Archive for the ‘Uncategorized’ Category

Missing the point – Jake DeSantis

The leaked letter from Jake DeSantis (reprinted in the NY Times) is a good example of the kind of narrative that we have seen in a number of different places recently. The basic story is that he worked in AIG Financial Products but he didn’t specifically work with Credit Default Swaps, so none of this was his fault, he deserves his bonus, and everyone should just leave him alone. This letter is specific to AIG, but we’ve all seen the broader story across all the banks.

The problem is that this narrative is crap. If we have learned anything from this debacle (and from LTCM), it is that trades that appear “safe” or “consistently profitable” might have not really been generating actual alpha over time. He says that he worked in the equity and commodity groups. Do we know what would have happened if there had been a tail event in those markets at the level that there was in the CDS market? How much leverage were they using? Would the hundreds of millions of dollars that they had made over time been swamped by billions in losses? We just don’t know, and unless/until we did I’m not so convinced by this letter.

One other really odd point. He is an EVP, but there is this line:

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I know that title inflation is rampant, but is it really this egregious? How the hell is it that Liddy has never met one of the senior people in the org that is creating the need for the rescue that he is trying to pull off. Is he that disconnected?

Good Judgement

In an earlier post, I had been wondering why Gary Pasciucco, the guy who’s job is to dismantle AIG Financial Products, would say that “Most of the business was written here appropriately.” Although that quote is still mind-boggling to me, some pictures circulating around the internet start to give a little more color. He went to a party in Greenwich that was billed as having “the sights, sounds and tastes of 1940s-era Havana” and this is what he wore:


Gary Pasciucco, second from right

Gary Pasciucco, second from right

Although pretty much all I know about Che Guevara comes from The Motorcycle Diaries, I don’t think the timeline works.

AIG, again

I’ve seen this quote before, but it is pretty hard to beat:

“It is hard for us with, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions,” Cassano bragged.

Then they lost $500 billion.

Over the hedge

Perhaps the most interesting (and/or terrifying) part of this article in Vanity Fair is the bizzarely distorted pictures of the various hedge fund managers that it mentions.

Aside from that it is a decent rehash of everything that is going on in the hedge fund world. One interesting quote:

Others in the industry also say that preventing investors from taking their money out is nothing short of an admission that the assets in the fund can’t be sold as they are currently valued. One manager tells me that he has a debt security that he is valuing at 50 cents on the dollar. He knows another fund that is marking the identical security at 90 cents on the dollar.

In an earlier post I mentioned that the ’08 returns were not as bad as I would have expected. With the above quote it sounds like there might be another shoe to drop (even leaving aside the early bloodbath in the markets this year).

Inside the Bear Stearns Boiler Room

Interesting article about the Bear Stearns hedge funds that collapsed in the summer of 2007. At the time it seemed like a big deal but not necessarily the precursor to all the problems we eventually saw. It starts off a little slowly, but there is a lot of interesting content.

There are some funny quotes in here complaining about the marks that Goldman Sachs gave them on some of the securities they held. People were complaining that the marks were too low. I’d be interested to know what the marks would be right now.

Another interesting quote is below — amazing how little was understood by the senior execs at the time. You think that they would have learned from this rather than complaining that the firm was taken away from them last spring. They really had no clue what was going on.

By the time they did figure out what most of it was worth, the firm had miscalculated badly. “We thought there was $400 million-ish of cushion, and in fact, as it turned out, we missed by like $1 billion out of $1.5 billion,” says Friedman. “It was not even close. You would think you could get it to the nearest billion, and a lot of it was the market deteriorating dramatically in that five or six weeks. But it was just a guess to begin with.”

AIG and Gerry Pasciucco

This is an interesting article on AIG Financial Products, the division that is the core cause of all the AIG problems. Nothing groundbreaking, but a good overview. A couple interesting quotes:

Executives at Financial Products viewed the swaps as “free money” because computer models showed almost no chance of ever having to pay out. But the swaps contracts included provisions requiring the company to put up cash as collateral if AIG’s Triple A credit rating ever fell. When those downgrades came, signaling that AIG was no longer as reliable as it once had been, companies like Goldman Sachs that had done business with Financial Products demanded it put up billions of dollars.

I love this notion of “free money”. Nothing could ever go wrong in a scenario like that. The other interesting thing in this paragraph is the implication that the problem is just the collateral, as if the swaps are fine except for the collateral requirements. Given everything that is going on, there is a very real chance that real money (i.e. hundreds of billions of dollars) will need to be paid on these contracts. I’m sure that it makes the people involved feel better to think that the problem was just downgrades of AIG, but they are living in a fantasy world.

Gerry Pasciucco is the guy (from Morgan Stanley) whose job is to “dismantle” AIG Financial Problems. This quote makes me feel like all that taxpayer money is in great hands:

“Most of the business was written here appropriately,” he said.

What does that even mean? I suppose it could be true in a literal sense but it makes it sound like there were a just a couple transactions that were problematic and the place is otherwise fundamentally sound. That doesn’t square with anything that we’ve seen out there about the culture of the place.

Two funny things about Jon Winkelried’s retirement

Both of these are from a Dow Jones article about the retirement.

First, the notion that someone can make $50 million a year yet the company will not have “a material impact on the shares or operations from [his] retirement,” is pretty mind-boggling.

Second, he has a horse called “I Sho Spensive”. Really? I just can’t imagine how many layers of irony are needed to make that name remotely palatable.

Beyond belief – Emanuel Pleitez

I’ve seen some absurd comments, but this one has to be among the most impressive. I almost have to believe that this is a joke (from the NY Times):

Of course, mistakes were made on Wall Street, says Emanuel Pleitez, a 26-year-old former Goldman Sachs employee who quit his job a few months ago to run for Congress in his hometown, Los Angeles. But to a great extent, he says, those mistakes were born of misplaced trust.

“Look, you can talk about collateralized debt obligations all day long,” he said, referring to a type of asset-backed security that has gone famously toxic. “But there were ratings agencies that were supposed to tell us how risky these securities were. We essentially closed our eyes and said, ‘O.K., you say this is rated triple-A, fine, I believe you.’ ” In hindsight, he said, “Everyone should have been more skeptical.”

Yes, clearly the poor traders and bankers at Goldman were led astray by a nefarious plan by the devious ratings agencies.

The degree of self delusion and lunacy in that statement is truly mind boggling. Small surprise Mr. Pleitez is running for Congress.

Hedge Funds Lost 18.3% in 2008

From NYT:

The hedge fund industry as a whole lost 18.3 percent in 2008, according to data released Thursday from Hedge Fund Research, as the financial markets reeled from the exploding credit crisis.

This is actually surprisingly good given everything that happened. Obviously people won’t be happy per se with these returns but at the same time I think most people were expecting much worse.

As the first commenter points out, however, the data is self reported and is only for a self selected subset of funds. It is not clear if, for example, a fund which performed poorly this year could/would just drop out of this report. This would in effect serve as a lightweight version of survivorship bias and make things look better than they really were.

Lehman PE Survives

From WSJ:

The deal calls for the Lehman estate to spin out the unit’s most recent fund, a $3.3 billion vehicle raised in 2007. It will be owned by the firm’s current management, which is led by chief Charlie Ayers. It is unclear how much the management is paying.

Bold mine. It seems a little strange to me that this wouldn’t be public.