Sunday, March 14, 2010

Intellectual Dishonesty (again)

Shot in the Dark has one decent writer (Mitch) who, despite engaging in sophistry to start off many of his posts, otherwise tries to argue toward a rational point. I don't always agree with Mitch, but he writes persuasively pretty often. To be clear, I frequently think he short changes decent analysis and seems to go out of his way to attempt to ignore or consider how very important counter-points dramatically impact his claims.

Shot in the Dark also has other authors - one is Johnny Roosh. JR apparently holds some sort of position in financial services, and has described himself as being a "financial planner." We've asked a few times what licensure he holds (Series 7 would be pretty standard) - but he hasn't answered. I'm not sure he is properly licensed, and frequently he makes comments which belie the suspicion that he is not, for he, like our former pest troll KR, claims that it was governmental regulation which caused the recent econimic meltdown/catastrophe.

I can't claim to be a great expert on financial services - I work in investment banking, dealing with large cash movement and the reasons for the appetite (or lack) of banks for deposits and the desires of brokers to make 'spread revenue' with the cash they have on hand. But, I DO work with some people who are VERY experienced in financial services, people reasonably well-known on Wall Street. I talked with them about what happened from 2007 into 2009. In short, what I heard was:

1. Companies, thru lax oversight, were allowed to hide debts (like Enron), and many, many of them did so.
2. People were overly incented to do deals - so they did bad deals when the good deals ran out.

Some of these kinds of deals were:
a. Many companies sold their bad debts off to other companies packaged up into deals with many parts, claiming they were good investments (i.e. derivatives)
b. Other companies effectively sold their debt exposure (insurance against loss) telling the buyer they were good ideas to hold the risk (Credit Default Swaps).
c. Still more companies bet long with what was supposed to be 'low risk' money - namely money market funds. When their bets failed, the underlying money fund collapsed.
d. Still MORE companies wrote mortgages with zero income to debt requirements, or wrote HELOCs with equity percentages above 100%, or agreed upon mortgages with HUGE balloon payments that they should have had zero expectation the customer would be able to pay when the interest rate or the balloon shot up.

Yet - people like KR (and JR, and Mitch), have attempted to claim that in fact it was TOO MUCH governmental regulation which really was the underlying cause of the collapse. Specifically that the 3% of the bank's books dedicated to providing mortgages at normal rates to low-income borrowers instead of jacking the rates or requiring outrageous down-payments (or both) was the underlying reason. Now, make no mistake, CRA loans WERE packaged in CDS's and derivatives, but they didn't cause those CDS's (or derivatives) to collapse by themselves. No, instead they collapsed for what was understood to be the underlying problem, specifically a broad and deep income weakness in a as weighted against increasing fuel and healthcare costs- which combined with ARMS and balloon payments (and some idiotic loans which could never ever have been expected to be repaid) caused MANY MANY MANY mortgages to collapse, MILLIONS more than all of the CRA loans.

Yet, when you want to hate the government, you look for any excuse.

So, to that I offer two comments -

First, my almost universally Republican friends who work(ed) on Wall Street think this line of blame (of the government) is laughably stupid. They know full well it was too many people, and too huge bonuses, causing them to chase too few good investments so they started chasing bad ones, combined with shrinking numbers of decent jobs.

Second - Wall Street knows it full well too. You'd be hard pressed to find anyone worth a damn actually blame CRA - they'd be mocked, they'd be a laughingstock. Consider the independent audit done by Anton Valukas (a court appointed auditor). In his recent report (March 12, 2010) - he found:

"“There are many reasons Lehman failed, and the responsibility is shared,” Mr Valukas wrote in his report, which was made public by the court on Thursday. “Lehman was more the consequence than the cause of a deteriorating economic climate.”

Those of you who have read my prior comment on this know that I've said Lehman bought too much bad paper - e.g. #2a and #2b above... Valukus goes on..

"In his report, Mr Valukas claimed that Lehman’s financial plight “was exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by government agencies, who by their own admission might better have anticipated or mitigated the outcome.” (e.g. #1 above)

By the time Lehman imploded, $25bn in capital was supporting $700bn of assets and liabilities, a leverage ratio that was regarded as extremely high. In an effort to maintain favourable ratings from the rating agencies, Lehman engaged in what was referred to internally as Repo 105, a sort of window dressing which involved getting $50bn of assets off the firm’s balance sheet at the end of both the 2008 first- and second-quarter balance sheets. The examiner quotes a Lehman executive saying, “there was no substance to the transactions”.

As anyone can see, Mr. Valukas was extremely critical of Lehman's leadership, describing them as absent or complicit.

Now, when I confronted my friend Mitch, he claimed the report was work of a 'biased NYT report.' His reaction was knee-jerk ad hominem. He didn't research the report. This was no such thing, it wasn't simply Op Ed - which Berg has no problem quoting when it's conservative spin from the Journal, NO, the report was put together by Anton R. Valukas, a former federal prosecutor and current chairman of the law firm Jenner & Block, who is serving as an examiner for the bank. As JDsupra.com notes - "Examiners in bankruptcy cases are appointed to investigate accusations of wrongdoing or misconduct. Their job is to determine whether creditors can recover more money in these cases, and their findings often serve as guides for more lawsuits and even regulatory action." He is eminently qualified to draw his conclusions, and is certainly far more an expert than my friend Mitch, or his supposed financial expert, John Roosh.

As a further aside, Mr. Valukas gave $3000 to the McCain Victory campaign for President prior to giving $4000 to Rudy Giuliani's campaign, whom he apparently preferred. Yep, Mr. Valukas clearly is a biased liberal.. but even had Mr. Valukas actually BEEN a liberal - what would it matter? He was charged with a task, a legal responsibility - how dare anyone claim he would change the numbers it for simple politics? Apparently it's easier to use baseless personal attack for Mitch than to do actual research. So, he winds up looking foolish (in the extreme) by claiming the report was simply spin. Or maybe, just maybe, Mitch seems utterly unwilling to conduct himself in any regard on his blog without massive spin, and so is equally unwilling to conceive that others are actually upright and honest. Consequently, he attacks a dyed-in-the-wool conservative Republican who did his job professionally, and seemingly well. He attacks him by claiming his report was liberal spin. This kind of knee-jerk truly baffles me, yet I encounter it over and over again from the likes of Mitch, for to consider the alternative, that Valukas' comments were true, would fundamentally indict the idea that capitalism ran amock, greed often has consequences, and most importantly, that the government didn't cause anything due to too much regulation, but may well have enabled it through far, FAR too little. Lax regulation was the watch-word of the Bush Administration and the end of the Clinton Admnistration with the willing agreement of folks like Phil Gramm. Ad hominem is the argument of the weakly justified - and it seems, the poorly researched.

Anyway, back to the point - Today, Michael Lewis, Wall Street 'wunderkind', and author of "Liar's Poker," has published his own analysis...
- Michael Lewis, "Inside the Collapse."


"This was an episode where capitalism was almost destroyed, just by the capitalists. And, in the most sensational way, they were sort of destroyed by their own folly," Lewis told Kroft.

Asked what happened, Lewis said, "The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests."

So, when someone claims the governement was the cause - much like they might claim FDR (and liberalism) caused the Great Depression - laugh, laugh out loud, and let them know, you are laughing at them.

For my friend Mitch and the reader, I would ask whose version do you think is more likely true, the one which pretends to blame 3% of the mortgage market (not to mention doesn't for a moment explain the present danger of a commercial mortgage market collapse), or the one (I'd like to think mine in contrast to "theirs"), which is embraced by Wall Street, hangs together logically, makes sense, and which nearly every analysis points to? When you decide you already know the answer to every question, and that answer is "it's the governments fault," you wind up looking and soundling like an extremist with a tin ear, wearing blinders, which I suppose is best, because that way you don't have to hear the laughter.

10 comments:

  1. Well I agree with you more than your friend Mitch. You and I have talked about this several times and the big investment banks mostly did this to themselves. Anyone who works in a large, Fortune 500, company should be able to see this even today. My employer makes money off real estate transactions by servicing loans, doing titles, and other things. They complain about a soft market with no one buying real estate while at the same time laying people off and replacing them with people in India and other countries. They either don't see or don't care that every one of the layoffs contributes to the soft market they are hoping will end.

    That said there is one area where the government, Congress specifically, is partially responsible for what happened. One of the only things financially Bush tried to do right is both he and McCain asked for more regulation of Fannie Mae and Freddie Mac and Congress refused as most of the committee members were getting large donations from them. If Fannie and Freddie say they will not buy risky loans then the banks will not make them. There is a bill right now, not sure where it is in the process, in which Fannie and Freddie will have the right to review the original documents for any loan they buy which defaulted, if the loan does not meet minimum standards they set then the bank that made it takes the hit and not Fannie and Freddie.

    On the other side of conservatives saying that the government caused this is some liberal claims that capitalism does not work. This does not prove capitalism does not work, it does however prove that capitalism does not work when you can take risks, get the profits if they pay off, and have someone else take the loss if they do not. For capitalism to work the person taking the risk has to take the loss if there is one. You cannot have a Fannie Mae and Freddie Mac buy up all your risky loans and let the taxpayers cover your losses when they default. If government corps are going to buy up loans and the risk that goes with them you have to have regulations controlling what kinds of loans can be made.

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  2. Blinders, baby, blinders.... It is easy to hold onto a theory or position if your blinders are large enough to shield out research (or to only search out research that furthers your cause. And in this day of the internets, that's pretty easy to do....).

    I'm getting sort of tired of the SITD single-mindedness-only-my-truth-elitism. I continue to search for a good conservative-leaning Twin Cities blog with open comments but have yet to find one. Any suggestions?

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  3. Tuck,

    While I agree Bush BELATEDLY looked for more oversight of Fannie and Freddie, understand that he didn't come to this until late. By 2005, Fannie and Freddie held a combined $7T in debt, was being run by Harvey Pitt (an old friend of Bush's) and was in ruins (effectively).

    Bush finally had to oust Pitt and start looking for someone better (whom he found) - but lax oversight was the watchword of Bush's first 4 years - and he only started acting where Freddie was concerned when the situation was in freefall.

    With respect to accepted loans - I concur that Freddie should hold some right of review, but let's remember why both were created - they were created to help back stop FHA and VHA loans to ensure those loans which the government said it would back, would in fact be backed - YET - they wanted to keep the actual operation private (similar to how Medicare is run) - so Freddie and Fannie appeared (I'm going a bit from memory btw).

    Freddie and Fannie LONG used the promise of Fed Government backing to stabilize their reputation. They were able to be liquid and solvent prior to folks deciding to write horrid loans. As long as people complied with FHA standards, Freddie and Fannie weren't going to get saddled with many bad loans, but, poor underlying conduct got passed along. My issue with rejecting lots of loans is that these loans were written with the promise of FHA support, if you put that in jeapordy, they don't get written, and not just BAD loans don't good FHA loans don't.

    The better course, to me, is to hold the underlying bank accountable for the insolvency of the FHA loan.

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  4. Redbeard,

    Prior to his departing for "Hot Air", I would have said Ed Morrisey's "Captian's Quarters" without hesitation. Morrissey was still a conservative, but he was generally honest about how he treated subjects.

    Now.. I don't know - Mitch writes a lot, but too much is just invective disguised as discussion (outside his stuff on musical gear and history). But... based on your question I realize I'm remiss in reading a little more broadly stuff from the right now that CQ is gone. So, I'll look around and post back.

    I'll tell you this, the following are simply crap (in increasing degrees of crapitude) and Mitch is hands down better than any of them-

    1. AntiStrib - a blog of mostly useless bloviation, with a comment section of even greater amounts of ad hominem and invective

    2. TVM - wow.. sophistry disguised as populism.

    3. MDE - GOP lapdog and mouthpiece

    4. Whateverinthehell Joe Tucci calls his useless blog

    5. Grumpy Old Men- Swift and KR hang out together - yuck.

    I know that the Admiral and some others used to do a decent job up at SCSU Scholars - maybe I'd start there - assuming they're still in business.

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  5. BTW, Tuck, I've not heard one credible liberal say capitalism does not work, I've heard them say unfettered capitalism doesn't, and I'd agree. Any financial model which doesn't have some restraint on the ability of ownership to create monopolies and drive labor into the ground is one which is no less destined to fail than one which provides no incentive for innvation. Unfettered capitalism leads to monopoly, and must, by it's very nature, fail as a result as it then gaurantees no competition, price fixing, and extreme resistance to change.

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  6. Redbeard - Dog Gone here - are you looking for a strictly Minnesota written conservative blog experience?

    If you aren't that specific, there is a link on oru blog to OpinionEditorial.com, which is set up to feature left, middle, and right/conservative writing -- literally, in columns left, center, and right. We link directly to it.

    Some of the writing is quite good, and not the same old same old from the major sites.

    Pen is wrong about one minor detail. You don't have to go to Grumpy Old Men to find KR and Swiftee (and Terry) the familiar faces from SitD. You can find them on Apathy Boy's blog (yup, we link to him too--- Hi! AB!!!!).

    The three of them comment prolifically on AB's blog.

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  7. I would like to like to try n stick with TC-based blogs, but if I find something somewhere else I'll go there.

    Thanks for the recommendations.

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  8. Unfettered capitalism works in some markets, mainly where the cost of entry is low. If a carpenter lowers his prices to the point he puts other carpenters in the area out of business generally when he raises then some of the carpenters will come back and undercut him bringing the prices back down. However when you are talking about a multi billion dollar investment bank or phone company that does not work because no one wants to risk that much money on the chance the other company will not do it again. There are also other problems in that you have the Federal Reserve basically setting the rates banks borrow at so the cost that affects the consumers the most, what the bank pays for their money, is basically the same for every bank, not really a lot of competition when that happens. When I bought my house recently the finance company got 7 quotes for interest rates, the difference between the highest and the lowest was about $10 a month, now over 30 yrs that is $3600 but was still less than the downpayment much less closing costs and stuff, not enough of a difference to make me go with anyone other than the first that took the loan. If there is not enough of a market and enough competition that the businesses keep each other honest you have to have regulation. Some things are better off as regulated monopolies, power for instance, I think every state that has deregulated electricity providers has seen their costs go up. In Texas our cost to produce electricity is lower than all but 2 or 3 states yet the average price we pay per kilowatt hour is higher than every state except California and New Jersey. One company still owns all the lines and meters. One company owns about 85% of the power plants, all the others are buying in bulk and selling for a bit more. Now the biggest supplier of electricity is going to the PUC asking for a rate hike because people are using less so they are not making the percentage profits they were promised when the industry was deregulated. Oh the other thing that happened within 6 months of the deregulation is that all the electric suppliers in the state were bought by investment firms. TXU had 8 new power plants planned that would have been some of the clean coal and natural gas plants Obama talks about. These new plants would have dropped our electic costs to some of the lowest in the country. The first thing the investment firms did was cancel them because they did not want the costs to drop. In some industries you just need regulation.

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  9. I’ll use a technology example that is important to our eyes – video tape recorder formats. In the late seventies, the free market created two competing video tape formats; (1) VCR and (2) Beta-Max. While beta-Max was a technically superior recording format (primarily due to a higher resolution), the VCR format won out in the market place. VCR, it seems, was a good enough product that hit a home run in marketing and manufacturer acceptance.
    Should free markets be regulated?
    Proponents of the free market do not realize that the free market system too, is an evolutionary system. Because they do not abide by it, they know very little of evolution and thus, little about how a free market actually works.
    I find it interesting that free market proponents oppose nearly all legal constraints on the markets because they fear such constraints hinder the market’s ability to provide the “best” solution to any social – or at least economic - problem.
    All complex adaptive systems, it seems, evolve by following a relatively few number of rules. These rules change and evolve as the ecosystems change and evolve and as species within the ecosystems co-evolve. The free market works in the same way. As the markets evolve – owners change, and as companies enter and leave the market, the market itself evolves. If rules do not change, a particular market will become top heavy and crash (Sound familiar?). Complex systems theorists say that such crashing systems evolve to tread on the edge of chaos – and eventually fall into the abyss unless a fundamental paradigm shift can be made. Changing rules promote such paradigm shifts.
    A free market cannot operate as a free market if there are no rules. The fact is, there will always be rules and the question we must ask is: do those rules serve the greater interests of society, or do they serve only the parochial interests of a small group of market players? Since society as a whole is the ecosystem within which the free markets exist, that answer is obvious. Yes, free markets must co-evolve within a larger ecosystem of world economies and societies.
    And yes, free markets must be regulated by rules imposed upon them by the larger ecosystems within which they operate.

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  10. Intellectual dishonesty is often driven by belief systems. When belief systems trump rational reasoning, the result is intellectual dishonesty or what I often refer to as intellectually “strange bedfellows.” One example that is relevant to this discussion follows:
    Based upon my observations, I would assert that politically conservative thinkers are most often conservative in the way in which they approach their religions. For example, they are more likely not to accept the theory of evolution and often oppose its teaching within the science curriculum of public schools. These politically conservative people are also strong advocates of what they call the “free market.” What such people fail to understand is that biological evolution and the free market are manifestations of the same underlying processes! In short, they both work the same way.
    That underlying process is evolutionary change. Anti-evolutionists who are free market advocates are intellectually strange bedfellows indeed!
    Biological evolution opponents most often do not understand how evolution works. They often oppose evolution because it does not seem to fit within their belief systems. They simply deny the increasing body of fossil evidence that supports biological evolution. They simply fail to acknowledge the mechanisms of evolutionary change that can be observed within existing species and ecosystems. However, these same people embrace evolutionary processes when they play out in the free market. They don’t call free market processes evolutionary, of course, but that is precisely what they are.
    Let’s compare the two:
    Biological Evolution: Survival of the fittest (Natural Selection)
    This term was not originally coined by Darwin. Close associates of Darwin convinced him to introduce it as what we would now call a “sound bite” to make it easier for people to understand the process. It was an unfortunate decision. Natural Selection, the term Darwin preferred, much more accurately portrays the actual process. Natural selection is an almost cooperative process whereby biological organisms co-evolve to their mutual advantage. The basic unit of biological evolution is now generally believed to be the gene. In Darwin’s time that fundamental unit was believed to be the individual organisms of a species.
    It is very important to note that biological evolution does not lead to perfect adaptations. The eye – often cited as evidence of intelligent design – evolved several times and each instance its development is far from perfect. An intelligent designer could have done a much better job in each instance. But biological evolutionary processes lead to the development of an adequate eye – an eye that was good enough.
    That is an important concept for free market proponents to keep in mind.
    The Free Market: Competition brings out the best (Survival of the Fittest)
    Free market proponents believe that market competition brings out the best through a mechanism similar to Survival of the Fittest. And they make this mental jump without acknowledging the underlying mechanism – evolution. The basic unit of market evolution appears to me to be owners. Others might assign that fundamental characteristic to companies. A market is probably equivalent to a small ecosystem in biology. Entire economies or societies would be equivalent to large ecosystems.
    While free market proponents sincerely believe that free market competition will ultimately yield the best solution, the laws of evolution – which bind the free market just as surely as they bind biology – don’t produce perfect results. Free markets, too, only yield solutions that are good enough.

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