The Greek Riots and the Markets

Daniel Gross provided a quick reaction to the response of the financial markets to the deadly riots in Greece. What I don't get is the extent to which the markets were apparently surprised by the reaction of the pampered Greek people to the idea that they were going to have to adjust to a new reality. Greece had a system under which people could retire on full pay at age 53, there were lots of cushy government jobs (the technical term is "sinecures"), and tax laws were only loosely enforced. Now the government is cutting jobs and subsidies, promising to enforce the tax laws, moving out retirement ages, and cutting pensions.

Say you're a 45-year-old Greek looking forward to retiring on full pay in only eight years. Now they tell you that you can't retire for several more years, and when you do retire you're not going to take home as much, and the government is going to take more out of your pay in taxes than they have in the past. This is supposed to be make you happy?

AIG May Pay Back Much of What We Lent It

I've listened to a couple of radio interviews lately with the author of The Big Short. Michael Levin wrote Liar's Poker a few years ago about the peccadilloes of investment bankers. He has a real talent for breaking down arcane (and sometimes deliberately obscure) financial operations into language normal people can understand. In The Big Short he goes at the myth that no one saw the financial crises of 2007 and 2008 coming. There were people who saw that the emperor had no clothes, and they made a lot of money betting against the boom.

The bottom line was that banks and insurers radically underestimated the risk inherent in certain securitized mortgage instruments and their derivatives. The premiums paid by purchasers of credit default swaps were absurdly low; when they went bust, the insurers didn't have the cash to cover the claims. That's the AIG story in a nutshell. They didn't charge enough in premiums to make up for the risk of the financial instruments they were insuring.

One could note that, by charging more for premiums, AIG would have protected itself in two ways: 1) It would have taken in enough money to cover the likely claims, and 2) it would have diminished the number of claims it would have had to cover. The latter effect would have come about because either investors would have chosen not to buy the expensive insurance, or they would have had second thoughts about buying securities that were so obviously risky. Premiums are a signal to the market of the degree of risk.

In this column, Daniel Gross estimates that the government bailout of AIG may wind up costing us only $12 or $15 billion. If we get some effective financial regulation out of the deal, that may be a small price to pay.

What Paulson Knew

Daniel Gross devotes his column to a review of Henry Paulson's memoir of the financial crisis. The review, as a review, is good and readable, and it makes me think that the memoir itself would be worth reading. Gross does chide Paulson for being unreflective and for failing to see the big picture. Paulson takes things as they come; he doesn't place them in a larger context, and he doesn't have a grand philosophy to bring to bear on them.

What Gross doesn't, perhaps, get is that a more reflective man, a man with an explicit philosophy about how the economy was supposed to work, might very well have been paralyzed in the face of the financial crisis. Paulson's very pedestrian, task-oriented approach enabled him to deal with one problem at a time.

Gross mentions that Paulson is a birder. Well, there are birders who worry about the ecosystem as a whole and how our winged friends fit into it. But there are also birders who get out to a location, binoculars, field guide and notebook in hand, and just look for the birds that are there. Paulson strikes me as one of the latter.

The book is On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.

The Old Passeth Away

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: The Penguin Press, 2008. 442 pages. Acknowledgements. Notes. List of Illustration. Index. $29.95. ISBN: 0-793-67093-4. Read 19 September-15 October 2009.

I reviewed this book back on November 7. It's a good book, and I'm sure it's out there in paperback now for your reading pleasure.

Since I finished it in October, and posted the review six weeks ago, I think it's time to remove it from the Current Reading list.

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: The Penguin Press, 2008. 442 pages. Acknowledgments. Notes. List of Illustrations. Index. $29.95. ISBN: 978-1-59420-192-9.

Niall Ferguson has become a very popular, very well-known, and probably quite wealthy historian. He has gotten into the business of writing television documentary scripts, which he converts into books that can ride the wave of publicity from the TV version. The Ascent of Money is one such, and I should say now that I did not see the television series. In fact, until I read the Acknowledgements at the end of this book, I was unaware that such a program existed. Its origin as a Ken Burnsian voiceover for a television audience helps to explain the simplicity and clarity of the narrative of The Ascent of Money. This is a very readable book, and it contains some charming and well-told stories.

The basic structure of this book is indicated by the title; Niall Ferguson portrays the development of our financial institutions as a matter of increasing complexity and hierarchical evolution. That’s fair enough, although, just as in biology, there are plenty of simple forms being created today, along with the complicated financial products that triggered the recent crisis. It is, by the way, a good thing, I think, that Ferguson wrote this book in early 2008, before the full dimensions of the crisis were known, and before its impact on the “real economy” was apparent.

The chapters reflect Ferguson’s structural assumptions. “Dreams of Avarice” is about the invention of money and the evolution of banking. While one of Ferguson’s first stories is about a mountain of silver, he makes it clear that, even in Sumerian times, money was as much a matter of accounting and marks on paper as of precious metal. A lesson that is clear throughout The Ascent of Money is that money is trust: credit really does depend upon credo. And that is true whether we’re talking about cash, bank accounts, bonds, stocks, real estate, or derivatives.

“Of Human Bondage” is about the development of bonds and the markets for them. “Blowing Bubbles” concerns stock markets and investment bubbles, primarily the grand-daddy of them all: The Mississippi Bubble. “The Return of Risk” takes up the story of the insurance business. “Safe as Houses” is about the real estate market, and the development of securities based on real property. The last chapter, “From Empire to Chimerica,” is the most speculative, but it does give a clear portrait of the interdependent relationship between Chinese productivity and American debt.

This is a very painless way to learn a lot about finance and something about economics. It may also serve to help some of us to understand some of the events that have shaken the banking system over the past two years. How was it that big insurance companies were so vulnerable to the machinations of supposedly private deals among wealthy investor? Why did the banks’ strategy of passing their mortgage risks off to other people through debt-based securities backfire? Why is it that we still do not know the full extent of exposure of American banks to these problems? And why has 2009 seen 99 bank failures, some of them of very large banks, when the government “rescued” the system a year ago?

I’ll recommend The Ascent of Money to those of you who don’t know much about finance. One of the things I have been learning is that you can’t know too much about the stuff that may determine whether you spend your golden years living in a refrigerator box under a bridge. Another is that most of us casual investors don’t have the time, energy, training, or instincts to understand finance on more than a very superficial level. Reading The Ascent of Money is an enjoyable way to get an overview of a subject that many people think of as dull. But the understanding it provides is, of necessity, less than profound.

Chicken or Egg

Here's the deal. General Motors is not doing well. Citigroup is not doing well. General Motors took a lot of government money. Citigroup took a lot of government money. General Motors is about 60% owned by the government. The government has a large - maybe 40% - equity position in Citigroup. See, we told you that the government couldn't run large corporations at a profit! That's the position Daniel Gross is arguing against here. If it had not been for the government bailout, GM would be in a class with Packard, Stutz, and DeLorean - gone, gone, gone. No employees, no pensions, no suppliers, no dealers, just a line of vacant showrooms as far as the eye can see. That didn't happen, so far, and we have the Bush and Obama administrations to thank for it.

Why Is Ken Lewis Retiring?

This is a nice article about the role of ego in the career of the chairman of Bank of America.

As Frank Sinatra sang, "If I can make it there, I'll make it anywhere!" The appeal of New York in various fields - finance, broadcasting, journalism, ballet, classical music, cuisine - is undeniable. So when a kid from Meridian, Mississippi, finds that he can't make it there, it's time to retire.

I've been posting quite a bit from Daniel Gross's Moneybox column. Well, I think it's a good column, and economic and financial affairs have been, and continue to be, critical for the country at this time. Afghanistan, gay rights, and Bo's birthday may be hogging the headlines today, but the economic and financial issues facing this country are going to be driving the real news for a long time.

A Tale of Two Bailouts - II

"The bad news? While the government has pacified the commercial finance, savings, and plain-vanilla banking sectors, it's sending reinforcements into the vast, restive region where the trouble began: housing."

Isn't that just too depressing?

What's worse is that the FHA, the only lending organization in the country to retain some shred of sanity over the past few years, is now buying subprime loans. "In the second quarter, about 14.4 percent of the FHA's loans were at least one month past due."

There may be another shoe waiting to drop in the housing/financial crisis. Can anyone say "Double-dip recession?"

A Tale of Two Bailouts - I

Daniel Gross that we'll be all be out a few hundred billion dollars from the bailouts of the financial system. But what's a few hundred billion dollars among friends? At least, according to this column a lot of money has been collected from the banks in the form of fees and charges based on the amounts the Federal government guaranteed for them. Bank of America, for example, paid $425 million as a fee for a guarantee of $118 billion in loans, which it has now dropped as no longer needed.

I suppose that's the real good news: The banks are doing well enough that they no longer need some of these guarantees. Until the next time.

Exciting, Environmentally Friendly, and Profitable

This article by Daniel Gross contrasts the "old industry" financial folks in New York with the "cleantech" innovators in California. Cleantech sounds like being a lot more fun than banking and finance. (Well, okay, a lot of things sound like more fun than banking.) Someone once told me that many doctors went into medicine because it offered a way to do well while doing good. Cleantech has some of that same appeal.

Did Bush and Paulson Do Something Right?

Daniel Gross, author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, takes on a simple question in this column from Slate. Back when TARP - the Troubled Asset Repurchase Program - was created, there was a lot of skepticism about the program. From what I heard, a lot of people believed that we had seen the last of that $700 billion dollars. As Gross explains that pessimism was incorrect. The banks and other companies bailed out by the government have paid back around a third of the money, with interest. We, the taxpayers, may be making 17% on the money invested. This article provides a good account of the current situation with our $700 billion.