Thursday, August 14, 2008

The Spiral - Part I - Those Vultures

looks a little like carl icahn

It is beyond amusing the lengths to which CDO managers have gone (had gone) to avoid price discovery.  But the day of reckoning approaches them all, if it has not yet arrived.  Amusingly, two CDO managers I knew tangentially simply refused to accept reality.  Their superior management ability made it impossible for their CDO structures to fail.  The (Markowitz) efficient frontier was calculated to blend the tranches to perfect proportions, down to two decimal precision.  Superior in every way these structures.  Until they weren't.  I can't help but poke fun. [1 minute 18 second, 10mb quicktime H.264 movie]

Friday, August 15, 2008

The Spiral - Part II - Managing Directors Everywhere

destroy everythingPart II of the Going Private miniseries "The Spiral." Time is running out for the firm after the Fortress sale and the news of a pending Department of Justice investigation.  Even the thick disgust for leadership that middle management has, for years, carefully cultivated, cheers no one.  Resumes are flying.  The CFO makes a bold, last minute effort to persuade the Chairman and CEO, and the Head of Compliance has a run-in with legal over a point of ethics. [4 minute 15 second, 10mb quicktime H.264 movie]

Monday, August 18, 2008

The Spiral - Part III - On Stage

on stagePart III of the Going Private miniseries "The Spiral." A mortal betrayal by the CFO is revealed.  The head of the firm's mortgage desk airs his concerns about the firm's aggressive hedging positions, but the CFO cannot be bothered.  The exodus of firm personnel begins.  The CEO is repeatedly urged to consider asset sales, or at least an equity raise to prop up the firm's dwindling capital, but his focus is on the future, and the phoenix-like rise he believes the firm will undertake.  The sounds of financial panic, however, echo through his corner offices. [3 minute 28 second, 23.9mb quicktime H.264 movie]

Tuesday, August 19, 2008

The Spiral - Part IV - Liquidation

Liqu Part IV of the Going Private miniseries "The Spiral." The firm's most decorated and loyal Managing Director and Portfolio Manager of three of the firm's internal hedge funds gets wind that his funds are to be liquidated for refusing to buy the firm's distressed assets.  A visit to headquarters, and an encounter with a highly intoxicated bunch of the firm's accountants, makes it clear the leadership is misinformed and quickly deteriorating.  An unwanted promotion follows hard upon. [2 minute 52 second, 19.6mb quicktime H.264 movie]

Wednesday, August 20, 2008

The Spiral - Part V - The Board

Part V of the Going Private miniseries "The Spiral." The Board of Directors is increasingly perturbed with the Chairman and CEO, but their loyalties are difficult to shed.  Self-interest also prevents any meaningful change.  Meanwhile, the Chairman and CEO presents bonuses to prized members of his salesforce, but the effort now feels like something antique and obsolete. [2 minute 35 second, 44.6mb quicktime H.264 movie]

Wednesday, September 03, 2008

The Spiral - Part VI - Crescendo Partners

the last supper? Part VI of the Going Private miniseries "The Spiral." It is getting increasingly difficult for the firm's executives and senior managers to travel about without being attacked by shareholders and activists.  A new head of mortgage trading is appointed.  The CFOs brutal betrayal is revealed by a famous online gossip magazine.  The nature of consultants and their place in society is discussed.  The Chairman and CEO reveals his plans for a daring defense, but are they realistic? [6 minute 23 second, 118.6mb quicktime H.264 movie]

Monday, September 15, 2008

The Spiral - Part VII - The Kitchen

Kitch Part VII of the Going Private miniseries "The Spiral." The CFOs aide has vanished.  The Chairman and CEO begins to rebuff anxious minions for their disloyalty.  The dreaded "non-compete" clause strikes terror into the hearts of traders, once committed to the firm, but now despondent over the pay cuts they will be forced to endure.  If unable to keep them in the style to which they have grown accustomed, will they be able to withstand the wrath of their wives?  How will they break the news? [3 minute 38 second, 69.6mb quicktime H.264 movie]

Friday, September 19, 2008

The Spiral - Part VIII - Jet A

will 20,000 liters be enough? Part VIII of the Going Private miniseries "The Spiral." The wives and mistresses still in the dark, bad news begins to slip in from all over.  Capital reserves are almost gone.  A full fledged liquidity crisis is amiss.  The Chairman and CEO makes a rash and desperate decision.  Will his minions carry it out faithfully?  Will he face the troops?  Call an "all-hands" meeting? [4 minute 30 second, 79.6mb quicktime H.264 movie]

Monday, September 22, 2008

The Spiral - Part IX - Paulson

will 20,000 liters be enough? Part IX of the Going Private miniseries "The Spiral." With the Chairman and CEO missing in action, the margin calls come in.  A team of bankers meets secretly as they prepare to gut The Firm.  The complicity of certain regulators leaves a foul stench in the air as the Firm's negotiators prostrate themselves before the presence of a Wall Street luminary.  The offers are low.  Very low, and turmoil threatens to destroy what is left of the Board of Directors.  Despondent, one mistress resorts to an old habit for consolation. [3 minute 30 second, 59.3mb quicktime H.264 movie]

Thursday, February 19, 2009

The Spiral: The Director's Cut

the end'tis the end for Going Private and, though those with the taste for more of my musings can find them heretofore on finem respice (it is still in beta, be gentle to it), I thought it fitting to give you all the end of The Spiral as a little parting gift.  YouTube seems so, pedestrian, however, so, instead, attached below is the full, Directors Cut of "The Spiral" including the brand-new final chapter.  Caution: It is not for the faint of bandwidth.  The Spiral was, without a doubt, the number one generator of email commentary and I'm pleased to tie off this particular "loose end" in the last entry of Going Private.  The series also generated a number of reader questions, answers to most of which I typed up some time ago in a piece I planned to post with the finale.   You will find it below.  Hopefully, it has been worth the wait.

Q. What inspired the connection between Hitler and the credit crunch?

A. Actually, it was less about the personage of Hitler, or Himmler and the like and more about the tone of those times.  There is this latent, and eventually very blatant, desperation and despair in Oliver Hirschbiegel's original 2004 film "Der Untergang."  This group of supposedly brilliant and rational people, stuck in the Führerbunker, awake for 18-20 hours a day, constantly at odds with this unbridled enthusiasm, unwavering loyalty, indeed the cult of personality that surrounded National Socialism.  I think insomuch as Der Untergang is about the painful conflict between rationalism and this charisma driven mysticism, it is a perfect analogy for the credit crisis.  You have this unwavering belief that modern portfolio theory and Gaussian distributions, are realistic models of the world all the time.  That asset prices can only go up.  Forever.  And there is this huge confirmation bias built into the system.  I mean, when you have people repeatedly ignoring five, six and seven sigma events, instead frantically pointing to a model based on efficient markets theory, what's the difference between that and the National Socialist wonk who insists, "Aber, das ist ein Führerbefehl!" ("But that is an order from the Führer!")?  Interesting, that there was actually a word in German for an order from the Führer. Today we might call it a "normal distribution."

But it was always the people, not the models that were at fault.  I listened to these CDO managers just insisting that their structure couldn't possibly fail, all evidence to the contrary, and I couldn't help but think of Hitler's absolute conviction that Army Group Steiner, SS Obergruppenführer Felix Steiner's almost entirely fictional force, would attack the encircling Russians and "make military history."  That, on top of the fanatical, myopic loyalty of his senior officers.  You get these situations where the likes of Generalfeldmarschall von Rundstedt, tasked with telling Hitler the Eastern Front was about to fold for want of gasoline, comes out of that meeting eight and a half minutes later convinced that they will win a decisive victory.  If that's not a rather direct parallel to some of these senior managers in finance over the last 18 months, I don't know what is.

Q. Don't you feel some twinge of remorse at casting Dick Fuld as Hitler?

A. Well, two things.  First, "the firm" in the clips is not necessarily Lehman, or Bear Stearns, or any other bank in particular, though I do poke fun at some of the institutions that loom large in finance, Harvard, Goldman, The Treasury, Cain.  Second, I think it is easy to see the image of a banker you are looking for in the characters because, for good or for ill, they all act like bankers to some extent.  Really, the characters fit alarmingly well.  I think that's why it works.

Q. I take it you've gotten a lot of reader mail since posting the series?

A. People seem to overestimate the amount of mail I get quite a lot.  What I have noticed is that there is this class of financial Schadenfreunde who not only are eager to delight in the woes of others, but who are inclined to exaggerate (or even create) the Schaden themselves.  I have gotten a couple of emails from people enthusiastically convinced that I am a left-leaning anti-capitalist because all they have seen of my blog is the videos, and they write in the erronious belief that they have found a kindred spirit.  Of course, it is quite a shock to them when I refuse to agree with them that were are in, for instance, the down-cycle of the latest 50 year Kondratieff-wave, or that Kondratieff-waves or any other 20-50 year cycle indicator is worth the paper it's printed on.  The reaction can be quite violent.  An email exchange that started off with "love the blog, genius stuff, hey, what do you think of K-waves" turns quickly into "you fucking poser snob" when I won't join the "it's all coming down on our heads because of the reverse rainbow formation in my chart" crowd.  Ironically, these are people who are replacing one dogma, modern portfolio theory, with another less academically grounded worldview- macro-technical analysis.  Ugh.

Q. Where did you get the idea to subtitle "Der Untergang?"

A. Of course, I wasn't the first person to re-subtitle "Der Untergang."  Not by a long shot.  So it leaves something to be desired as an "original work."  Lots of readers seem to enjoy pointing this out.  What can I say?  I stand on the shoulders of giants.

Q. So you don't think the sky is falling?  Isn't "The Spiral" about how bankers blew it for the rest of us?

A. I think capitalism eventually punishes the consistently reckless.  I think capitalism eventually punishes those possessed of fatal doses of hubris.  With respect to both of these, I include central planners dedicated to e.g., the "American Dream of Home Ownership"- and these are far more sinister as they ply their myopia from the moral high ground.  At least capitalists don't try to tell you the urine on your head is rain.  All of these fantasies, from Gaussian distributions to price controls and "fairness," are excuses to be consistently reckless.  Any time you hear someone telling you "this time it's different" run, do not walk, away- and head straight for your broker to buy deep out-of-the-money puts.  Western equity investors have been spoiled beyond recognition.  I mean, if you really just want prices to go up all the time (except on certain commodities, because that would be bad), and you want to beat the stuffing out of short-sellers, why not just institute price controls on everything?  Either admit that you want a system based on bullshit that always does what you want (or what the ruling class wants), or a system based on free markets.  You don't get to have both free markets and endlessly appreciating asset prices.  You are not entitled to an eight percent return every year.  You should not be able to sue someone when you don't get it or get bailed out when you blow your fortune on opaque securities that not even a forensic accountant understands.

The Spiral isn't about bankers destroying wealth.  The Spiral is about the consequences of buying into the fantasy that you can have "soft capitalism."  Or "capitalism lite."  You can't.  It will bite you and everyone else on the ass if you try- no matter if you are a banker, a mortgage broker, a regulator or a legislator.

It has been a great pleasure writing Going Private these three years, mostly because of the many readers I have communicated with.  Thank you for that.  Enjoy the Director's Cut before Typepad decides that I am using too much bandwidth, and I will see you, I hope, on the new blog.

Download The Spiral (The Director's Cut) [00:35:20 - 178.9 MB .mov file]

Some administrative notes:

Sometime in the next few days the equityprivate -commercial at- hushmail address will be set "whitelist only" to stave off spam.  If we've talked there before, it will probably still work for you.  Be this as it may, you should use the new email address listed on the new blog to contact me.  I will be phasing out hushmail slowly.

I will leave Going Private up as a reference as long as it seems prudent to do so.  Eventually, the entire site will be shifted to an archive on the <em>finem respice</em> domain.  That day, however, is months (years?) away.

The removal of a link to the Director's Cut of The Spiral is probably a much closer event.  Act now, supplies are limited.

Finally- Some interesting statistics: After three years and almost twenty days, Going Private houses 445 posts, 9 comments and 89 "trackbacks."  As of this writing the blog has had just over 2.5 million page hits and, near as I can tell, around 1,500 direct links point here.  I have no idea where this ranks among blogs, except that it probably isn't very high given Going Private's particular niche.

Acta est fabula, plaudite!

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