Monday, December 28, 2015

The Big Short, Advice for Politicians and a New Short Story

                                                                

The Big Short
I heartily recommend a film I saw this weekend.  The Big Short is an adaptation of Michael Lewis’ book describing the events which led to the financial debacle which occurred in 2008 in this country and affected the entire world’s economy.   Basically, the movie illustrates how sub-par mortgages (which never should have been granted in the first place) were bundled with healthier mortgages the payments on which were being regularly made and widely traded as AAA rated packages of mortgage-based securities.  


All of the major investment banks were doing this. Three astute investors, the book and the movie show, caught on to how this scenario had to inevitably collapse and found a way to wager on the likelihood of this collapse through investments designed specifically to profit only when the mortgage-based housing market and the mortgage-based securities based on it collapsed.  This practice, shorting these securities through vehicles known as “swaps,” worked. This was “the big short.”

 
Scene from the film


The housing market did indeed collapse in 2008 and they did make a lot of money, but tragically, only at the expense of individual homeowners and ignorant bankers.  People lost their homes; Lehman Brothers and Bear Stearns, major investment banks, failed, and AIG, an insurance company which sold policies to investment banks designed to pay off only in the unlikely event the value of mortgage-backed securities collapsed, had to be bailed out by the Federal Government.  


See the film.  You should walk out of it convinced that stricter government regulation of everything that takes place on Wall Street is absolutely necessary, and asking yourself the question of why hundreds of Wall Street investment bankers and mortgage brokers all over the country are not in jail.  Many of those serving hard time in Federal penitentiaries today committed far less serious crimes.  Similarly, the government regulators who allowed this to happen should be hauled onto the carpet and prosecuted as well, if necessary. 


(Of the current campaigners for the Presidency in 2016, only Bernie Sanders recognizes the need for such changes in the financial marketplace.  Hillary Clinton and all of the G.O.P. hopefuls seem to be willing to let things slide with only cosmetic changes.  Even today, investments in “junk bond” funds seem to be plummeting; fortunately, the Dodd-Frank reform bill has limited the role of banks in investing in these risky securities.  I am certain that somewhere, by someone, they are being “shorted” but on a scale far less than what happened in 2008.  Should we have another economic meltdown stemming from Wall Street excesses, however, look for Senator Elizabeth Warren to make a strong bid for the Presidency in 2020.)
dek Hank Paulson, former Goldman-Sachs head, was appointed Secretary of the Treasury in 2006 and all of this stuff happened on his watch.

I find it impossible to believe that government regulators and banking and investment executives did not understand what was going on!  The three investors in the movie figured it out and found a way to make millions from the collapse of these securities in 2008.  Even dumb little old me, here in Boynton Beach, suspected something unsavory was going on.  In fact, here is the text of a letter I wrote which was published in the Palm Beach Post on December 1, 2007.


“To the Editor:

According to the article, "HSBC to rescue troubled funds,' (Tuesday, Business), 'Structured investment vehicles, or SIVs, sell short-term debt such as unsecured commercial paper to hedge funds and other investors.  The banks use the proceeds to buy longer-term assets such as mortgage-backed securities.'


Unsecured commercial paper, hedge funds, mortgage-backed securities: Balderdash! (used in lieu of a more feisty, unprintable expletive).  Investing in money as a commodity never will replace the economic growth that manufacturing and harvesting of natural resources produces.  It may make millionaires out of some bankers and investors, and create some liquidity in the financial marketplace, but it does not create jobs and consumer spending, without which our economy will continue its slide down the tube.

Jack Lippman"


See the movie and hereafter take with a grain of salt anything said by bankers, investment “experts,” government regulators and of course, economists.  Question any scheme’s credibility when it is based on what rating companies like S&P and Moody’s say about it.  Most of these dodos missed the events leading up to an economic debacle which almost destroyed our country and the effects of which are still being felt.  If even I was able to smell a rat in 2007, you too should be able to do so today.

JL
                                                       


Advice for Politicians from the Writings of Lao Tzu 

(The Way of Life – 17)

A leader is best

When people barely know that he exists,

Not so good when people obey and acclaim him,

Worst when they despise him.

‘Fail to honor people,

They fail to honor you;’

But of a good leader, who talks little,

When his work is done, his aim fulfilled,

They will all say, ‘We did this ourselves.”

                                                     
Weight Loss, the Hard Way


Bill laughed when Tony told him he had made a New Year’s Resolution to lose at least forty pounds during the upcoming year.


 “Tony,” Bill replied, “You said that last year and the year before as well.  You went to Weight Watchers for a while, you joined a gym, you ordered those special food packages to help you lose, and I remember you were seeing a nutritionist for a while.  You even tried running each morning. That lasted three days, right?  None of it seemed to help, did it? You’re still the same fat guy you’ve been as long as I’ve known you.  Nothing will work for you.  You’ll always be fat.”


overweight man on scale


“This time it’s gonna be different.  And here’s how.  You’re going to help me lose the weight, Bill.  Let me tell you how!  Since you seem to think I won’t lose the weight, let’s put some money on it.  How about me putting up $5,000 that says I will lose forty pounds this year … which you will get to keep if I don’t?”


“And if you do lose the weight, what happens?  Do I have to pay you?” Bill asked.

“That’s the idea … but I’ll make it easy for you.  “You’re so damn sure that I’ll fail to lose the weight, like Iast year and the year before, that I’ll give you odds.  If I lose the weight, all you have to do is pay me a grand!  I’m giving you five to one odds!  That ought to give me the incentive to lose the weight.”


Bill wasn’t laughing anymore when he grasped Tony’s hand and sealed the deal.  He knew that Tony was totally serious about the wager, and would probably give it more effort than he had in the past, but It probably would turn out to be the easiest $5,000 he ever made. 
  Tony and Bill worked with gaming industry leaders such as John Avello, who runs the Wynn sports book in Las Vegas.

Tony and Bill both worked as well-paid professional odds-makers in the sports book operation of one of the larger Las Vegas casinos.  Each could well afford to lose the bet, but since both were career professional gamblers, both of them wanted to win it as a matter of personal pride.  Just as they derived great satisfaction from coming up with accurate point spreads on basketball and football games, both also had difficulty dealing with situations when their predictions turned out to be wrong, and both carried that attitude along with them when they made the wager about Tony’s weight loss.  Both wanted to win.


As the year progressed, Bill saw that Tony was actually losing weight.  Apparently, he was watching what he ate and exercising daily, and that was doing the job.  Bill knew that if things continued that way, he would lose the bet and he had to do something about it.


Knowing that Tony loved pizza and couldn’t resist a slice or two regardless of the hour, Bill arranged for large pies covered with extra cheese and pepperoni to be delivered to Tony’s apartment two or three times a week.  Whenever Tony came into Bill’s office at the casino, there always were bowls of chips and trays of various dips and cheeses sitting there, along with cans of soda and beer.  Bill knew Tony had trouble resisting that kind of stuff. And of course, Bill made sure that enough of his own favorite nosh, chocolate dipped caramel popcorn, was around for Tony to indulge in when the two were working together.


Tony was no dope and knew what Bill was doing.  “Bill,” he would say, “I know what you’re trying to do.  I would do the same if the shoe were on the other foot.  I understand.”  He tried to avoid the temptations being put before him, but found that very difficult.  As the year progressed, what weight he had initially lost was slowly being regained.  Bill’s plan was succeeding and it looked like he would be winning the $5,000. When the year drew to a close, Tony weighed just about the same as he had when they made the wager.


Turning to Bill as they were leaving the casino one evening in December after working on the point spreads for the upcoming bowl games, Tony suggested that they go out to dinner together.


“Bill, you win our bet.  Let’s go across the Strip to my favorite steakhouse and I’ll write you a check for five grand over a couple of filet mignons and some chocolate cheesecake afterwards. Okay?”


As they stood waiting for the light to change, a car careened out of the roadway into the crowd of people clustered at the crosswalk, knocking them down like a bowling ball slamming into the one-three pocket.   You might have read about this accident in the paper or seen it on TV.  Several people died instantly.  Bill managed to jump out of the way, but Tony wasn’t so lucky.   He was among the severely injured.

 
Accident on the Strip


About two weeks later, when Tony was being discharged from the hospital, Bill was there to pick him up.  Tony was on crutches, and his left trouser leg was pinned up above where his knee should have been.


“Don’t worry about me, Bill,” Tony joked.  “They’re already working on a great prosthesis to replace my leg.  Nowadays, they’re like computers, electronic and everything.  I’ll be fine!  And by the way, the chunk of my leg they had to amputate weighed 43 pounds, so you owe me a grand, buddy!”

Jack Lippman



                                                


                                                

                                             




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