Charlie Gasparino Still Doesn’t Understand

I recently wrote a piece about Goldman Sachs an took issue with some things Charlie Gasparino had said. He felt it was necessary, then, to write something about m article, but not really respond to it. It should come as no surprise that Mr. Gasparino’s response is as devoid of content as his original piece. I go through it here, line by line (my responses are in bold):

Why a Business Writer Wishes Wall Street Wasn’t Such a Big Story

Could it be because of the scrutiny that now is focused on the author of this missive?

I’ve been covering Wall Street now for nearly 20 years, and it’s been a pretty good run. I’ve broken some big stories and written three books about the “Street,” and I’m looking to write another. I’ve made some friends along the way — people like Teddy Forstmann, the great investor who called the junk-bond crisis and had the insight to steer clear of several others, and I’ve made some enemies, namely the traders and bankers who work at many of the big firms who would have preferred I kept silent about their problems during last year’s financial crisis rather than blab about them on CNBC.

I find this the source the mainstream media’s greatest power and the cause of their greatest weaknesses. Notice that Mr. Gasparino makes his success a function of how many stories he has broken. Did he get them right? Well, given his propensity to report gossip, merely skim the surface, and follow the meme of the day when giving his opinion, perhaps he’s just picking the most favorable metric.

The story about Wall Street is a big one — and I’m afraid to say, it’s going to get bigger in 2010 and beyond. If you want to know why the federal government allows all those community banks to fail, but bails out Citigroup, Bank of America, etc., with unlimited funding, it’s because these institutions have grown so large, and become so important and intertwined in the global financial system, that letting them fail would be catastrophic. In other words, it’s cheaper to guarantee Citigroup’s survival (and that of Goldman Sachs, Morgan Stanley, Bank of America, JP Morgan) with hundreds of billions of dollars in bailout money as the government did last year, than watch the global banking system implode.

Honestly, I have no problem with this paragraph’s message. Too big to fail is a true problem and it evokes a lot of populist rage. I’m inclined to question his motives for putting this here, but I’m going to give him the benefit of the doubt (there’ll be plenty of opportunity to pick on actual errors, faulty logic, and cherry-picking later).

Now you may think I just can’t wait to cover this story in 2010. Of course, the journalist in me says, “bring it on”: another book and columns to write, big stories to cover. But the American citizen in me makes me wish Wall Street wasn’t such a big story, that people like Vikram Pandit of Citigroup and Lloyd Blankfein of Goldman Sachs (yes, the guy who thinks trading bonds is “God’s Work”) just weren’t such a big part of American life that the country’s economy rises and falls on their bad bets.

This last part makes no sense at all. So, American citizens merely want the media to stop covering Wall St. or cover it less? And it’s because Goldman and Citi are big parts of the “American life” that the economy rises and falls on their bad bets? In the interest of being charitable, I’ll just assume that he meant to say that he wishes that the events causing the story weren’t as severe as they have turned out to be and that the problems, not just the focus wasn’t all that big. You’re welcome Charlie.

I’ve come to this conclusion after reading two articles. One is a thoughtful but at bottom unrealistic piece written by several HuffPost contributors, including Arianna Huffington. It proposes that Americans remove their money from the large money-center banks at the center of the reckless risk taking that led to last year’s meltdown and bailouts, and move their deposits into community banks, the good guys of finance that didn’t take the risk because they weren’t Too Big To Fail.

Interesting that he likes this piece, but thinks it’s unrealistic. It’s like damning with faint praise. I also think he needed an article to say something positive about, so why not the one written (at least partially) by the person who distributes his writing to the masses?

The other is a less thoughtful post written by an anonymous blogger also on this site that defends Goldman Sachs and questions some of my reporting, including one piece from The Daily Beast that suggests Goldman’s all-too-obvious image problems have begun to impact its investment banking business.

Ahhhh… and here it is. My piece is being called less thoughtful by Charlie Gasparino? That’s like me calling a fish a bad swimmer. Further, he says that I defend Goldman Sachs. Can we all pause for a moment and reread the headling of the post, written by me, that he cites? It is, “2010 Will be Challenging for Goldman Sachs”–how he translates my thesis, that next year will be an uphill battle for Goldman, as defending Goldman is still totally unbelievable to me. As a matter of fact, it implies that he doesn’t understand the piece at all. Now that, I believe.

As for his questioning my conclusion that there is no evidence that Goldman’s investment banking business has been materially hurt by their image problems, well… I cite the league tables in the original article. Further, this shouldn’t even matter all that much since such a large percentage of Goldman’s profits come from their trading and principal investing (again, in the numbers, and the exact point of my article).

What I like about Arianna’s piece is that it attempts to hold the bad guys responsible. Its point is pretty simple: The likes of Citigroup and Bank of America don’t deserve our money, so let’s hit them hard and reward those who deserve our support, namely the community banks, who, despite many failures, didn’t engage in massive risk taking as the so-called large “money center” banks did over the past decade. The problem with the piece is twofold: First, community banks weren’t blameless in terms of risk taking and thus aiding and abetted the real estate bubble, which is the root cause of our economic problems. That’s why so many of them have failed and will continue to do so. Also, by making smaller community banks more important we might simply transfer the policy and status of Too Big To Fail to a different set of institutions. Armed with government support and subsidy from the Too Big To Fail precedent, what would stop community banks from taking excessive risk just as Citi has done?

This paragraph is just silly. So, community banks are going to create hundreds of billions of dollars in CDOs? Could it be that smaller banks have failed because credit froze and they don’t have sophisticated hedging operations? Could it be that small banks have failed because they have loans as their primary assets and when the economy begins to have problems less people pay back their loans and banks take losses? Or, it could just be because they aided the real estate bubble. Although… Let’s take a look at this graphic from this ProPublica story (chopped a bit by me):

(Click for a larger version.)

Oh, right… If a small, community bank owns some mortgages, it means those mortgages weren’t securitized, and, thus, weren’t part of the massive overhang of toxic CDO assets that were made up of securitized mortgages. Finding this information cost me approximately five minutes on Google.

There are almost too many ways to attack the posting from the anonymous blogger (who goes by the name “Dear John Thain”), titled “2010 Will be A Challenging Year for Goldman Sachs,” (this guy obviously has a flair for understatement) so I will make the following points.

My comments will be more frequent now, as he’s getting to the good stuff. So far, all he says is (1.) the problems with my “posting” are numerous and (2.) I understated the problem in my title. He also promises to make multiple points…

Because he’s anonymous, we don’t know if he’s a Goldman executive (one way Goldman is now looking to attack its critics is by blogging positively about the firm, I am told) an investor with holdings of Goldman Sachs stock (a substantial conflict of interest if this is true), or just some guy with too much time on his hands.

This part is stupid, baseless, and implies Mr. Gasparino is backed into a corner. First, let me end this discussion now and forever by making the following statement: I am not now, nor have I ever been, an employee of Goldman Sachs or any of its subsidiaries. Further, I own no financial interest in Goldman or any of its subsidiaries. Second, I dare Mr. Gasparino to produce one shred of evidence, a comment on the record, or anything else indicating that Goldman is indeed using bloggers to defend them (Mr. Gasparino apaprently defines “blogging positively” as pointing out that Goldman almost certainly can’t reproduce its strong 2009 in 2010, as I did).

Beyond the mere infirm grasp of reality, this is where I think everyone who likes the blogosphere keeping the mainstream media honest, and indeed the blogosphere itself, should be deeply offended by what Mr. Gasparino has done. Mr. Gasparino has resorted to a sort of McCarthyism where insinuating someone who doesn’t wish to divulge their own identity is planted her by Goldman–a firm better known for suing bloggers than spawning them. This is insulting and should not be tolerated by any thinking person. The people who know the most about finance are the people who work in it. I make zero dollars from my blog and my writing. So many others risk their futures and livelihoods by writing, only to explain what is actually going on to those that are interested.

In fact, Charlie Gasparino, and his ilk, are the reason we exist. If he didn’t have the accuracy of a backfiring gun when it comes to issues other than gossip we, the pseudonymed finance writers, wouldn’t be needed. The public would understand financial topics much better and the record wouldn’t need to be set straight by those in the know. And now, when faced with someone correcting him on the record, he merely wishes to dismiss the facts and figures put before him and insinuate something for which he has no facts. Honestly, this speaks volumes about his regard for the truth and his ability to justify his own words when challenged.

This sort of attack should be rebuked as swiftly and sternly as it was introduced.

In any event, one line caught my eye: He takes issue with my assertion that Goldman benefits from a subsidy from the government because of its status now as a bank; he says it’s really a “financial holding company” as opposed to a “bank holding company” but fails to point out that there’s really no difference.

Honestly, Mr. Gasparino should either stop saying patently false things and merely learn to read. There is a major difference. Banks have stringent capital requirements. Financial holding companies do not. Let me pose a simple question, keeping in mind the distinction I just made. Is a financial holding company that owns a bank and a broker-dealer (the broker-dealer having a $1 trillion balance sheet) the same as being a bank with a $1 trillion balance sheet? Absolutely not. Banks cannot own certain sorts of assets, don’t have trading portfolios that need to marked to market every day, and are severely limited in terms of how much leverage they can take on. A broker-dealer, however, can take much riskier positions, can be more leveraged, and have different accounting rules (in addition to costs of funding). Mr. Gasparino did get one thing right, I failed to point out something that was patently false.

In the aftermath of the financial meltdown and bailout, Goldman is now primarily regulated by the Fed (as opposed to the Securities and Exchange Commission), the banking system’s chief regulator, and receives along with that all the benefits of the classification, including being treated in the market as Too Big To Fail, and thus being able to borrow cheaply.

Goldman the “financial holding company” is regulated by the Fed. Goldman’s bank is regulated by bank regulators. Goldman’s securities businesses are regulated by securities regulators. This is why people working inside large “financial supermarket” institutions have heard the expression “bank chain vehicle” and similar terms, the regulator for a specific division matters.

Here’s another fun fact that shows Mr. Gasparino has no idea what is saying: Goldman Sachs has had cheaper costs of borrowing (as shown by their credit default swaps) than Citi, the ultimate example of being way too big to exist.

As I pointed out in my book The Sellout, there’s much to admire about Goldman and its history in risk taking compared with the other big firms; this was, of course, the only firm to question its own irrational exuberance and short the subprime real estate market back in late 2006 (a trade in which a firm makes money if prices decline) whiles it competitors were betting bigger on the bubble. But that hedge only delayed the inevitable — Goldman, like the rest of the financial business (except maybe JP Morgan), bet big and wrong, so wrong that by the fall of 2009 it, along with most of its competitors, was falling into insolvency.

Fall of 2009? So, I guess the billions in profit Goldman reported for the third quarter of 2009 was all smoke and mirrors. Maybe he means 2008? Or maybe he’s more confused about what he wrote than I am.

All of which brings me to the bigger point of this piece: We as journalists, as commentators, and policy makers spend way too much time arguing over the fine points of Goldman’s status as a bank holding company or a financial holding company. Lloyd Blankfein is pilloried for saying he does God’s Work when he trades stocks or bonds, when in a more perfect world, what he says or what he does just shouldn’t mean that much to the guy who owns an auto repair shop in Queens or the family farmer in Iowa.

Charlie Gasparino, lumping himself in with policy makers, is being charitable. I want the people who make the law to argue over whether or not certain institutions should be allowed to employ certain types of corporate structures. I want the actual facts to be part of the public discourse and guide policy. Given the errors Mr. Gasparino tends to make, I can see why arguing over the specifics wouldn’t hold much appeal.

That’s why I kind of like Arianna’s idea (despite its drawbacks) of empowering community banks as opposed to the money center banks that are way too important and powerful and whose leaders just shouldn’t wield that type of influence because at bottom they’re just not smart enough — nor, perhaps, is anyone. Dear John Thain’s nom de plume is a reference, of course, to the former CEO of Merrill Lynch John Thain, who by all accounts didn’t think twice about spending more than $1 million decorating his office during the financial crisis, including tens of thousands on a high-end commode.

Make no mistake, the reference to John Thain “tricking out” his office has no place in the discussion. If Mr. Gasparino can’t take the time to read my About page, then at least he did as much research on me as he did for his actual articles.

To be sure, bankers have always wielded enormous power in our society — JP Morgan was a real person, after all. But somehow the importance of people like John Thain (whose spending spree also included a $1,400 parchment paper waste basket) and Lloyd Blankfein has grown beyond anyone’s comprehension, even their own. When former Lehman Brothers CEO Dick Fuld was rebuffing offers to buy his firm before its free fall into bankruptcy last year, I don’t think he truly envisioned the power of his inaction: That the entire financial system would shut down as a consequence of holding out for more money. One of the great lessons of the financial crisis is that this power was bestowed on the wrong people — the people who helped foment the housing bubble (along with the government) by packaging all those risky mortgages into allegedly safe bonds and then took so much risk that they destroyed the financial system and created the Great Recession and with it 10 percent unemployment.

Amazing. Once again he references John Thain’s excessive decorating budget. This is about as useful as me accusing Mr. Gasparino of being a murderer because his first name is the same as Charlie Manson. The other points in the paragraph are actually true: financial C.E.O.’s have a lot of power and have a huge impact on our financial system. This is why their industry is heavily regulated. The ending of his rant, about “the wrong people” and all that, is nonsense and vague. I’d dissect it further, but I’m tired.

It would be nice if in the not so distant future the Dick Fulds and Lloyd Blankfeins of the world become less important, even if I lose a book deal in the process.

I, too, think it would be nice if Mr. Gasparino had less of an opportunity to be in the public eye. But then again, I bet you already knew that.

Maybe Charlie Gasparino is Too Simple to Grasp The Obvious

Yes, that’s right… The guy whose only role, as far as I can tell, is to parrot back gossip, rumors, and “trial balloons” from P.R. people and executives has gone and proved that he is as irrelevant as he seems to be uncomplex. Did you read his attack on Matt Taibbi’s “piece” on Goldman Sachs? Well, I did… and I bled IQ points from doing so. Here’s where Mr. Gasparino shows his inability to reason:

It’s one thing to watch half-literate bloggers in desperate need of attention jump on the Goldman is the root of all evil story; it’s quite another to see respected news organizations with experienced reporters and presumably more experienced editors do it and in the process obscure the fact that Goldman, for all of its sins during the bubble years, was probably the least culpable for the system’s eventual collapse.

(Emphasis mine.)

Oh, and Mr. Gasparino is (highly, highly ironically!) writing this in a section entitled “Blogs and Stories”–since Gasparino’s post/article/whatever falls far short of the reasoned, cogent, logical, and expertise-based sorts of things one gets from the the blogosphere, I’ll let you decide which of these two headings applies to his writing.

Writing a particular piece of drivel and attacking the blogosphere isn’t all that bad in the grand scheme of things–it is, however, a good reason people should stop reading what he says and watching his appearances on air (and people are doing just that). More damning is Mr. Gasparino’s inability to see that he is a major part of the problem. If he went even the slightest bit beyond the drivel he usually passes off as reporting (aforementioned gossip, rumors, and “trial balloons”) he might have been able to educate people to the point where they wouldn’t buy into hyperbole-laden articles. Mr. Taibbi’s job isn’t to be a journalist and provide a fair and dispassionate accounting of the facts–he even says as much:

I’m aware that some people feel that it’s a journalist’s responsibility to “give both sides of the story” and be “even-handed” and “objective.” A person who believes that will naturally find serious flaws with any article like the one I wrote about Goldman. I personally don’t subscribe to that point of view. My feeling is that companies like Goldman Sachs have a virtual monopoly on mainstream-news public relations; for every one reporter  like me, or like far more knowledgeable critics like Tyler Durden, there are a thousand hacks out there willing to pimp Goldman’s viewpoint on things in the front pages and ledes of the major news organizations.

(Emphasis mine.)

(By the way, Mr. Gasparino says what amounts to the same thing: “I have to admit I love to beat up on Goldman; I do it for The Daily Beast and on CNBC every chance I get.”)

Mr. Taibbi’s job is to get page views and tell a story. He even admits that members of the blogosphere (Tyler Durden being a reference to the blog whose traffic has experienced a meteoric rise–Zero Hedge) have a better grasp of whats actually going on than he does. I would hope, for example, that most bloggers wouldn’t make the mistake (I’m being about as charitable as one can be by not calling it “lying” or “misleading” or “taking advantage”) of confusing leverage with VaR as Mr. Taibbi does. Mr. Taibbi, in that same piece, also glosses over technical details of primary dealers of treasury securities (I wonder if he understands bid-to-cover and direct versus indirect) and nuances of equity underwriting (What sort of limits are in place for fees? How does a greenshoe work? What does an investment banker do versus an equity capital markets person? What about a syndicate person?). In his original piece, there is a ton of faulty reasoning and thin (well, mostly non-existent, actually … mostly the reasons for things or support are “because I say so”) evidence for his theories. But, who’s to know? The public knows almost nothing about how the financial system works.

Which brings me back to my original point–Charlie Gasparino is to blame for Matt Taibbi’s drivel. Not solely, obviously, but he is a very public face of a very dumbed-down financial media that is the personification of the phrase, “Couldn’t find his ass with both hands.” If Mr. Gasparino and the financial media can’t report on the markets and financial system reasonably–and instead dumb down their reports, thus helping feed the financial illiteracy of the mainstream public–then he has allowed Matt Taibbi’s piece to gain traction in the minds of the public, not the bloggers. He and his colleagues have completely failed in their charge: to keep the public well-informed when it comes to matters of finance and markets.

If Charlie Gasparino had even the slightest bit of a clue, or if even the most modest degree of intelligence was peeking through his rants and gossip column style of reporting, he might understand that blogosphere should be his friend and best resource. Where else can anyone get a peek into the extremely technical, often changing worlds of trading, banking, finance, etc.? You literally have dozens of people who are giving away their domain expertise for free (anonymous authors–the brave, intrepid, good-looking genius champions of truth and justice that they are [hyperbole included at no extra cost]–don’t even take credit for their work, they are doing it for themsevles and their readers solely!). Mr. Gasparino (and other CNBC personalities whose brains seem to be disconnected during the day to conserve energy–go to the link, but don’t watch the clip, you’ll start spilling IQ points all over the floor) should be looking to these bloggers to help him understand complex issues that it would take years of experience to understand, give him ideas for how to report on an issue and explain the nuances, and even as sources that he can cite to increase the authority of his conclusions.

But, of course, this “get information from where information lives” approach to journalism completely escapes the financial media (I’ve explained how problems like this can be fixed before). Mr. Gasparino prefers, instead, to refer to bloggers as “half-literate” and thinks New York Magazine, because it’s a “respected news organization” (Of course! When I think of the news I think of New York Magazine!), will do a better job than the people in the trenches every day. This is why finance is the reverse of every other major news category I can think of–usually the primary value of the mainstream media is to dig up facts and write complex stories (that show cause and effect or intricate interconnections) while the blogosphere adds a layer of gossip, conjecture, spin, and/or analysis. In finance, the complex picture gets painted by the blogs and the mainstream media reports singular, one-dimensional little tidbits (think, “Chuck Prince gets fired!” or “Goldman Reports profits for this quarter!”). The notable exceptions are some of the detailed timelines published by the WSJ (like Kate Kelly’s three part Bear Stearns article) and a large swathe of the content from Dealbook (Is it a coincidence that Dealbook has bloggers writing for it and contains both the single fact/headline-driven articles as well as detailed analysis and complex reporting? Nope. Although, the reporting done for much of the longer articles isn’t blogger driven.).

In fact, keeping with the clueless theme, Gasparino directly addresses some of Taibbi’s conjecture, attempting to disprove some of the moreimflamatory claims:

Okay, sure, maybe there’s some evidence somewhere proving that the entire regulatory apparatus of the Fed run by an appointee of a Republican president, Ben Bernanke, to the Treasury Department run by a lifelong Republican (Paulson once worked for Richard Nixon) … would drop everything to save Goldman Sachs[.] … But if there is good evidence to that effect, I haven’t seen it. A more plausible explanation for the Goldman bailout via AIG’s bailout (borne out by my reporting for my upcoming book The Sellout) goes something like this: There was panic in Paulson’s office … not because they saw their retirement money tied up in Goldman stock ready to disappear, but because after Lehman fell, the other dominoes would be teetering.

(Emphasis mine.)

Whew! With an expert reporter like Mr. Gasparino on the case (including the reporting he has done for his book), then if he hasn’t seen any evidence, who has? Oh, right, the New York Times:

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted. […]

But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling. […]

While that agreement barred him from dealing on specific matters involving Goldman, he spoke with Mr. Blankfein at other pivotal moments in the crisis before receiving [conflict of interest] waivers.

Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver. […]

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars. […]

According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

Seems like a pretty clear pattern that strikes right at the heart of the matter. I’m sure it was just bad luck for Mr. Gasparino that the one place he tried to move the conversation into a more rational zone, and also the one point he used to show why his upcoming book has any value at all, was the place more professional news outlets actually did some serious reporting and proved him naive. The Times’ piece doesn’t prove beyond a reasonable doubt, conclusively, or to any other standard one would like to use that what Taibbi alleges occurred, but its pretty good evidence that Hank Paulson conducted himself in a way that is questionable ethically. Well, don’t forget that Mr. Gasparino has a better theory in his book–which you can pre-order for $27.99! What’s this magical book about? From the Amazon description:

[Gasparino] shows how and why several of these storied institutions have suffered staggering losses in assets and influence since [2002], triggering the vast financial crisis that is now devastating individual and institutional wallets through the United States and across the globe. Gasparino is known as a dogged reporter who regularly breaks news about Wall Street’s inner workings and who has a direct line into Wall Street’s most prominent dealmakers. His book promises to be one of the first books out of the gate in what will prove to be a crowded market of ‘financial crisis’ books, but his talent for delivering a dramatic narrative and colorful anecdotes and explaining complex financial maneuvers in accessible terms.

(Emphasis mine.)

Actually, instead of spending $27.99 on this book, by the guy who didn’t see any evidence of something the New York Times found significant evidence of (now that its published, maybe he’ll see it … when he reads the Times), you can just read blogs to understand “how and why several of these storied institutions have suffered staggering losses in assets and influence.” You’ll understand it better when you’re done and the information you read has a much, much higher probability of being both correct and complete. Oh, and reading a blog is free…

P.S. Maybe I’ll write a point by point refutation of Taibbi and Gasparino’s remaining arguments at some point… But please don’t think that because the Times found some evidence consistent with what Taibbi alleged that he is correct. Stopped watch and all that.

Making the Financial Networks Useful

Starting with the little spat between John Stewart and CNBC I started to think seriously about how the financial news stations are extremely broken. Now, I’ve mused on specific parts of this equation before. However, I’ve been writing this post, a more complete look, for a while. So, imagine my surprise when Barry Ritholtz beat me to the punch! Barry’s look, though, seems to focus more on the “low-hanging fruit” when it comes to improving CNBC. Personally, I think there is a massive overhaul needed. So, instead of taking the same approach as Barry (telling a network how to improve itself) I’ll focus on describing what my ideal financial news network would look like.

1. Make no buy/sell recommendations. Honestly, the shameless self-promoters that  go on CNBC are quite often wrong. There is no accountability for recommendations–obviously, the logistical issues are both important and daunting. However, there is a much larger problem that is most observable with Jim Cramer. I have no doubt Mr. Cramer is intelligent, just as I have no doubt that his show is useless drivel–he needs to make so many recommendations just to fill his airtime that no one ever sees his performance, CNBC doesn’t track it, and all the studies that look at his recommendations need to make huge assumptions. But, the easiest explanation of why recommendations are bad comes from a post entitled Lawyers vs. Detectives. Clearly, also, there doesn’t exist the air time or continuity to track and update recommendations correctly–the logisitical issues I mentioned earlier. And, to be frank, any idiot can just dump ticker symbols onto the screen and say a few sentences about why those ticker symbols are good or bad… and be completely wrong or stupid. The point of a good finance network should be to bring reporting and analysis to light. (Further evidence: look at Barron’s experts who, as a whole, underperform passive indices. And they are tracked and asked for analysis of their picks regularly.)

2. Emphasize investiagtive journalism. Financially literate, intelligent people can add a whole lot of value when it comes to explaining and digging into economic and financial stories. Think Kate Kelly and her three part tick tock of the Bear Stearns situation as a good example. Think of the deep look into the mortgage industry that NPR did. Think of the detailed profiles of various individuals at the center of the finance world. Clearly, there is a lot of value to be added merely by going beyond the puff piece. Right now what people get 90% of the time when it comes to finance reporting pertains to what the Dow Jones did or is doing for the day. Guess what? When stocks go up, it’s because there are more buyers than sellers. When they go down, vica versa. Trying to divine more than that from the market move on a given day is as useless and surface as it often is wrong.

3. Hire experts and not personalities. I’ll tell you a secret… Maria Bartiromo adds no value if you know anything about markets and finance to start with. I’ve seen her provide an outlet for executives to provide narrative versions of their press releases several times. There is never a question I’ve heard her ask that was probing or had an answer I didn’t already know from reading the NY Times or the WSJ. She doesn’t even understand journalism very well! The entire lineup of attractive and vacuous seat-warmers add no value. Remember this little episode with Fox Business news? Now, that’s a little different because it was live, breaking news. However, a thinking person probably would have stopped before talking about how great a move it was for Apple to buy AMD, despite the fact that such a purchase would have been “WTF?!” move for Apple–the current anchors just talk to talk. I even remember a CNBC anchor pulling up a guest’s chart on a segment (the network had been hyping this segment for a few hours–theoretically the anchor had prepared for it) and asked why, if things were so dire, the chart showed such a strong rally/uptrend. Well, the chart was showing spreads for a certain class of bonds–and, as we all know, when yield goes up, price goes down! She was anchoring a segment on fixed income (and had already been chatting about the topic for a few minutes!) and still couldn’t figure out what was going on in a very simple chart… Surely there’s room for improvement!

The model, though, for financial news anchors should really be an engaged, credentialed moderator. Thomas Keene, honestly, is a great example of this. I don’t catch his show (or podcast) as often as I would like, but whenever I do it’s clear he’s intelligent, familiar with the underlying issues, and that he views his job as getting his guests to make their case as well as expose the “other side” of the argument. A network should be able to create a lineup of intellectual experts (with relationships and enough personality to be interesting) in equity markets, corporate credit/finance, economics, macroeconomics, currencies, commodities, personal finance, etc. Networks haven’t seemed to figure out that, unlike human interest stories and traditional news, having some domain expertise is vital to being able to ask the right questions and get the underlying reasoning out into the open.

4. Go beyond soundbites and short on-air segments. I think finance is much more complicated than normal news, in the same way that political news usually is more complicated: there are lots of underlying dynamics, complex rules, and large parts of the process are hidden from view and established through precedent. Unlike a plane crash, terrorist attack, or story about some zany celebrity antic, financial news that focuses on the “what” instead of the “why” is dull, uninteresting, and useless. This is why financial news, in the first place, tries to explain what’s going on. So, it should only be natural that financial news, if it needs the “why” to be useful and is more complicated than garden-variety news, needs to allocate more than a few minutes to a given issue. No one is going to understand what’s going on with commercial real estate in five minutes. CDOs can’t even be explained in ten minutes, let alone covered in the context of the credit crisis in that time.

How can a financial news network, then, ensure that there is enough depth to a story or segment? Well, time is obviously a big piece of the equation. To revisit a prior example, Thomas Keene usually has guests on for 30+ minutes. However, media and a command of visual aides and interactive media online is also important. Some of the most compelling explanations of how CDOs work and different aspects of the credit crisis are graphics. Further, finance is based on data–models, data highlighted in charts and stories, and other material should all be made available online.

5. Embrace new media. As far as I can tell, no financial news station has a strong online presence. If a strong group of credentialed experts is the backbone of the network’s on-air talent (see #3 above) then they should have deeper, more valuable insights than what they can cover on the air. These thoughts should be blogged about, tweeted, and whatever else to make them as accessible as possible–more and more the “conversation” is online and to join it one must have their thoughts online. The NY Times does a good job at this–their columnists and reporters write all sorts of blog entries ranging from deep, researched pieces to random musings and clever one-line arguments.

Further, with my idealized network, all the content from on-air segments would be put on YouTube and made available to whomever wants to link or embed it. Openness and access would be key strategies for the network. A part of this is also making the on-air personalities and others who contribute regularly interact with the public as much as possible (currently, Twitter is a great medium for this).

6. Emphasize standards–make objectivity, fairness, and accountability the network’s core values. Barry talked about this in his list:

7.  Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

Now, this ties in with some of what I’ve said above. However, my point goes beyond this. Executives should not want to go one my idealized network when they need to “get out a statement”–the “narrative press release” as an interview is useless and doesn’t hold the subject of the interview accountable for their words. Similarly, when a guest comes on and makes an assertion that is incorrect it needs to be challenged at the time and corrected later–I clearly take a harder stance on this issue than Barry does. If people will be making their investment decisions based on information presented on the network and then they need to trust the network–viewers need to know the network strives to prove correct information and puts every effort into doing just that. Also, the rules of “journalistic engagement” for the network (things like policies on anonymous sourcing) should be public.

7. Make education a pillar of the network. Finance and markets, as I describe in multiples places above, are complicated and often counter-intuitive–a fair amount is “inside baseball.” Having a section of the website and some on-air time dedicated to explaining both terms and important but obscure facts and market dynamics is an important service. Simple things, like bond math, are important and static–these concepts (that subtly undergird all other topics–remember the anecdote about the misread chart above) should be revisited whenever absolutely necessary while being available at all times.

If these simple pieces were all followed, I believe there would exist a simple to follow, engaging financial network that would add a ton of value where there currently is a void. Then, maybe, the other networks would need to follow suit. I won’t hold my breath.

Revisiting a Debate We Should be Past

Recently, Felix Salmon, Clusterstock, and others have been mentioning an essay from the Hoover Institute about the financial crisis. Now, I haven’t yet linked to the essay in question… I will, but only after I’ve said some thing about it.

I was on the front lines of the securitization boom. I saw everything that happened and am intimately familiar with how one particular bank, and more generally familiar with many banks’, approach to these businesses. I think that there are no words that adequately describes how utterly stupid it is that there is still a “debate” going on surrounding banks and their roles in the financial crisis. There are no unknowns. People have been blogging, writing, and talking about what happened ad naseum. It’s part of the public record. Whomever the author of this essay is (I’m sure I’ll be berated for not knowing him like I was for not knowing Santelli — a complete idiot who has no place in a public conversation whose requisites are either truth or the least amount of intellectual heft), unless it’s writing was an excesses in theoretical reasoning about a parallel universe, it’s a sure sign they don’t what they are talking about that they make some of the points in the essay. Let’s start taking it apart so we can all get on with our day.

For instance, it isn’t true that Wall Street made these mortgage securities just to dump them on them the proverbial greater fool, or that the disaster was wrought by Wall Street firms irresponsibly selling investment products they knew or should have known were destined to blow up. On the contrary, Merrill Lynch retained a great portion of the subprime mortgage securities for its own portfolio (it ended up selling some to a hedge fund for 22 cents on the dollar). Citigroup retained vast holdings in its so-called structured investment vehicles. Holdings of these securities, in funds in which their own employees personally participated, brought down Bear Stearns and Lehman Brothers. AIG, once one of the world’s most admired corporations, made perhaps the biggest bet of all, writing insurance contracts against the potential default of these products.

So Wall Street can hardly be accused of failing to eat its own dog food. It did not peddle to others an investment product that it was unwilling to consume in vast quantities itself.

(Emphasis mine.)

Initial premise fail. I had a hard time finding the part to emphasize since it’s all so utterly and completely wrong. Since I saw everything firsthand, let me be unequivocal about my remarks: the entire point of the securitization business was to sell risk. I challenge anyone to find an employee of a bank who says otherwise. This claim, that “it isn’t true that Wall Street made these mortgage securities just to dump them on them the proverbial greater fool” is proven totally false. There’s a reason the biggest losers in this past downturn were the biggest winners in the “league tables” for years running. As a matter of fact, there’s a reason that league tables, and not some other measure, were a yardstick for success in the first place! League tables track transaction volume–do I really need to point out that one doesn’t  judge themselves by transaction volume when their goal isn’t to merely sell/transact?

In fact, the magnitude of writedowns by the very firms mentioned (Merrill and Citi) relative to the original value of these investments imply that a vast, vast majority of the holdings were or were derived from the more shoddily underwritten mortgages underwritten in late 2006, 2007, and early 2008. In fact, looking at ABX trading levels, as of yesterday’s closing, shows the relative quality of these mortgages and makes my point. AAA’s from 2007 (series 1 and 2) trading for 25-26 cents on the dollar and AAA’s from early 2006 trading at roughly 67 cents on the dollar. The relative levels are what’s important. Why would Merrill be selling it’s product for 22 cents on the dollar if the market level is so much higher (obviously the sale occurred a few months ago, but the “zip code” is still the same)? This is a great piece of evidence that banks are merely left holding the crap they couldn’t sell when the music stopped.

Now, onto the next stop on the “How wrong can you get it?” tour.

It isn’t true, either, that Wall Street manufactured these securities as a purblind bet that home prices only go up. The securitizations had been explicitly designed with the prospect of large numbers of defaults in mind — hence the engineering of subordinate tranches designed to protect the senior tranches from those defaults that occurred.

Completely incorrect. Several people who were very senior in these businesses told me that the worst case scenario we would ever see was, perhaps, home prices being flat for a few years. I never, not once, saw anyone run any scenarios with home price depreciation. Now, this being subprime, it was always assumed that individuals refinancing during the lowest interest rate period would start to default when both (a) rates were higher and (b) their interest rates reset. [Aside: Take note that this implicitly shows that people running these businesses knew that people were taking out loans they couldn’t afford.] Note that the creation of subordinate tranches, which were cut to exactly match certain ratings categories, was to (1) fuel the CDO market with product (obviously CDO’s were driven by the underlying’s ratings and were model based), (2) allow AAA buyers, including Fannie and Freddie, an excuse to buy bonds (safety!), and (3) maximize the economics of the execution/sale/securitization. If there were any reasons for tranches to be created, it had absolutely nothing to do with home prices or defaults.

Further, I would claim that there wasn’t even this level of detail applied to any analysis. We’ve seen the levels of model error that are introduced when one tries to be scientific about predictions. As I was told  many times, “If we did business based on what the models tell us we’d do no business.” Being a quant, this always made me nervous. In retrospect, I’m glad my instincts were so attuned to reality.

As a matter of fact, most of the effort wasn’t on figuring out how to make money if things go bad or protect against downside risks, but rather most time and energy was spent reverse engineering other firm’s assumptions. Senior people would always say to me, “Look, we have to do trades to make money. We buy product and sell it off–there’s a market for securities and we buy loans based on those levels–at market levels.” These statements alone show how singularly minded these executives (I hate that term for senior people) and businesses were. The litmus test for doing risky deals wasn’t ever “Would we own these?” it was “Can we sell all the risk?”

But wait, there’s more…

Nor is it plausible that all concerned were simply mesmerized by, or cynically exploitive of, the willingness of rating agencies to stamp Triple-A on these securities. Wall Street firms knew what the underlying dog food consisted of, regardless of what rating was stamped on it. As noted, they willingly bet their firm’s money on it, and their own personal money on it, in addition to selling it to outsiders.

One needs the “willingly bet [their own] money on it” part to be true to make this argument. I know exactly what people would say, “We provide a service. We aggregate loans, create bonds, get those bonds rated, and sell them at the levels the market dictates. It isn’t our place to decide if our customers are making a good or bad investment decision.” I know it’s redundant with a lot of the points above, but that’s life–the underlying principles show up everywhere. And, honestly, it’s the perfect defense for, “How did you ever think this made sense?”

And, the last annoying bit I read and take issue with…

Nor is it true that Wall Street executives and CEOs had insufficient “skin in the game,” so that “perverse” compensation incentives created the mess. That story also does not pan out. Individuals, it’s true, were paid sizeable bonuses in the years in which the securities were created and sold.

[…]

Richard Fuld, of failed Lehman Brothers, saw his net worth reduced by at least a hundred million dollars. James Cayne of Bear Stearns was reported to have lost nearly a billion dollars in a matter of a few months. AIG’s Hank Greenberg, who remained a giant shareholder despite being removed from the firm he built by New York Attorney General Eliot Spitzer in 2005, lost perhaps $2 billion. Thousands of lower-downs at these firms, those who worked in the mortgage securities departments and those who didn’t, also saw much wealth devastated by the subprime debacle and its aftermath.

Wow. Dick Fuld, who got $500 million, had his net worth reduced by $100 million? That’s your defense? And, to be honest, if you can’t gin up this discussion, then what can you gin up? The very nature of this debate is that all of these figures are unverifiable. James Cayne was reported to have lost nearly a billion dollars? Thanks, but what’s your evidence? The nature of rich people is that they hide their wealth, they diversify, and they skirt rules. So, sales of stock get fancy names like prepaid variable forwards. Show me their bank statements–even silly arguments need a tad of evidence, right?

Honestly, at this point I stopped reading. No point in going any further. So, now that you know how little regard for that which is already known and on the record this piece of fiction is, I’ll link to it…

Here ya go.

Although, Felix does a great job of taking this piece down too (links above)… Although, he’s a bit less combative in his tone.

Nor is it plausible that all concerned were simply mesmerized by, or cynically exploitive of, the willingness of rating agencies to stamp Triple-A on these securities. Wall Street firms knew what the underlying dog food consisted of, regardless of what rating was stamped on it.

Why do the Articles about John Thain Change?

Okay, I really wanted to write something insightful about John Thain’s recent dismissal. There’s lots of information swirling around since the story caught fire and, especially with John Thain’s recent memo, I think there’s an underlying story emerging. However, the story keeps changing… Not just as new facts are revealed, but the actual article keeps changing! Let’s look at the timeline.

January 22nd — The narrative turns to John Thain’s excesses and the Ken Lewis flies to New York and dismisses Mr. Thain around 11:30AM.

Later Janaury 22nd — The blogosphere catches fire with the story. Mr. Blodget writes about it here (this link is extremely important later, we’ll come back to it). Deal Journal also dedicates a lot of ink to the events (the last link is great reading, btw). Felix also writes up his thoughts.

January 23rd — The Wall St. Journal sprays their pages with several articles about the situation. Deal Journal provides a nice roundup (note this link too).

January 26th (today) — There is more reporting about BofA’s role in the P.R. nightmare that is Merrill’s early bonus payments.

January 26th (today)– I try to go back and write about the entire incident. Wanting to ensure I catch the emotion and facts as they evolved, I try to go back to the original WSJ article.

The last step is the problem. The article from the 22nd, with all it’s anonymous sourcing and inflammatory language, is totally gone. In it’s place there’s an article dated the 26th, with some of the same information, but a totally different structure. Now, let’s examine the excerpt I was able to find, from Clusterstock (first important link):

Bank of America had lost confidence in Mr. Thain, this person said, after Mr. Lewis learned of mounting fourth-quarter losses at Merrill from the transition team handling the Bank of America-Merrill merger rather than from Mr. Thain himself. And when Mr. Lewis asked Mr. Thain what happened, the Bank of America CEO did not get a “good explanation for what was happening and why,” this person said.

The Bank of America CEO also concluded Mr. Thain has exercised “poor judgment” on a number of fronts. He left for a vacation in Vail, Colo., after the losses came to light, bonus payments at Merrill were accelerated so they could be collected before the end of the year and Mr. Thain had planned to fly this week to Davos, Switzerland, even though Bank of America had signaled that such a trip was not a good idea, this person said.

(Emphasis mine.)

This section appears nowhere in the new article from the WSJ. The entire article has been rewritten. Specifically, the charge about the bonuses being accelerated, emphasized above, is totally gone.

Now, I encourage you to see for yourself. Please don’t take my word for it.. Instead, go click on the links from the 22nd and 23rd, and follow the links to WSJ articles about John Thain being dismissed and see where the link takes you. I’ll even reproduce those here, in context. However, don’t feel shy about verifying!

Well, yes, of course he did.  And it’s apparently a common affliction at Bank of America (BAC). WSJ: Bank of America had lost confidence in Mr. Thain, this person said, after … (from Clusterstock)

Bank of America and Merrill Lynch arranged the deal in less than 48 hours, and the hasty work shows. Thain’s departure Thursday is the clincher… (from Deal Journal)

It was always a bit weird that John Thain was going to stay on at Bank of America, but as it turned out, he lasted less than a month before getting fired this morning by the equally-beleaguered Ken Lewis. (from Felix)

Amazing. Maybe someone has the original article so I can write about what’s been going on and in the public sphere of debate, instead of having to rely on revisionist history.

Dear Financial Media: Please Rise Above the Least Common Denominator

It’s a simple request. Here’s an example, when a T.V. network talks about Wall St. being happy or sad, “the market” being up or down some percentage, etc. based on what “stocks” do. The S&P 500 represents about $13 trillion (slightly lower, as of this posting). The bond market, though, is over $27 trillion dollars (a statistic from 2006). Now, while the stock and pure interest rates sometimes move in correlated directions, the credit markets or mortgage market can be experiencing a very different directional movement. As recent history has shown us, fixed income markets can be more important to consumers and the economy over a period of days, months, or even longer. So, then, why don’t media organizations describe the financial world based on how fixed income instruments perform? Oh, and lest I forget the $516 trillion notional of outstanding derivatives contracts ($11 trillion in net amount, but counterparty risk makes both numbers valuable) that have been pushing around the larger bond markets recently (ABX, the storied sub-prime index, is a member of the derivatives segment). I realize that these nuances and different markets aren’t easy to explain, but why should that stop the financial media from explaining it?

(I’ll completely skip the fact that it’s often the Dow Jones Industrial Average that’s cited and the issues associated with that index!)