For example, if the credit swap has a spread DV01 (dollar value of 1 basis point) of $450 and the interest rate swap has an interest rate DV01 of $450, then the two better not be correlated, because if they are, the total risk of the position will be greater than $450 for every basis point change in rates. The corporate note in the cash market has a DV01 of only $450, so any correlation between credit spreads and swap rates adds unintended risk. Constructing a basis trade this way makes an interesting assumption about the correlation between the two derivative pieces, considering that one might imagine that an inter est rate swap spread, the residual that’s left from receiving on an interest rate swap and selling a Treasury, is itself a credit spread. If it’s not a Treasury bond, there is a risk of default! However, the going assumption in the credit derivatives market is that the credit risks in interest rate swap spreads are independent of corporate default probabilities. How good is this assumption?

As Figure 4.1 (in the book) illustrates, there are times when it isn’t realistic to assume independence between the derivative legs of a basis trade. Yield changes in a cash corporate note can be attributed to either a change in interest rates or a change in the probability that the bond’s issuer will default. Of course, both risk factors can change at the same time, but each influence can still be consid ered separately, because we can measure the price risk of a note by perturbing its yield by just one basis point. The same may not be true of credit default swap and interest rate swap spreads; there is evidence that during the period illustrated in Figure 4.1 there have been times when the two spreads have moved together. In this case, any positive correlation between the two would lead to a greater price risk in the synthetic bond than is present in the cash note. A true basis trade would swap identical risks to mea sure the pricing differences between each side. One can always make more money by taking more risk, but the point of constructing a basis trade is to take identical risks to discover pricing discrepancies. A first stab at arbitrage is to search for mispricings between risks that, by all rights, should be interchangeable. In order to adjust for correlation, one could measure the historical movement between the sides and then scale up or down the derivative pieces so that the statistical risk is comparable to the cash note. There are several problems with this approach. First, statistical measurements drift. Second, there is the problem of which side should be scaled—the credit or interest-rate swap? On the one hand, it is amazing that such a large market has grown up with such imperfect relative value approaches, but this might also be a testament to how sorely the credit market needed derivatives and how much utility they afford users.

Default Probability, Corporate Debt, and the Delivery Option Before digging into the mechanics of evaluating the delivery option, it is instructive to take a step back and consider the inter-actions we are studying. Accurately evaluating a credit default swap necessitates analyzing two markets: one for default probability and one for the debentures of the company. Rather than being divorced from the cash corporate market, credit derivatives are quite closely linked to this market through the structure of the embedded delivery option. The delivery option is a feature of trillions of dollars worth of outstanding credit derivatives. While the delivery option does have elements that behave like interest rate options, the triggers are very different. Interest rate options go in the money when there is a market move past a certain threshold. The delivery option goes in the money when a credit event occurs. The cash flows of a credit default contract are influenced by changes in the probability that a particular company will default. Presumably, the higher the premium paid in the default swap, the more likely it is that a company will default or the greater the severity of that default will be. (The severity of default refers to the loss incurred by the protection seller after paying par for a note that may be worth less than par. Typically, one considers the probability of default and loss severity to move in lockstep, since it is relatively unusual for a company to be in financial distress but pose little risk of loss to its bondholders. The exception to this could be collateralized debt, a separate situation from evalu ating the unsecured debentures of a company, which constitute the vast majority of credit default swaps.)

Even though default probabilities are the most important fac tors to consider when evaluating the cash flow of a default swap, it is also necessary to evaluate the structure of the market for the underlying debenture to determine the value of the delivery option.

Consider a default by a company with just one note outstanding: there is no delivery option since there are no alternatives for delivery except that one note. What if the company has two notes outstanding? The situation may or may not be very differ ent than it is for the “one note” firm, depending on the differ ences between the two notes. For example, the two notes could be just three months apart in maturity, with the same coupon, in which case price movements would be nearly identical between the two. Although there is technically a choice about which note to deliver, the economic differences between the choices are rela tively small.

But what if a company has two notes with a twenty-nine-year difference in maturities and the long bond is a zero-coupon issue? In this case there would be a great difference between the risks of the two issues, which would make the right to choose which note to deliver upon settlement of the contract quite valu able. Of course, companies rarely finance themselves with such a berserk barbell structure of discount notes and 30-year bonds. In fact, most firms have a fairly orderly structure to their liabilities. However, the point worth making is that the value of a delivery option is tied to the structure of the notes available in the cash bond market.

Inspiring Confidence

This is the new Treasury Secretary, Tim Geinther. Under our present economic circumstances, it really does my old heart good to have our fate in the hands of so capable a man. Doesn't this face inspire confidence? I'm sure that he's just a bit tired, not suffering from depression or any anxiety related to the execution such an important job in the face of the worst set of circumstances the country has faced in a generation. Have I mentioned, that this is the guy who endorsed Paulson's forcing Lehman into bankruptcy? A really brilliant move. By the way Tim, what was your reasoning? Oh, that's right, it was against the rules for the Fed to help Lehman, but not AIG, Morgan Stanley and Goldman (Paulson's former firm).

More on Arrogance

Having fought a few battles with the IRS, I can understand wanting to keep a bigger slice of the income pie. However, not reporting something as obvious as the income value of a limo and driver is something that only the very naive or hubristic or obtuse would dare.

BTW, nice glasses ... the rims are a bit light, but overall, not bad.

Hubris

Hubris, n. arrogant pride or presumption ... it's been a major part of the Street for as long as there has been, The Street. It's really interesting to watch as a bunch of arrogant congress (not the fun kind) people criticize "Wall Street Bankers" for doling out $18 billion in bonuses. If it's happening at Goldman and Morgan Stanley after they waltzed into changing their charters to become national banks and received $10 billion each then, then we taxpayers are really getting taken to the cleaners.

I especially enjoyed the comments of Rudy Giuliani in defending the bank's right to pay whatever they please. Golly, it seems like it was only yesterday when Rudy was a prosecutor and needed a cause, which turned out to be the insider trading scandal, to ride into politics. In those days, the country's mayor was hauling (totally innocent - and he knew it) people away just so that he could get on the evening news. Seems to me that he railed against the fat cats back then. Funny isn't it, now that old Rudy's a fat cat himself, how the worm has turned. That that dope can be taken seriously is way beyond my ability to comprehend.

I'm Moving

I'm fed up with being ignored so I'm moving to Butt Hole Road in Crapstone

I really don't expect anyone who can actually help to read all the way back to last summer and, the post below may not be clear enough ...
1. In order to be in compliance with SEC regulations, a privately issued MBS has to meet very specific structural requirements, one of which is that the issuer look like an actual corporate that has an equity like structure.
2. This equity class of the MBS is typically placed with institutional investors.
3. If no institutional investors can be found to purchase the equity, the Wall Street firm that executes the MBS transaction may be dumb enough to hold it itself.
4. Because the equity can not be rated - it is at the bottom of the cash flow chain - the issuer may employ a derivative strategy to artificially rate the equity.
5. The derivative turns out to be a credit default swap (CDS) which is issued by a credit worthy entity like AIG or Fannie Mae or Freddie Mac or Bear Stearns or Lehman or JP Morgan - shall I go on?
6. The CDS issuer uses a reference security having the same rating that the MBS equity needs.
7. The MBS equity holder (the actual issuer is a wholly owned subsidiary of some eleemosynary institution - I think?) employs leverage to finance the MBS equity.
This part I have to guess about:
8. The CDS referenced security is likely some private label MBS that was considered to be very unlikely to default, e.g. it possessed investment grade ratings. Further, it would seem that MBS issuers (I use issuer to really mean their sponsors - Bear & etc.) used the same referenced security - the size of the defaulted CDS' implies that.
9. Under the terms of the CDS contract, if the referenced security defaults, the CDS issuer is required to make a principal payment equal to the notional amount of the swap contract.
10. Like all insurance contracts, the issuer of the CDS contract is only required to keep a fraction of the notional amount of its outstanding contracts as capital.
11. When the referenced security defaulted, AIG and the rest were required to pay up - they lacked the necessary capital and the whole thing fell apart.

The point that I have been trying to make is, that if the referenced securities regain their investment grade ratings and if MBS holders can be assured that the ratings have a sound footing, the market should be restored.

Banks Do What Banks Do Best

Look back to my entries from November 14th and 18th. Also, I have tried to make the point that managers in the banks and investment banks do not have a clue as to what these securities really are nor do they really understand how they ended up owning them in the first place. This is really why the banks are desperately trying to get the "government" to take them out of the whole mess by buying the defaulted securities. I don't have the time to write about this right now. Keep in mind, that 1. the ABA is the strongest lobby in the US, 2. banks will never admit that they are as incompetent as they are, 3. the problem is credit default swaps and the fact that underlying assets all got downgraded and 4. people at the fed and the treasury have been lied to and they do NOT have a clue either.

All right ... because nothing substantive has been done, I must conclude that the people who are groping for a solution really do not know how to proceed. Throwing $350 billion at the banks may have kept them afloat, but it has done nothing to solve the underlying problem - no liquidity complicated by a lack of confidence.

Liquidity is necessary for the efficient functioning of the capital market. It exists in the macro, system wide, and micro, security specific or market sector sense of the word. The lack of liquidity in the MBS sector led to the liquidity crisis in the entire capital market. The idea behind TARP was to add liquidity to the banking system and the banking system would add liquidity to the market. All it did was reward incompetence.

I touched on a solution like this in past posts but never really formed the idea. So ... the problem started because "mortgage related securities" held by Bear Stearns, Merrill, Lehman, AIG and everyone else, could not be financed by their holders. The notional value of the MBS exceeded the capital of the firms that owned them - the MBS could not be sold - the firms lost all of their ability to carry other positions (because they were insolvent) - and the credit market ceased to function. I don't think that it's too late to fix the problem by providing cash flow to the securities that defaulted owing to the foreclosure of their underlying collateral.

Keep in mind:
1. Credit default swaps, referenced by or tied to MBS, created the mess when they were downgraded.
2. Very few people, especially those at the credit rating agencies and the GSE's and the management of ANY firm involved in this mess, understood the risk associated with the subject CDS's.
3. When liquidity dried up, managers did what managers do best, they panicked, and all parties involved tried to get out at the same time compounding the problem and leading to the current crisis.
4. When the managers met with the fed, all they cared about was getting out of the MBS, not trying to fix the cash flow - remember, they don't know anything about the mortgage market. If they did, no prudent person would have let this mess happen in the first place - right?
5. Everyone involved in this mess, from mortgage originators to the investors who bought this crap, have a responsibility to fix it.
6. The MBS market is extremely efficient, it would have to be to finance the trillions that it has. The players involved know the collateral and know exactly what it would take - as it relates to interest and principal payments - to get the defaulted securities back on a cash flow basis.
7. If the $350 billion that went to the banks under TARP were used to provide cash flow to the securities underlying the defaulted CDS's, we would not be in this mess.
8. Is it too late then, to put the cash into propping up the MBS and therefore, the CDS? That is, can the market be rebuilt? If it can, all of the parties that got us into this mess are made to stay in the game and to pay in some way for their incompetence.

I'm not sure that what I suggest will work. I'm pretty sure though, that it's a lot better than throwing good money after bad by giving it to the banks and letting them do whatever they please with it.

What do you think?

There Is No substitute For Intelligence

"I'll be long gone before some smart person ever figures out what happened inside this Oval Office."
Washington DC, 12 May, 2008

It all starts with effective leadership ...

Understanding Risk or Not

The Sunday Times magazine had an article on understanding risk in the capital markets. It was an interesting article. It discussed a system referred to as VaR or value at risk. In a nutshell, the system is set up so that a portfolio manager can assess the potential P&L of a given position as its market value fluctuates. VaR is a good system - variations of it have been in use at banks for many years. It has been considered so reliable, that bank regulators have endorsed it and the Basel Committee has used it to determine compliance with regulatory capital requirements. Remember though, that the model was developed for banks ... banks, that historically bought only treasury securities and took all of their risk in lending to corporate clients.

What does this have to do with the mortgage crisis and why should we care? Simple ... if one has read what I have written in the past, one knows that the limitation of any trading system, is the people that are involved with it. The Times article seemed to miss this point. To actually believe that any valuation system can be relied upon all of the time illustrates, not only the folly of relying on computer models, but the limitations of the small minds in Wall Street.

The following is the lead-in to one of my posts from a while back: avarice |ˈavəris| noun: extreme greed for wealth or material gain - Harry's definition; an uncontrollable urge to look the other way when, in the face of making huge amounts of easy money, otherwise astute managers allow their staff to do deals they do not understand - even remotely.

The way that the deals get done, is to remind everyone just how reliable the models are and how careful everyone has been as it relates to VaR and, therefore, the soundness of the firms capital.

In summary: remember, that Wall Street firms are like all corporations, e.g., their organizational chart looks like a pyramid. Further, owing to time constraints, the higher you go on the chart, the further away from reality the managers become. Now, let's pretend that I'm a senior trader (who has always been profitable) and that I see an opportunity to make a big score. Generally, these opportunities occur due to disruptions in the market value of a security that is relative to another security or sector of the market - the security is said to be cheap. So, I can buy the cheap collateral, restructure it into collateralized debt obligation, like a CMO, get it rated and place it in the market and make a two or three percent profit. To the extent that the deal is $2 billion in size, two percent equals $40,000,000 - nice days work, non? Have you all read Catch 22? The catch in this deal is, that in order to get it rated, I have to come up with a buyer for the bottom most tranches ("the equity") of it. Let's say that a major institutional buyer - AIG say, tells me that they'll take 50% of the equity if we take the other 50%. Let's further assume, the equity is two percent of the deal, or $40 million. My pitch to management now becomes, "hey, this deal is so sound, that AIG will take 50% of the equity if we take 50%" management, "what's in it for us"? me, "$40 million" management, " how much do we have to buy and what's the risk"? me, "half, $20 million and the models tell us the risk is manageable" management, "so we put up $20 million, that we can borrow, and we can make $40 million? ... done! it's a no-brainer"

Now, the preceding scenario was carried out dozens of times during the last three or four years at every firm that was involved in the mortgage market. The astute among you will see the flaw, that is, "that we can borrow". What happened, is that each of the firms that are getting bailed out, and those that did not, borrowed the cash that was necessary to finance the portion of the deals that they, and their idiotic models, decided had risk characteristics that were manageable.

The models can't measure liquidity. When liquidity dries up, it does so from the bottom up. This means, that the lowest rated securities loose their ability to finance first. As soon as lenders realized that there was no market for the MBS, they pulled their lines and the firms that owned the securities had to use their own capital or sell the securities. The loses exceeded the firms capital and down we go.

I'm making this all seem pretty simple. In fact, it was. If any of the firm's management took the time to think about the nature of the collateral they were using to collateralize these securities, we hope, that the deals never would have gotten done. But, look back at my definition of avarice - could everyone have been blinded by greed? Can the models measure that variable?

I'll state this one more time; any reasonable person knows that real estate is the most vulnerable market of all to economic cycles - it's always been boom and bust. How, therefore, could a reasonably prudent manager look at a collateral pool filled with loans having LTV's of 100% - at the obvious top of a cycle - and think that the deal was sound?

Here is the best example that I know of: in 1989 or 90, on behalf of the trust of the same name, Goldman Sachs sold Rockefeller Center to a large Japanese investor. Rockefeller Center IS THE trophy piece of real estate in the US. The sale price was $1.3 billion and the date coincided with a peak in the cycle for real estate. In 1993 or 4, post Japanese bubble, a group led by Goldman and the Rockefeller Trust bought it back for about $600 million. So, the best piece of real estate in the US lost more than half of its value in about five years. Everybody in the US real estate market knows this. How then, could they let the single family market get so far away from reality?

Could it be avarice?

Metaphor

One of my favorite scenes in movies is from the Godfather. It's the one in the Corleone driveway where Sal Tessio asks Tom Hagen to spare his life. Tom turns him down and Sally, perhaps in an attempt at reconciliation, asks Tom to tell Michael that, "it was only business". Under similar circumstances albeit, not so final, I had a boss, as he was showing me the door, use the same line. I mention this, because much of what has gone wrong in this country in the last several years can trace its roots to the attitude expressed in that line - it's only business.

A little background - I was on the express bus down to Wall Street. In those days (early eighties), I subscribed to both the Wall Street Journal and the NY Times. I enjoyed reading the editorial pages of the Journal, it's good to see just how delusional the right can be. Anyhow, the following headline caught my eye, "Business Schools Require Ethics Course". I have to admit to a certain confusion caused by the story, e.g., in my mind, one is either ethical or not and taking a course in ethics will never change that fact. Further, it will only make it easier for the unethical to exploit the ethical. The deans at Harvard and Warton however, detected a shift away from traditional morality in the attitudes of their aspiring MBA students. However, reading this article really cemented the difference in the way that I approached business and the way almost everyone else in the Street did. It also forced a debate between myself and those to whom I was close, wife, friends and some colleagues, the result of which was the realization that I was a square peg in the round hole of Wall Street. What I never quite got however, was the fact that, everyone in the Street is convinced that the "here's to your buddy - tried and true - screw him before he screws you" attitude. Armed with this rationale, the MBA's are freed to go on offense. I think, that this is the root of business ethics and also the reason why your writer finds himself among the working poor.

I have alluded to the profit centric nature of all of the players in the mortgage debacle in previous posts. Really though, it pervades all of big business. Advertising is propaganda and caveat emptor is the Holy Grail of merchandising. Take a look at the chart of any commodity index for the last year, you'll quickly discover that supply and demand had nothing to do with the run-up in the prices of food and energy - it was all about trading profits for which consumers pay. In an environment where bank cost-of-funds is below 1%, is the fact that they charge upwards of 25% on credit cards justified? Look at the attitude of the "big three" auto makers before Congress - were they contrite? Do they feel entitled to the amount of money they make? Do they care about energy consumption? This IS the attitude of the majority of American business and consumers are going to continue to pay ... or are they?

So, is it only business? Who is to blame, we who pay or they who charge? THINK!