A Commonplace

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30/9/2017

Sat, 23 Aug 2014 14:49:09

What I Read on My Holidays.

I read "Worldly Philosopher: The Odyssey of Albert O. Hirschman" by Jeremy Adelman. - on the back of an article that I read by Malcolm Gladwell. The biography was interesting - I mean, what a life the guy had. He fought in the Spanish civil war, he fought in the French army against the invading Germans. He helped Jewish people escape France to America. He joined the American army (he was impressed with the US army, having been in the French army because they had food, uniforms and guns). He was the German translator for the first German general to be sentenced to death for war crimes. He was blacklisted as a communist during the McCarthy era (for the crime of having a background that was just "too complicated"). But actually reading the book was nowhere near as much of a revelation as reading one of the most famous essays by the great man himself "The Principle of the Hiding Hand" by the great man himself. Which has supplied me with the concept of the "Fata Morgana". I'm going to be developing and babbling to people about over the next year, I'm very sure. Plans are Fata Morgana (Fatae Morgana?).

I was on holiday, and so I wanted something readable. The economics and the academic sniping at the end of Wordly Philosopher was getting just a bit tedious. So next I read "Double Down: The Dramatic Inside account of the 2012 Presidential Election" because I read "Game Change" and loved it and found it very readable.

A friend of mine recently talked to an American billionaire and Republican party supporter who thought that because he paid more taxes than any individual poor person he should have more of a vote, kind of getting back to the good old-fashioned rotten boroughs system in England that the US war of independence was a revolt against. You can see why this kind of thinking might be gaining credence amongst the republicans. They don't seem to be able to field a candidate for the presidency that anybody wants to elect. Rick Santorum? Really? By the standards of US presidents (and this is NOT a high standard) Mitt Romney might actually have been half-decent.

But he had a few problems. Firstly, you suspect, he didn't really want to do it - why would he? He had a ton of money and was building a massive beach house he could fill up with all his Mormon kids and their kids. Secondly, the main reason I think he would have probably been OK as a president is the main reason the republicans hated him: because he came up with a way of providing socialised health care in Massachusetts. Yeah, that's right. What kind of crazy commie comes up with a way of providing everybody with health care at an affordable price?

The other interesting thing about this book was the travails of Obama through the television debates. He totally messed up the first one and was clearly out-prepared by Romney. And for a long time the second debate looked like it might be going the same way. Some obvious stuff got fixed - Michelle made sure that he was well-fed, well-rested and he'd been able to talk to his family - things that had unaccountably been a problem in the first debate in Denver. But still there was a problem which seems to me to show the exquisite dance that you need to be able to perform in your head to get the top job (the Greeks call the US President "O Planetarchis" - the head of the planet). Obama kept dealing with the logic of the arguments that were levelled at him, especially the Obamacare "Death Panels" garbage championed by Sarah Palin rather than just being statesmanlike and landing blows on top of Romney's self-inflicted injures (47 percent of people aren't going to vote for me anyway because they're poor, I like firing people, London isn't ready for the Olympics).

Finally - his advisors managed to stop him talking about the dreaded election Kryptonite IPABs (the real name for the death panels - although they aren't real) only by showing him video of him talking about them and letting him see just how awful it was for himself.

How interesting. In "Death Panels", Palin had found herself a Fata Morgana - not a seducing one, but a terrifying one. And like all fairies that hover on the horizon, menacing or seducing - it was dashed hard, no actually impossible, to kill with logic. The only way to defeat it was to persuade everybody to look the other way.

Then I read some books about financial disasters. I'd read Michael Lewis's book "Liar's Poker" about twenty years ago - and then more recently, I'd read the truly awesome "Moneyball". So I thought I'd read "The Big Short" and soon realised that this was about a different Fata Morgana - the AAA credit rating.

So here's the game. If I lend someone money. Then I can charge them interest on that money - great. But there's a risk that they won't pay be back, so there's a limit to the number of people I'm willing to lend money to and there's a limit to how many people I can lend money to - how much money I've got. Well, I can get rid of this second limit by lending to AAA people and then selling the debt on to other people as a bond - which pays interest every month. Now I have more money to lend to more people - but there's only a limit to the number of AAA people that I can lend to. But now I've got an idea. How about I lend to lots of people who aren't AAA people - these people are called "sub-prime," but we won't call them that in front of customers obviously. Our logic (if you can call it that) Is that if we lend to enough of these customers - and we'll call this our "loan pool" - we can hypothesise that some of these not-AAA people will still pay back their loans in full, over the period of the loan, just like nice AAA people. Some won't, but let's not worry about that just now. Now we can slice up our loan pool and sell of the "top layer" of these loans as bonds - just as if they were "AAA" loans to "AAA" people. OK, here comes the tricky bit. What if you take the loans that aren't AAA in these loan pools and then pool them again? Well if nobody's looking too closely (and bizarrely, almost nobody was) you can make the same claim. Some of these loans won't be repaid, but some of them will - and the ones that will - we can sell them as AAA bonds. Never mind that after a few runs through this cycle the loan pool that you're dealing with varies from loans where the people who borrowed the money are so poor that they won't be able to make payments after the initial "teaser rate" period has finished to people so poor that they won't even be able to make the first payment.

Right. Up to this point the whole business of of CDO's was just dumb and possibly criminal. But that in itself wouldn't have been enough to almost bring down the world's economy. No. Here's where it gets really crazy. Because some people started to get the idea that these sliced and diced pools of loans (they have a name - Collateralised Debt Obligations - CDO's) were a really dumb idea. But, being financial market traders and merchant bankers and bond dealers, they didn't do what you or I would do if we thought something was a bad idea - avoid it. Rather than do that, they bet big money against the idea of these CDO's. And they did this by taking out a special kind of bond insurance - an insurance policy that would pay out if these bonds failed. This kind of bond is called a "Credit Default Swap" a CDS. OK, here's where it gets even crazier. In order to take out this insurance on a bond failing, you don't need to own the bond. So that means you can take out as much insurance as you can afford on the bonds failing and all you lose is the premiums. And initially, because the general view was that Collateralised Debt Obligations were a good bet - they had the triple A rating right?

Perhaps it isn't a surprise that some people figured out what was going on and, ultimately made a lot of money. Perhaps what is more surprising is the amount of grief that they got on the way to being right. I know this first hand from a friend of mine who runs a hedge fund - there is a disproportionate amount of energy devoted by his clients to complaining when things aren't going so well. Especially if a fund is losing money.

What is utterly astonishing is that when people started buying CDS's (bets that CDO's would fail) in large numbers there was always someone willing to sell them. One of the companies will to sell them was the giant America insurance company AIG, which ended up being on the "wrong end" of up to $700bn worth of Credit Default Swaps.

Following on from "The Big Short" and breaking a rule that you should never read two books by the same author back-to-back, walked my mobile phone down to the beach where I could get decent reception and downloaded "Boomerang" which is Michael Lewis's follow-up, watching the donkey of the sub-prime disaster go through the boa constrictor of the world economy by visiting Iceland, the Republic of Ireland and Greece. It's a less interesting book than "The Big Short" because Lewis suffers to some degree from a problem he shares with a lot of other Americans. Their critical stance when writing about life beyond the borders of the USA essentially boils down to "Why do you do things like we do them in the states?" To which, the answer is so obvious that it simply seems rude to make it explicit - "History, culture, economy, geography, society. You know, all that stuff that varies from country to country?" All the things that make America, America are different in other places. For example, to explain anything like the near-default of the Greek economy by pointing out the selfishness and greed of the Greek people is utterly meaningless. It is like explaining with reference to their oxygen dependency. And also can it really be true that Greeks as a nation are particularly more selfish and greedy than Americans?

But it did make me start to think about the decade we haven't yet quite decided to call the noughties. And the phrase that W H Auden used about the nineteen thirties in his awesome poem September 1939. "A Low, Dishonest Decade". Were the noughties, starting perhaps with September 11th a low, dishonest decade? And what the fuck did just happen in Ireland, in Iceland, in the UK?

Perhaps proof that Greek people are not particularly more selfish, dishonest and venal than any other race or nationality can be found in Harry Markopolos's fascinating book - "No One Would Listen.".

In the early years of the noughties Markopolos, who had cut his teeth as a detector of fraud ferreting out employees who stole frozen fish from his father's fish and chip restaurant, was working for a small investment firm. He found himself being asked to analyse an investment fund being offered by a competitor that was doing very well, delivering over one per cent return per month. Very quickly, after doing some initial analysis, Markopolos became convinced that the fund - run by a respected member of the New York financial community, Bernie Madoff - was a "Ponzi scheme.". This is a form of con in which existing investors are paid using the money of new investors in an ever-growing, but ultimately doomed-to-collapse pyramid.

But it took a long time to collapse. Partly because the Securities and Exchange Commission, the US Government Body that was supposed to be regulating such things. Well. Wasn't. Markopolos made five separate submissions to the SEC over a number of years and none of them revealed the scheme to be a fraud. Ultimately it collapsed on its own, as it had to do. But not before it had taken sixty-five billion dollars of the money of institutions and individuals. Sixty-five billion dollars.

There are a few things that make this book such a fascinating read. One is Markopolos' nerdy paranoia. I'd love to see the scene in the movie where he explains to the chief of police in the small town in Massachusetts that he may be the target of an international Conspiracy (it would be great if Jim Carey could play him). Although the guileless way that he describes arming himself with a shotgun and several belts of cartridges starts alarm bells ringing.

The other is the unrelenting pressure of his managers to "produce something like Madoff's product." Even though they knew that it was a con. But here were are again - the Fata Morgana - the deceiving fairy. The one hundred percent safe investment that returns better than the market. But, to refer back to something that I've talked about before - here we see the Gervais principle in action. The Sociopaths ask the losers for the moon on a stick - the Fata Morgana - but make sure to leave it up to the Losers to figure out how to deliver the impossible. If they're good, smart sociopaths, they never ever explicitly break the law - that would be stupid. So they can continue to take fees from the clients and pretend to be surprised when it turns out that the risk-free investment that returned better than the market was in fact a fraud.

I don't seem to be too interested in fiction at the moment - but I do seem to be interested in money (for those who know me personally this will be a surprise). But not as interested in money as the great train robbers. The one novel I did read was Signal Red by Robert Ryan. It's a fictionalised account of the great train robbery and a right riveting read. What's interesting about it is the relatively carefully planning that went into the robbery, compared to the little planning that went into the clean-up after the robbery and the zero planning that went into laundering or hiding the money once it had been stolen. Maybe what they really needed as part of their firm was a bent banker like Bernie Madoff. Then again, maybe not.