The New Robber Barons Read online

  Jim Rogers also warned about Lehman when Bear Stearns imploded in mid-March 2008, but Whitney continued to rate Lehman outperform. Whitney downgraded Lehman to “perform” at the end of March 2008—so much for taking a hint or issuing an early warning. Lehman went under September 2008.

  I first took an interest when Whitney was billed as the woman who gave early warning about AIG, because she did not as far as I know. In August 2007, I challenged AIG’s earnings—specifically its failure to take losses on credit derivatives protecting “super senior” structures, the type of products on which we eventually paid out TARP money.

  When asked by an economist to comment on my analysis of her calls that missed some death threats, Whitney retorted: “She is just jealous.” Not true. My feeling is akin to that which I have for Rosie Ruiz, who appeared to run a marathon in record time, but had merely jumped in at the end of the race—it’s a different feeling entirely.

  Nassim Nicholas Taleb’s Backfiring Blunderbuss (See “Taleb Kills $20 Billion and “Stranded Swan”)

  According to The Guardian: “to establish his credentials as the sage of our current predicament, Taleb frequently refers to an August 2003 article in TheNew York Times in which he correctly predicted [Fannie Mae] had underestimated the risk of [a big move] in interest rates that would destroy the value of their portfolio.” By the time Taleb spoke up in August of 2003, many others had already raised issues not only about the models, but also about the GSEs’ massive exposure to a handful of counterparties (Wall Street Journal and The Street.com), a risk Taleb missed. The New York Times article also asserted that Fannie Mae’s business plan seemed safe, “since people typically do not default on their mortgages,” so it would not establish anyone’s credential’s as the sage of our current predicament.

  Malfeasance, not models, disrupted the global economy, and Taleb still gets that part wrong. Black Barts imitating the gentleman highway robber—not black swans—caused most of the damage.

  Taleb’s Empirica Kurtosis “black swan” fund had negative returns in 2001, the year of the 9/11 black swan event. Taleb later claimed he only called it a hedge fund “in May-Oct 2001.” Perhaps he meant something else, because Empirica Kurtosis wound up at the beginning of 2005 with lackluster returns , and performance specifics are not public, but it may have been a stranded swan.

  In the spring of 2009, Taleb prominently posted a GQ article on his web site that (inaccurately) attributed $20 billion in gains to a strategy employed by a new fund that Taleb advises. I had contacted Taleb about the obvious (to me) error and written that the mistake was not Taleb’s. But silence may be interpreted as endorsement whatever the source of the original error. The error suggested his strategy had proven to be scalable (would apply to large investments), while the fund was attracting new investors. But there is actually no empirical evidence.

  Taleb asserted the article was about philosophy, and one should ignore the numbers. The Times (among others) didn’t seem to see it that way. The Times’s original reference to GQ’s article focused on the erroneous $20 billion in trading gains months before Taleb made his correction in the face of media pressure. As for Taleb’s eventual explanation that the “$20 billion” referred to a “notional” amount of derivatives that produced between $250 to $500 million in gains, it raises further strategy questions.

  Taleb has appeared in public with Arianna Huffington who has credited him with courage, yet he plays the victim and resorts to unwarranted name calling when asked legitimate questions. He has said Myron Scholes belongs in a retirement home and called Nobel Prize winners charlatans. Viciousness isn’t the same as courage. It takes courage to be transparent not just when results look fabulous (temporarily or otherwise), but when they don’t make you look as favorable.

  Gasparino’s Shadow Boxing (See also: Gasparino’s Glass Jaw Is CNBC’s Draw)

  I did not give enough credit to some of CNBC’s on air reporters when I wrote it should be viewed solely for entertainment. CNBC’s Diana Olick did brilliant (and early) reporting during the onset of the housing crisis—the best on any news channel at the time. CNBC’s David Faber provided context to the global financial meltdown and our nagging debt hangover. They aren’t alone in good reporting at CNBC.

  But Charlie Gasparino’s reportage was more entertainment than substance in my opinion. I’m told Gasparino said he normally doesn’t respond to “people who do not matter on Wall Street” (people like me who have appeared with him on CNBC) and called me a “publicity hound.” He said it to Dealbreaker, a Wall Street Tabloid, because it was looking for something to publicize.

  Gasparino also bashed bloggers, including Crossing Wall Street’s Eddy Elfenbein (his real name) and Tyler Durden at ZeroHedge. (I would explain the pseudonym “Tyler Durden,” but 1st Rule: You do not talk about [IT], and 2nd Rule: You DO NOT talk about [IT].) Why should anyone, including people who matter: Nobody But Me, Nobody But You, or Nobody But CNBC, take his posturing seriously? Gasparino’s blogger bashing got further publicity, but not for opinions that matter.

  Serious Issues For Serious People

  This roundup is the last of my commentaries on pundits who may—inadvertently or otherwise—be associated with claims that their opinions carry more weight than others. All opinions, no matter what the source, should be backed up with facts. That goes double for hype. Legitimate questions deserve answers. Backlash unaccompanied by a fact-based argument is pointless. Many people are deterred from raising legitimate issues, because those who want “the worship of jackals by jackasses,” as H.L. Menken put it, tend to lash out. That isn’t the only reason people lash out, of course. Some people simply have very thin skins. If so, perhaps they shouldn’t make provocative public comments.

  We have tough issues to confront, and all of us should be prepared to deal with tough questions and have their representations, conceptions, misconceptions, and theories scrutinized. No pain, no gain. In my experience, people with the most substance are also the most pleasant when asked questions that most people find awkward. They realize that raising issues is often awkward for both the questioner and the person responding. Serious people are prepared to engage in serious discourse.

  Looking back on true early warnings and how they were dismissed and discredited helps us understand the issues now threatening the global economy and the failings in our system. It is important to identify who provided thoughtful analysis when it mattered most, instead of those that simply said they did.

  Michael Lewis: Junior Salesgirlieman

  March 15, 2010

  I was in the Salomon Brothers' 1985 training class that Michael Lewis lampooned in his amusing book, Liar's Poker. Imagine my surprise to see him billed as a trader on 60 Minutes, since he was actually a junior salesman. Well-heeled male peacocks strutted the trading floor, and junior salesmen were girlie-men, mere eunuchs serving their pashas.

  Michael hit the roof when I ribbed him about the mischaracterization.* Yet, in January 2007 he didn't spare the "wimps, ninnies, and pointless skeptics" at Davos. I wasn't at Davos (Michael wasn't either), but he derided people who staked their reputations--as I staked mine--on the fact that the financial system was in peril. One might think he'd have a thicker skin, when turnabout was fair play and truth was his casualty.

  Michael had asserted "Davos Man...will brood about virtually anything, no matter how little he knows about it." He ridiculed their concern of a pending crisis due to the surge in derivatives demand and called it "this year's case in point." Then Michael showed how dangerous it is to be a brilliant writer with a poor command of facts and their true meaning:

  "None of them seemed to understand that when you create a derivative you don't add to the sum of total risk in the financial world; you merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about."

  Actually, there was a lot of evidence that risk was being "redistributed" in ways we should all worry a
bout. Predatory lending was a national scandal. I was well-published on phony securitizations, phony AAA ratings, phony accounting--and the mother of all risk--excessive leverage on securities that could only plummet in value.

  Other serious people also spoke and wrote eloquently and accurately about the risks. They were often ridiculed by mainstream media girlie-men and intimidated by their bosses. Some--like my friend, Arturo Cifuentes--stood their ground and were maliciously fired for it.** Meanwhile, Michael was still cheerleading Wall Street:

  "But the most striking thing about the growing derivatives markets is the stability that has come with them."

  Derivatives had destabilized the global financial system, albeit Michael was clueless. Leverage was much more dangerous than at the time of Long Term Capital Management's implosion. Then Michael gave us the payoff:

  "If they really believe the markets mispriced risk...they must also believe they could make vast sums of money if they quit their day jobs and opened a hedge fund to take the other side of stupid trades."

  Exactly. That is what I wrote to risk managers at the same time Michael was penning his screed. I told them to get out of investment banks and short those trades, since bank managers had their boots on the necks of risk managers, as regulators and the media licked the managers' boots.

  Michael had it wrong in more than one profound way. The markets weren't just "mispricing risk," those in-the-know were manipulating prices--covering up malfeasance and losses. Meanwhile, some members of the fourth estate used their pernicious pens as pawns in the cover-up.

  All of the legacy investment banks enabled predatory lending, yet they now perpetrate what Elizabeth Warren calls the "myth of the immoral debtor." Wall Street banks were the key architects of the financial meltdown. The Fed provided cheap money, but irresponsible financiers exploited it. Banks massively over-borrowed, their agents extracted billions in bonuses, and now they blame hard-working taxpayers. These predators call this "God's work,' while most of the media covers-up for them.

  Michael Lewis is Wrong Again: It was Fraud

  Michael wrote me that he read my book on structured finance while he was working on his book, because "it inspired one of the main characters" of The Big Short. Yet, he mangled the facts in his eagerness to create a story, since it is again fashionable--and profitable--for Michael to bash Wall Street.

  Michael told 60 Minutes (March 14) the financial crisis is a story of mass delusion, but he's only deluding himself. It takes courage to tell the real story. This is actually a story of Wall Street's massive, wide-spread, multi-year fraud, including accounting fraud.

  I appeared on 60 Minutes (February 14) and said Wall Street's dealings with mortgage lenders, securitizations, derivatives, and investors were a massive Ponzi scheme, the biggest crime ever against the American economy. Wall Street and Washington hope you are gullible enough to believe otherwise.

  The Washington Post says his book reads like the "same smart-alecky Michael Lewis," a biased account of industry players "whom he holds up to ridicule for their arrogance." I'm sure I'll enjoy it for the irony.

  * We are not colleagues but have exchanged the occasional email.

  ** Arturo Cifuentes, Ph.D., later joined R.W. Pressprich & Co. and is currently a professor at the University of Chile. As a Sr. V.P. at Moody's, he developed early CDO technology (where his ratings had meaning) from 1996-1999. Upon my recommendation, Dr. Cifuentes testified before the Senate Committee on Banking, Housing and Urban Affairs in April 2008 about subsequent unsound practices and the role of the credit rating agencies in the global financial turmoil.

  Note: The italicized quotes are from "Davos is for Wimps, Ninnies, Pointless Skeptics," Bloomberg News, January 30, 2007, by Michael Lewis.

  Wealthy Patriots Wage Class War

  December 12, 2011

  A strange thing happened in Chicago on Thursday, December 8. An audience of well-heeled professionals, a mixture of Democrats and Republicans, packed a room at the Drake Hotel to hear Robert Shiller, a Yale professor, give a presentation on the housing market. A few members of the audience were in the top 1%, and the balance of the audience was probably in the top 2%-5%. At the end of the presentation, there was a bi-partisan revolt.

  The Chicago Mercantile Exchange (CME) and the Chicago Council on Global Affairs (CCGA) jointly sponsored the presentation. I'm a donor to CCGA's president's circle. Professor Shiller, deemed one of the country's foremost housing authorities, proposed a futures index for hedging and a new type of mortgage loan product along with some historical filler. In the context of our recent housing debacle, he never once uttered the word "fraud."

  Fraud "Blind Spot"

  Shiller's speech was 2 ½ years after I appeared on C-Span talking about the many aspects of widespread interconnected mortgage fraud that damaged the global financial markets. I summarized fraud's significant role in the 2008 financial crisis in a book called Dear Mr. Buffett.

  Shiller's speech was months after Congressional investigations showed how Wall Street firms provided financing for fraudulent loan activity of a number of different loan originators by creating fraudulent securitizations.

  His speech was also months after widespread reports of robo-signing of affidavits and other types of foreclosure fraud. Banks showed up in court with fraudulent documents, which is fraud on the courts.

  The Yale professor's speech was just four days after 60 Minutes blew open widespread loan origination fraud at Countrywide (video below). The firm created fraudulent documents. Separately it was reported that in Countrywide's Chicago office, 90% of loan applications were altered and income was sometimes inflated by Countrywide employees, not by borrowers.

  Countrywide settled a well-publicized fraud lawsuit for $8.3 billion with several states including Illinois.

  Shiller's talk was the day after former Illinois Governor Rod Blagojevich was sentenced to 14 years in prison after his corruption conviction.

  Shiller spoke on the same day that Jon Corzine, former CEO of bankrupt firm MF Global (former Democratic Governor of New Jersey, former Democratic Senator from New Jersey and former CEO of Goldman Sachs), testified before Congress that he had no intention to break the rules but he just doesn't know what happened to an estimated $600 million to $1.2 billion of customers' assets. [Note added 12/13: MF Global was among other things a Futures Commodities Merchant (FCM) and Shiller was proposing a futures index.] Customers' money disappeared from segregated accounts that should have been intact but were not.

  Audience Calls for Integrity

  Michael Moskow, current vice-chairman and senior fellow on the global economy at CCGA and former head of the Chicago Federal Reserve, stood at the podium as Robert Shiller took questions from an upset audience. One attendee noted in an email to me that questioners were professionals, "not the Occupy Wall Street crowd who were accused of inciting 'class warfare' at the podium."

  During the brief Q&A two men, one a former long-term Wall Street professional, asked questions about how we move forward when there is so little confidence. They cited the lack of integrity in the global financial markets.

  After that, I asked how one creates a futures index (as Shiller proposed) in which one can have confidence without acknowledging the existence of fraud and vigorously prosecuting fraud. There was fraud by loan originators, fraudulent securitizations, and even fraud in the residential mortgage backed securities (RMBS) that backed a different hedging instrument, the ABX index.

  The first time the word "fraud" was uttered that evening was when I posed my question.

  Shiller himself never used "fraud." The most he would say in his so-called response was "some people aren't very nice." Really? It sounded rehearsed, and it struck most people in the audience as a shameful cop-out. If this is what economists are teaching students at universities, students should demand a refund of their tuition. Kindergarten children are given better warnings about strangers with candy.

  "Countrywide Broke the Law. Homeowners Did Not."<
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  Even worse Shiller, intentionally or otherwise, distorted my meaning. He claimed borrowers inflated income, without citing a source. Some of that occurred, but that wasn't what I referred to in my question. I corrected Shiller. I had clearly referred to instances where Countrywide altered documents and put in higher income amounts so that the mortgage loans would be approved for people that could not afford them. [Illinois Attorney General Lisa Madigan stated: "Countrywide broke the law. Homeowners did not."] Moreover, Shiller completely dodged the issue of fraudulent securitizations and foreclosure fraud.

  CCGA and Academia Need to Get Their Crimes Straight

  As if in a continuation of his answer to my question, Shiller mentioned he had spoken with a cab driver (apparently the source of all man-on-the-street information for academics) and the cab driver had no savings, only debt. Robert Shiller and Michael Moscow, the retired head of the Chicago Fed, appeared smug to me about this anonymous struggling working man's plight.