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.

Notes and Predictions: The Stress Test

As the results of the stress test start leaking out slowly, it’s a fun exercise to make some educated guesses/predictions about what the future holds and take note of pertinent facts. As we’ve discussed before, there is a lot to take issue with when considering the results of the stress test at all, especially given the added layers of uncertainty stemming form the limited information provided in the scenarios. So, without further delay, let’s get started.

1. The baseline scenario will prove wholly inadequate as a “stress test.” Please, follow along with me as I read from the methodology (pdf).  I’ll start with the most egregious and reckless component of the mis-named baseline scenario (I would rename it the, “if payer works” scenario) : what I will refer to as “the dreaded footnote six.” From the document:

As noted above, BHCs [(Bank Holding Companies, or the firms being stress tested)] with trading account assets exceeding $100 billion as of December 31, 2008 were asked to provide projections of trading related losses for the more adverse scenario, including losses from counterparty credit risk exposures, including potential counterparty defaults, and credit valuation adjustments taken against exposures to counterparties whose probability of default would be expected to increase in the adverse scenario.(6)

[…]

(6) Under the baseline scenario, BHCs were instructed to assume no further losses beyond current marks.

(Emphasis mine.)

Holy <expletive>! In what alternate/parallel/baby/branching universe is this indicative of anything at all? Assume no further losses beyond current marks? Why not assume everything returns to par? Oh, well, that actually was a pretty valid assumption for the baseline scenario. From the document:

New FASB guidance on fair value measurements and impairments was issued on April 9, 2009, after the commencement of the [stress test].  For the baseline scenario supervisors considered firms’ resubmissions that incorporated the new guidance.

(Emphasis mine.)

Thank goodness! I was worried that the “if prayer works” scenario might have some parts that were worth looking at. Thankfully, for troubled banks, I can skip this entire section. (Confidence: 99.9999%)

2. Trading losses will be significantly understated across all five institutions that will need to report them. First, only institutions with over $100 billion in trading assets were asked to stress their trading positions. Second, from the section on “Trading Portfolio Losses” from the document:

Losses in the trading portfolio were evaluated by applying market stress factors … based on the actual market movements that occurred over the stress horizon (June 30 to December 31, 2008).

(Emphasis mine.)

Okay, well, that seems reasonable, right? Hmmmm… Let’s take a look. Here is what some indicative spread movements for fixed income products looked like January 9th of 2009, according to Markit (who has made it nearly impossible to find historical data for their indices, so I’m resorting to cutting and pasting images directly–all images are from their site):

(Click on the picture for a larger version.)

Well, looks like a big move is taken into account by using this time horizon. Clearly this should provide a reasonable benchmark for the stress test results, right? Well, maybe not.

(Click on the picture for a larger version.)

Yes, that’s right, we’ve undergone, for sub-prime securities a massive widening during 2009 already. Also, as far as I can tell, the tests are being run starting from the December 2008 balance sheet for each company. So, if I’m correct, for the harsher scenario, trading losses will be taken on December 2008 trading positions using December 2008 prices and applying June 2008 to December 2008 market movements. For sub-prime, it seems pretty clear that most securities would be written up (June 2008 Spread: ~200, December 2008 Spread: ~1000, Delta: ~800, Current Spread: ~2600, December 2008 to Today Delta: ~1600, Result: firms would take, from December 2008 levels, half the markdown they have already taken).

Also, it should be a shock to absolutely no one that most trading assets will undergo a lagged version of this same decline. Commercial mortgages and corporate securities rely on how firms actually perform. Consumer-facing firms, as unemployment rises, the economy worsens and consumption declines, and consumers default, will see a lagged deterioration that will appear in corporate defaults and small businesses shuttering–both of these will lead to commercial mortgages souring.  Indeed we’ve seen Moody’s benchmark report on commercial real estate register a massive deterioration in fundamentals. That doesn’t even take into account large, exogenous events in the sector. Likewise, we see consistently dire predictions in corporate credit research reports that only point to rising defaults 2009 and 2010.

In short, for all securities, it seems clear that using data from 2H2008 and applying those movements to December 2008 balance sheets should produce conservative, if not ridiculously understated loss assumptions. (Confidence: 90%)

3. Bank of America will have to go back to the government. This, likely, will be the end of Ken Lewis. It’s not at all clear that Bank of America even understands what’s going on. First, if I’m correctly reading Bank of America’s first quarter earnings information, the firm has around $69 billion in tangible common equity. Also, it should be noted that the FT is reporting that Bank of America has to raise nearly $34 billion.  Now, with all this in mind, let’s trace some totally nonsensical statements that, unlike any other examples in recent memory, were not attributed to anonymous sources (from the NYT article cited above):

The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank. […]

But J. Steele Alphin, the bank’s chief administrative officer, said Bank of America would have plenty of options to raise the capital on its own before it would have to convert any of the taxpayer money into common stock. […]

“We’re not happy about it because it’s still a big number,” Mr. Alphin said. “We think it should be a bit less at the end of the day.” […]

Regulators have told the banks that the common shares would bolster their “tangible common equity,” a measure of capital that places greater emphasis on the resources that a bank has at its disposal than the more traditional measure of “Tier 1” capital. […]

Mr. Alphin noted that the $34 billion figure is well below the $45 billion in capital that the government has already allocated to the bank, although he said the bank has plenty of options to raise the capital on its own.

“There are several ways to deal with this,” Mr. Alphin said. “The company is very healthy.”

Bank executives estimate that the company will generate $30 billion a year in income, once a normal environment returns. […]

Mr. Alphin said since the government figure is less than the $45 billion provided to Bank of America, the bank will now start looking at ways of repaying the $11 billion difference over time to the government.

(Emphasis mine.)

Right around the time you read the first bolded statement, you should have started to become dizzy and pass out. When you came to, you saw that the chief administrative officer, who I doubt was supposed to speak on this matter (especially in advance of the actual results), saying that a bank with $69 billion in capital would be refunding $11 billion of the $45 billion  in capital it has already received because they only need $34 billion in capital total. Huh? Nevermind that the Times should have caught this odd discrepancy, but if this is the P.R. face the bank wants to put on, they are screwed.

Now, trying to deal with what little substance there is in the article, along with the FT piece, it seems pretty clear that, if Bank of America needs $34 billion in additional capital, there is no way to get it without converting preferred shares to common shares. There is mention of raising $8 billion from a sale of a stake in the China Construction Bank (why are they selling things if they are net positive $11 billion, I don’t know). That leaves $26 billion. Well, I’m glad that “once a normal environment returns” Bank of America can generate $30 billion in income (Does all of that fall to T.C.E.? I doubt it, but I have no idea). However, over the past four quarters, Bank of America has added just $17 billion in capital… I will remind everyone that this timeframe spans both T.A.R.P. and an additional $45 billion in capital being injected into the flailing bank. Also, who is going to buy into a Bank of America equity offering now? Especially $26 billion of equity! If a troubled bank can raise this amount of equity in the current environment, then the credit crisis is over! Rejoice!

I just don’t see how Bank of America can fill this hole and not get the government to “bail it out” with a conversion. The fact that Bank of America argued the results of the test, frankly, bolsters this point of view. Further, this has been talked about as an event that requires a management change, hence my comment on Lewis.  (Confidence: 80% that the government has to convert to get Bank of America to “well capitalized” status)

Notes/Odds and Ends:

1. I have no idea what happened with the NY Times story about the results of the “Stress Test.” The WSJ and FT are on the same page, but there could be something subtle that I’m misunderstanding or not picking up correctly. Absent this, my comments stand. (Also, if might have been mean.unfair of me to pick on the content of that article.)

2. The next phases of the credit crisis are likely to stress bank balance sheets a lot more. The average bank doesn’t have huge trading books. However, they do have consumer-facing loan and credit products in addition to corporate loans and real estate exposure. In the coming months, we’ll see an increase in credit card delinquencies. Following that, we’ll see more consumer defaults and corporations’ bottom line being hurt from the declining fundamentals of the consumer balance sheet. This will cause corporate defaults. Corporate defaults and consumer defaults will cause commercial real estate to decline as well. The chain of events is just beginning. Which leads me to…

3. Banks will be stuck, unable to lend, for a long time. I owe John Hempton for this insight. In short, originations require capital. Capital, as we see, is in short supply and needed to cover losses for the foreseeable future. Hence, with a huge pipeline of losses developing and banks already in need of capital, there is likely not going to be any other lending going on for a while. This means banks’ ability to generate more revenue/earnings is going to be severely handicapped as sour loans make up a larger and larger percentage of their portfolios.

4. From what I’ve read, it seems that the actual Citi number, for capital to be raised, is between $6 billion and $10 billion. This puts their capital needs at $15 billion to $19 billion, since they are selling assets to raise around $9 billion, which is counted when considering the amount of capital that needs to be raised (according to various news stories). Interestingly, this is 44% to 55% of Bank of America’s needed capital. This paints a very different picture of the relative health of these two firms than the “common wisdom” does. Granted, this includes a partial conversion of Citi’s preferred equity to common equity.

5. I see a huge correlation between under-performing portfolios and a bank trying to negotiate it’s required capital lower by “appealing” the stress test’s assessment of likely losses in both the baseline and adverse scenarios. As I’ve talked about before, not all portfolio performance is created equal. Citi has seen an increasing (and accelerating) trend in delinquencies while JP Morgan has seen it’s portfolio stabilize. So, for the less-healthy banks to argue their losses are overstated by regulators, they are doubly wrong. It’ll be interesting to see how this plays out–for example, if JP Morgan’s credit card portfolio assumes better or worse performance than Citi and Bank of America.

Citi’s Earnings: Even Cittier Than You Think

Well, Citi reported earnings this past week. And, as many of you know, there are a few reasons you’ve heard to be skeptical that this was any sort of good news. However, there are a few reasons you probably haven’t heard… (oh, and my past issues on poor disclosure are just as annoying here)

On Revenue Generation: First, here are some numbers from Citi’s earnings report and presentation, Goldman’s earnings report, and JP Morgan’s earnings report:

These numbers should bother Citi shareholders. Ignoring the 1Q08 numbers, Citi–whose global business is much larger and much more diverse than it’s rivals–generates no more, if not slightly less, revenue than the domestically focused JP Morgan and much, much less than Goldman. But it gets worse. Goldman’s balance sheet was $925 billion vs. Citi’s $1.06 trillion in assets within it’s investment banking businesses, roughly 10% larger.  I’d compare JP Morgan, but they provide a shamefully small amount of information. As an entire franchise, however, Citi was able to generate their headline number: $24.8 billion in revenue, on assets of $1.822 trillion. JP Morgan, as a whole, was able to generate $26.9 billion, on assets of $2.079 trillion. JP Morgan, then is 14% larger, by assets, and generstes 8% higher revenue.

These numbers should be disconcerting to Citi, it’s no better at revenue generation than it’s rivals, despite having a larger business in higher growth, higher margin markets. Further, in an environment rife with opportunity (Goldman’s results support this view, and anecdotal support is strong), Citi was totally unable to leverage any aspect of it’s business to get standout results… and we’re only talking about revenue! Forget it’s cost issues, impairments and other charges as it disposes assets, etc.

On The Magical Disappearing Writedowns: Even more amazing is the lack of writedowns. However, this isn’t because there aren’t any. JP Morgan had writedowns of, approximately, $900 million (hard to tell, because they disclose little in the way of details). Goldman had approximately $2 billion in writedowns (half from mortgages). Citi topped these with $3.5 billion in writedowns on sub-prime alone (although they claim only $2.2 billion in writedowns, which seems inconsistent). But, that isn’t close to the whole story. Last quarter, in what I could find almost no commentary on during the last conference call and almost nothing written about in filings or press releases, Citi moved $64 billion in assets from the “Available-for-sale and non-marketable equity securities” line item to the “Held-to-maturity” line item. In fact, $10.6 billion of the $12.5 billion in Alt-A mortgage exposure is in these, non–mark-to-market accounts. There was only $500 million in writedowns on this entire portfolio, surprise! Oh, and the non–mark-to-market accounts carry prices that are 11 points higher (58% of face versus 47% of face). What other crap is hiding from the light? $16.1 billion out of $16.2 billion total in S.I.V. exposure, $5.6 billion out of $8.5 billion total in Auction Rate Securities exposure, $8.4 billion out of $9.5 billion total in “Highly Leveraged Finance Commitments,” and, seemingly, $25.8 billion out of $36.1 billion in commercial real estate (hard to tell because their numbers aren’t clear), are all sitting in accounts that are no longer subject to writedowns based on fluctuations in market value, unlike their competitors. These are mostly assets managed off the trading desk, but marked according to different rules than traded assets. If one doesn’t have to mark their assets, then having no writedowns makes sense.

On The Not-so-friendly Trend: This is a situation where, I believe, the graphs speak for themselves.

Do any of these graphs look like things have turned the corner? Honestly, these numbers don’t even look like they are decelerating! Compare this with the (relatively few) graphs provided by JP Morgan.

These aren’t directly comparable, as the categories don’t correspond to one another, and JP Morgan uses the more conservative 30-day delinquent instead of Citi’s 90+-day delinquent numbers. However, JP Morgan’s portfolio’s performance seems to be leveling out and even improving (with the possible exception of “Prime Mortgages”). Clearly, the pictures being painted of the future are very different for these institutions.

On the Stuff You Know About: I’ll be honest, this business about Citi benefiting from it’s own credit deterioration was confusing. Specifically, there is more going on when Citi refers to “credit value adjustments” than just profiting from it’s own Cittieness. However, Heidi Moore, of Deal Journal fame helped set me straight on this–the other things going on are dwarfed by the benefit I just mentioned. Here’s the relevant graphic from the earnings presentation:

And, via Seeking Alpha’s Transcript, the comments from Ned Kelly that accompanied this slide:

Slide five is a chart similar to one that we showed last quarter which shows the movement in corporate credit spreads since the end of 2007. During the quarter our bond spreads widened and we recorded $180 million net gain on the value of our own debt for which we’ve elected the fair value option. On our non-monoline derivative positions counterparty CDS spreads actually narrowed slightly which created a small gain on a derivative asset positions.

Our own CDS spreads widened significantly which created substantial gain on our derivative liability positions. This resulted in a $2.7 billion net mark to market gain. We’ve shown on the slide the five-year bond spreads for illustrative purposes. CVA on our own fair value debt is calculated by weighting the spread movements of the various bond tenors corresponding to the average tenors of debt maturities in our debt portfolio. The debt portfolio for which we’ve elected the fair value options is more heavily weighted towards shorter tenures.

Notice that Citi’s debt showed a small gain, but it’s derivatives saw a large gain (the additional $166 million in gains related to derivatives was due to the credit of it’s counterparties improving). Why is this? Well, notice the huge jump in Citi’s CDS spread over this time period versus cash bonds, which were relatively unchanged. Now, from Citi’s 2008 10-K:

CVA Methodology

SFAS 157 requires that Citi’s own credit risk be considered in determining the market value of any Citi liability carried at fair value. These liabilities include derivative instruments as well as debt and other liabilities for which the fair-value option was elected. The credit valuation adjustment (CVA) is recognized on the balance sheet as a reduction in the associated liability to arrive at the fair value (carrying value) of the liability.

Citi has historically used its credit spreads observed in the credit default swap (CDS) market to estimate the market value of these liabilities. Beginning in September 2008, Citi’s CDS spread and credit spreads observed in the bond market (cash spreads) diverged from each other and from their historical relationship. For example, the three-year CDS spread narrowed from 315 basis points (bps) on September 30, 2008, to 202 bps on December 31, 2008, while the three-year cash spread widened from 430 bps to 490 bps over the same time period. Due to the persistence and significance of this divergence during the fourth quarter, management determined that such a pattern may not be temporary and that using cash spreads would be more relevant to the valuation of debt instruments (whether issued as liabilities or purchased as assets). Therefore, Citi changed its method of estimating the market value of liabilities for which the fair-value option was elected to incorporate Citi’s cash spreads. (CDS spreads continue to be used to calculate the CVA for derivative positions, as described on page 92.) This change in estimation methodology resulted in a $2.5 billion pretax gain recognized in earnings in the fourth quarter of 2008.

The CVA recognized on fair-value option debt instruments was $5,446 million and $888 million as of December 31, 2008 and 2007, respectively. The pretax gain recognized due to changes in the CVA balance was $4,558 million and $888 million for 2008 and 2007, respectively.

The table below summarizes the CVA for fair-value option debt instruments, determined under each methodology as of December 31, 2008 and 2007, and the pretax gain that would have been recognized in the year then ended had each methodology been used consistently during 2008 and 2007 (in millions of dollars).

Got all that? So, Citi, in it’s infinite wisdom, decided to change methodologies and monetize, immediately, an additional 290 bps in widening on it’s own debt. This change saw an increase in earnings of $2.5 billion prior to this quarter.  In fact, Citi saw a total of $4.5 billion in earnings from this trick in 2008. However, this widening in debt spreads was a calendar year 2008 phenomenon, and CDS lagged, hence the out-sized gain this quarter in derivatives due to FAS 157 versus debt. Amazing.

And, while we’re here, I want to dispel a myth. This accounting trick has nothing to do with reality. The claim has always been that a firm could purchase it’s debt securities at a discount and profit from that under the accounting rules, so this was a form of mark-to-market. Well, unfortunately, rating agencies view that as a technical default–S&P even has a credit rating (“SD” for selective default) for this situation. This raises your cost of borrowing (what’s to say I’ll get paid in full on future debt?) and has large credit implications. I’m very, very sure that lots of legal documents refer to collateral posting, and other negative effects if Citi is deemed in “default” by a rating agency, and this would be a form of default. This is a trick, plain and simple–in reality, distressed tender offers would cost a firm money.

The Bottom Line: Citi isn’t out of the woods. In this recent earnings report I see a lot of reasons to both worry and remain pessimistic about Citi in the near- and medium-term. If you disagree, drop me a line… I’m curious to hear from Citi defenders.

Rick Santelli is a Lesson for our Children

So, by now you’ve heard of the rant of some guy I’d never heard of before (not to be confused with Barron’s Michael Santoli). Does anyone else find it amusing that Mr. Santelli was ranting on the floor of an “open outcry” trading pit? That’s right, he was ranting about wasteful spending to help homeowners while standing on a monument to the past of finance and inefficient execution.

Mr. Santelli, while I completely accept the fact that you are most likely compensated based on how many viewers you reel in and your entertainment value, and certainly not based on the quality of your journalism (this is CNBC after all, the house of Cramer), analysis, or even grasp of reality, you should still, every now and again, try reading something. From the details of the plan one could learn some simple things:

1. The plan is available only to those people whose mortgages are owned by Fannie or Freddie or those whose mortgages were backed by Fannie and Freddie and put into securities by them. Fannie and Freddie have strict limits on whose mortgages can go into those pools. They have to have high FICO scores, relatively low LTVs, and there is a maximum size allowed. Please note that this restriction, in and of itself, totally disqualifies sub-prime mortgage loans. Let me repeat: sub-prime mortgages and agency-backed mortgages are a totally disjoint set of mortgage loans–there is no overlap.

2. The program does not reduce principal owed. So, in essence, there is no forgiveness of debt, but only a reduction in interest rates and, perhaps, an extending of the term of the loan to reduce monthly payments. People still owe the same amount as before. Sounds like a welfare state to me…

3. The program doesn’t allow refinancing of second homes or investment properties. So all the speculators that own 3 houses on that were supposed to be flipped cannot refinance any mortgages except for the single first mortgage on the house they currently reside in.

4. Second mortgages aren’t covered under the plan. All the people who took out HELOCs to borrow money to buy stocks aren’t going to be bailed out either.

5. There is about $75 billion being used to help stabilize the multi-trillion dollar mortgage market. This number alone implied that there is some selection process to weed out unworthy people from being given government funds.

Look, I want the economy to improve as much as the next guy, but I think swelling the unemployment rolls by one idiotic reporter might be the kind of change I can believe in. Oh, and let’s finally close down the value-destroying open-outcry trading pits. Maybe removing that friction in our economy can help us save a few dollars.

I was going to stop here, but I’ll be honest… the complete and total stupidity of Santelli and those knuckle dragging dinosaurs who still use hand motions to make money, add trnsaction costs, and keep the computers at bay (not all of them, but most of them, I’m sure) on the floor of the C.M.E. are the reason middle America hates everyone in finance. Further, it’s the reason we need a bailout. How often did I hear “not my problem” or “because that’s where the market is” or any number of other, totally tone-deaf incantations from the mouths of people making seven-digit bonuses? Often. And, to be honest, do we have even single piece of tape with Mr. Santelli yelling about taxpayers paying for Citi? Bank of America? How about AIG? No? Well, we gave Merrill Lynch $15 billion and around $4 billion of that was immediately blown through to mint 696 seven-digit bonuses.

At least I can take comfort in knowing that Mr. Santelli will be forgotten in 100 years and that his rant likely has no lasting impact on our society–it showcases the worst, most base and uninformed stupididty. Children, pay attention in school or you’ll wind up working on the CME trading floor for CNBC.

Build an Investment Bank: Technology

(As the first in this series, I’m trying to use construction terms to “build” our investment bank… we’ll see if it adds or detracts.)

The Foundation

As we begin our journey to build our very own investment bank, I’m going to make a few statements that people “in the know” will find both surprising and, in hindsight, very obvious. The topic, as the title states, is technology. Now, here are the statements:

1. A major contributing factor to the way banks did business, especially in the businesses that contributed the most to banks’ current  problems, was their lack of technology.
2. Credit default swaps, in all their glory, had most of their issues rooted in technological inadequacies at various institutions.
3. A large portion of the cost structures at investment banks are due to a lack of technological heft.

I know, these seem outrageous. However, as anyone who has worked at a few different firms will tell you, there is a massive difference between a firm with good technology and bad technology. Let me tell you a simple anecdote: When very senior executives at a firm called down to the managers in charge of securitized products, they asked for the current marks and a summary of the various exposures “on the books.” It took about ten people three days to cull through all the various positions, put marks on them, model them, and put a concrete value on them. There wasn’t time to break down exposures by anything but the most trivial categories. Now, why this end product was acceptable is a different issue, but it should be clear that an effort of this magnitude shouldn’t be necessary to answer questions so totally basic in the context of running a multi-billion-dollar (although now with fewer billions) financial institution. A corollary: If it takes you several days to enumerate the positions your area has, you don’t know what it is yourself.

Now, when I speak of technology, I’m really speaking of the specialized systems and solutions used to tackle business issues, and not really the “desktop support” kind of technology. The systems that manage risk and positions, handle accounting, maintain an integrated analytics platform, deliver research and other products internally and externally, manage the human resource functions of the firm, and otherwise grease the wheels of capitalism.

The Blueprint

Our technology plan will have a few different components…

Structural Frame 1: Whether our theoretical investment bank is a startup or an established entity, the technology at the core will be home grown.

Structural Notes: Hiring consultants to stitch together purchased solutions and legacy systems is unacceptable. Technology, in order to be most effective, needs to be responsive. When a trading desk needs to run its business, and the system provided is insufficient, then it’s an unacceptable solution, and things will be done manually. Remember synthetic CDOs? Remember the ABX and credit default swaps on sub-prime bonds? Would it surprise you to know that at many major investment banks there was a manual component involved with every single contract and trade? The systems weren’t able to handle these instruments, and these businesses scaled up at a rate that was untenable. Also, there were no analytics available for these products. Businesses bought third party solutions for modeling and analytics, but those didn’t integrate or scale, so all the marks and risk numbers used to compute capital needs and P&L were merely estimates as these businesses were growing the most.

Let that sink in. Is it any wonder the senior managers didn’t know, before it was too late, what the actual exposures were? Had these firms built an integrated set of systems instead of buying a patchwork of specialized programs to solve the most current problem, these issues would not have been nearly as bad. I won’t even tell, in detail, the story about how, years ago, the system for trading credit default swaps at one bank was so difficult to use that they only created one identifier for GM and GMAC, not distinguishing between the two at all. But, when they were both on the brink of being downgraded to junk, but GMAC was de-coupled from GM, I wonder what kind of fun it was to rummage through 5- to 8-year-old confirms trying to match thousands and thousands of trades with the exact entity? Costly? Absolutely. Avoidable? Double absolutely.

On another note, an investment bank need not be innovative, but if it isn’t, then it should be able to mimic innovations quickly. Reporting to management, having an accurate record of transactions and various changes to the firm’s balance sheet, the ability to run various analyses on various products, and other, more basic, reporting functions (not even mentioning compliance and regulatory functionality) are all things that should be implementable once something new hits, and the only way to make these kinds of incremental changes is to build, not buy. A business as complex as an investment bank shouldn’t be reliant on outside parties to build software vital to their business–both from a cost standpoint and from a delay-until-completion standpoint. Further, the procurement process takes months!

Structural Frame 2: The technology part of the organization will not be a monolithic standalone bureaucracy.

Structural Notes: Simply put, technology (the people or business unit) needs to be vested in the process of making a business more profitable. Rather than taking on the normal support role mentality of, “If I say ‘yes’ then I might be wrong and held accountable, so I will say ‘no.'” The best way to do this is to not have technology be its own portion of the organization. Allowing technology to have a seperate seat at the table–or, worse, report into some catchall support person–only contributes to creating a centralized process for technology decisions. Centralizing technology decisions for many businesses with different needs creates unnecessary layering and wedges a huge management structure between the people doing the actual work and the people who are using the product and paying for it.

The final plan, I believe, would be to have as many technology people as possible integrated into the physical workspace of the people that utilize their work. Have investment banking developers sitting amongst investment bankers. Have the developers that build trading applications sitting with traders. The reporting structure should be a matrix of sorts–senior technology managers should report into a business whose technology needs are distinct from other businesses (atomic, perhaps is a better word) as well as a more senior technology person. In essence, people working in technology would be ingrained with the thought that they are there to help–the business unit would be setup as the client and the technology super-structure would be more for managing the processes. Obviously when the business is viewed as the client, technology managers are incentivized to get the businesses what they want, and when the people (both doing the work and in charge of liaising with the clients/business) are integrated (and can see the working environment of their clients and usage of their products) a lot of inefficiency and “lost in translation” moments are avoided. Senior managers really need to think of their business as including technology instead of interacting with it. This is highly important and is much more likely with a structure like I’ve proposed. Also, the closeness will just yield some more technologically savvy people and even encourage people to move between the two “worlds.”

Structural Frame 3: The people who are hired for technology roles will be of a high caliber and will be under a compensation regime and in an environment that sets big technology companies to shame.

Structural Notes: This shouldn’t be a hard line of reasoning to follow, but in general the difference between firms that “get it” and firms that don’t is how they recruit. Having an engineering background, I was recruited for I.T. from a very good school for that sort of thing by a few banks. Those banks have a high correlation to both still being around and surviving the mortgage mess with the smallest scathing in their peer group. I know several people who have told me that some other firms, one that haven’t been so lucky, have absolutely ridiculous and incredibly stupid policies for recruiting technology people. Most notably, one Manhattan firm recruits from local state schools almost exclusively–this is done so that the students they recruit can work part time during their senior year of college. No school in the top fifty or so participates. If one had to draw a grid, and rank various factors as to how important they are, the program I have just mentioned is the most ridiculous, stupid, and demonstrating a complete lack of critical thinking skills (or, for that matter, basic grasp of the business and reality) of the programs I have heard of or encountered. The people responsible for it have all moved on and the firm has suffered greatly from it’s underinvestment in technology.

So, to recruit good people you need a draw. To be honest, most graduates don’t fully grasp the concept of upside or career path–especially not ones in I.T. This makes it simple to get them, just offer a bigger number for the compensation in the first year. While this would work, it should be clear that this won’t help make them much more productive than the average technology drone in an investment bank. Giving technology employees a compensation structure that matches the businesses they are supporting is, in my view, a great solution. Obviously there would be more stability, but there should be a linking of incentives to the business and an interconnectedness in how they think about how technology and the problems facing the business. They should also have an incentive to be proactive and try to advocate solutions to problems they see instead of waiting for others to focus on them–this contributes greatly to becoming a nimble organization.

As for work environment, whenever possible, for groups not truly linked to a single business, like infrastructure groups and the web development team, my focus would be on building a start up-like atmosphere. The marginal cost of things like free coffee, free food, and some extra square footage for odd amenities is insignificant in relation to the quality of the work produced by the people snatched from places like Microsoft and Google versus a lower caliber of student culled from whatever lower-tier school(s) happens to be nearby. When you know your competition and what they offer that you do not, it’s very easy to compete: just offer what they offer. For things that aren’t as timely and linked to a knowing how a certain business runs, there is no problem in creating a lifestyle and work ethic that is free-form as long as it meets goals and needs of the firm. (Note: This isn’t my unique idea. A certain investment bank with a strong brand does this sort of thing already… but I did think of it before I knew that!)

Structural Frame 4: Technology, especially experimental or new technologies, should be used to try to create, or even drive, value.

Structural Notes: This is more a philosophy than an actual directive, but it’s important to taking a firm’s strategy on technology to the “next level.” There is a massive body of knowledge within a firm that is lost everyday due to a lack of effort. Usually the solution is to put humans somewhere and have them manually type in numbers or perform mundane tasks to get this working smoothly. Not in our investment bank! Let me furnish you with an example. The corporate bond market works in an unusual way: traders send around “runs” or lists of bonds with quotes of where they are willing to buy and sell bonds via Bloomberg’s messaging system–they are generally free form text. Why do they do it this way? It’s quick and easy. The firm I worked at didn’t make any effort to collect these pricing levels and store them somewhere. However, for publishing strategy reports, helping the desk find trade ideas based on historical relationships, calculating risk metrics, and any other number of things, this data would have been vital. Technology can easily help to store, warehouse, and serve these sorts of datasets (readily available from the market but unstructured) and help the organization as a whole improve its efficiency. This is just one example, but it serves to illustrate a point that is extremely common in an investment bank–lots of things require information that no one keeps but was readily available. Technology can drive value for lots of internal things by helping to solve problems like this. And, honestly, there are too many things that are out of one’s control not to have an organized and structured solution to the simple things that can be fixed.

Another note on technology, however, is that as the Web innovates social behaviors and collaboration those technologies should be actively examined as potential solutions to problems an investment bank would face. For example, lots and lots of information is needed when talking to a client. Getting good market “color” that everyone can see, and that is available, consistent, and easy to find is important. Perhaps a series of blogs could be used to ensure the delivery of this content is made as efficient as possible. One way I added value at my firm was by knowing as many people as possible. When liquidity started becoming an issue, the people I spoke to on the desk that funded banks in the LIBOR-based funding market explained what was the situation and we were able to assess if we thought this warranted a change in our positions or business in general. If that desk had a blog where they posted color throughout the day and the firm had an easy way to deliver this information to all of its employees, perhaps this could have helped people develop a more specific view on the market and notice some irregularities leading to the current crisis. Could Wikis be used effectively? I’m sure that they could. If it was institutionalized to have an up-to-date knowledge base within the firm, and it was made a priority to keep those things updated, nuances and details on complex transactions could be documented. People could avoid falling into the same traps or having to research the same issues other already have. These are just a few examples of how new technology innovations can be used to create value where it would otherwise be impossible.

Structural Frame 5: Every employee should be very comfortable with technology and make a large effort to integrate it into their work.

Structural Notes: I hate to sound like a snob, but in general, if you can’t figure out things like email and basic spreadsheets, you don’t have a lot of room left to grow. People should learn new technologies as they are available and make an effort to work more effectively. If this isn’t a priority of almost everyone in the firm, then building new systems and integrating things into their daily “workflow” is useless. Part of pushing the envelope on how new things are used means that people will have to learn how to use them. I’ve seen too many people, uncomfortable with a new system, resort to keeping their risk positions and other vital data the firm should know in a spreadsheet. Unacceptable. Now, not everyone has to “ooohhh” and “aaahhhh” over new features and technological platforms, but everyone should be asking themselves how they can use some new technology product to make more money, pitch more transactions, better monitor the firm’s risk, develop a better strategy for investing, or whatever their job entails. I don’t think this is hard, but I do think it’s important. And, with technology employees sitting with business people and understanding how they work day-to-day, the resources to figure out these sorts of things will be much more readily available than at most other firms. (See how the “structural frames” all interplay?)

The Final Inspection

As one can see, I value the little things that help people get 10-15% more productivity out of their daily routine–that’s the edge most firm’s need to excel in what they are focusing on. However, most firms poorly thought out systems and infrastructure issues, especially when it comes to technology, adds a hugely cost-ineffective layer of one-fix-at-a-time solutions that have added up. Why have a system where traders can input their own trades as they do them? Give them a paper record and hire a person, with full benefits and being paid an amount commensurate with living in New York City, to type them in. Oh, and now that the business has grown to three times to trading volume in six months, let’s hire four more people. Why have a system that allows a capital markets person to view real-time quotes in their sector or updates those quotes into a spreadsheet or presentation? Just have a bunch of analysts do it by hand. Why would you want a system that can model securitizations and CDOs and run the numbers effectively? We can have someone do it in a spreadsheet, that’s “close enough.” Although it doesn’t capture the nuanced risk factors, I’m sure defaults will never get high enough to worry about. These are the kind of solutions that, from the start, one should be thinking about. From the first instant it’s possible to fix these, they should be fixed. I think the five parts of the framework I’ve laid out will make a good plan to follow when building the technology part of our investment bank!

More Bear! (Part Two)

The next installment in the WSJ’s look at Bear’s Collapse hit today. To be honest, nothing interesting stood out. Well, except the following..

1. Why was a Moodys downgrade of Bear Stearns–branded RMBS bonds cause the stock to drop? Something there makes no sense. These are insulated from the credit of Bear Stearns itself and the bonds are issued by a SPV. Seems off, or, perhaps, smacks of normal financial journalism that takes a fact and conflates it with the cause of the markets moving on that day.

2. I have to profess not knowing a ton about prime brokerage, but it seems that if, as it normal to do, Bear provided leverage on trades for prime broker clients, they need to borrow that money and as funds fled they would be able to require repayment of those loans. Also, since most funds are loathe to keep a lot of cash, as it hurts their performance, there shouldn’t be much cash fleeing with these funds.

3. Spitzer hosed Alan Schwartz. There is Alan Schwartz, talking about how super awesome Bear Stearns is, and Spitzer’s scandal starts interrupts him from saying things like, “Bear made money this past quarter.”

4. They had their lawyer call the Fed. I guess I’m not sure why the chairman of Sullivan & Cromwell was charged with calling the Fed to talk about Bear Stearns situation. Seems very odd. And why was it that when Alan Schwartz called the Fed, he struck a less alarmist tone?

5. J.P. Morgan representatives arrived and were shocked at Bear’s books. We don’t know what that means (their liquidity position? the marks they had on their positions?) exactly. But here’s an odd thing: The JPM crew asked for the Fed–and they were already there! Setup in a conference room was the Fed, having already been there for several hours. Maybe it’s completely logical that the Fed would be there, even if they hadn’t been asked for help yet… Just seems to not jive with Alan Schwartz being cautiously optimistic earlier.’

Ok, like I warned earlier, no much to really talk about in this one…. Soon, part three! The conclusion awaits.

Why “Best” Doesn’t Mean Anything

One thing I fixate on is finding “the best” something.  In finance, however, I have to radically adjust my thinking. “Best” is meaningless–albeit for unintuitive reasons. I always thought that to put together the “best” trading desk, one only needs to go out and get the “best” traders. Well, along what dimensions does one judge a trader? Risk management? Percentage of trades that are profitable? Overall P&L? Ability as a manager?

Let me give two examples that show why “best” is a meaningless term. First, consider a trader who is senior and runs a trading desk. This trader still has a trading book, though, and is given a lot of balance sheet to use and take risk with. This trader has many trades on at once and, in general, they go in his favor (say 60-75%). He/she has demonstrated a consistent ability to generate positive P&L, and with more resources generally generates more P&L.  He/she is a very hands-off manager, however, and his/her subordinates go to him/her only with specific issues. This trader goes home earlier than the rest of the desk and pushes off as many outside obligations as possible to others. He/she knows most major players in the business and will have some email or IM conversations frequently and shares information with others on his/her desk.

Second, consider another senior trader who runs a trading desk. This trader is involved with a trading book, but has a subordinate to take over the day-to-day trading responsibilities. He/she is very focused on being a good manager and making his subordinates feel like their voices are heard. This trader has been around for a long while and dictates the overall risk positions of the desk, but not necessarily specific trades. He/she will take a view on, for example, the shape of the yield curve, risk/reward in the marketplace, and where supply and demand are headed and then recommend his/her desk to position themselves accordingly.  This trader commits sizable amounts of capital to trades, but has been working in an environment where balance sheet is constrained. He/she is very focused on maintaining good relations with major market participants and is pro-active about setting up and attending events outside the office with important accounts. This trader, due to the focus on relationships, is able to source very large “franchise trades” that allow the desk to control billions of dollars in supply and/or demand in various securities–these lead to large positive P&L for the desk.

Now, which is better? See? Completely different people. Completely different styles. The first probably is a great person to have at a shop that takes a lot of proprietary risk. The second is most likely a terrific fit for a business that focuses on secondary trading and being in the flow of big customers. But, which is better to build a trading business from scratch? Which is a better fit to take over a desk that has just lost a lot of money and had several traders fired? Which of the two traders described above is better for a nascent hedge fund? These questions are much more complex and multi-faceted than I would have believed just a short time ago.

Perhaps I’ve just taken 653 words to say something obvious, but it’s always been counter-intuitive to me that one can’t just take a list of traders, sort them by the revenue they generated, or some other number,  and interview them from top to bottom to find the best trader for the job.

I will destroy this village in order to save it!

Can you identify where the title of this post comes from? (Most likely other places, too.)

I was reading this three part series on how a space war with China will affect space assets well beyond the scope of any actual conflict. The relevant quote:

But if the short term military consequences to the United States are not that bad, the long term consequences to all space-faring nations would be devastating.  The destruction … satellites hit during the first hour of the attack considered here could put over 18,900 new pieces of debris over four inches in diameter into the most populated belt of satellites in low Earth orbit. … [Over the course of] the next year or so—well after the terrestrial war with China had been resolved—the debris fields would fan out and eventually strike another satellite. 

These debris fields could easily cause a run-away chain of collisions that renders space unusable — for thousands of years, and for everyone.  Not only is this a quickly growing and important sector of the world’s economy … , but space is also used for humanitarian missions …

Interestingly, it seems like this is exactly what’s going on in the securtization markets right now. Conduits, or investment banks that commit their own capital for making loans which aren’t meant to be held, only securitized, are basically shut down. Why are they shut down? Spreads on Commercial Mortgage Backed Securities have reached astronomical levels relative to where they have been, making it completely uneconomical for re-financing. The longer the conduits stay shut down, the more they downsize. The more they downsize, the less capacity there is. The less capacity there is, the more illiquid the mortgage market becomes for borrowers due to the lack of ability to create new bonds. (This is a very nuanced cause and effect, but many players only buy “new issue” bonds and many indices track newly issued bonds. Once there is a lack of new bonds and those indices become concentrated in older bonds that may have been more aggressively underwritten the sector could become unattractive.) From here, two things happen: borrowers start defaulting because they can’t get new loans, and the aforementioned illiquidity in bonds backed by these loans (in an environment where risk, in the form of defaults, is rising) causes spreads to move even wider (larger spreads = higher rates on commercial mortgages).

Well, this pattern continues, and even the WSJ is talking about how little sense it makes.  (FYI–Caveat emptor for people who consume the WSJ stories on complex derivatives products. There are some issues with how it describes these that I will discuss in a later post.)

At what point would one decide to exit such a market? When does a market seem completely unattractive? Was this disaster necessary to ensure a return to sound credit analysis? Only time will tell.

On Risk in the Capital Markets

One term that people throw around a lot is risk (“I get paid to take risk.” “That risk is priced in.” “What’s the risk in this trade if rates move 100bps?”). The real question about how institutions view risk is very interesting. Let us, for a second, think about one trade that worked out well for a risk-seeking investment bank and what it tells you.

The first thing that I noticed is an issue that (during the writing of this post as a matter of fact) has gotten a lot of play. The senior people at the firm are very involved with the risk decisions. interestingly, this is the second article where I have seen this particular risk-seeking inestment bank’s C.F.O. as the arbiter of risk decisions and as the gatekeeper to committing the firm’s capital–the first was here. One might ask, “What else would a C.F.O. do?” Well, judging the risk and capital positions of the firm is one thing–this is obviously a big job. One has to understand the liquidity and capital needs of the various businesses (does this business churn their balance sheet, how do we have to categorize the positions of this business [Level 3 Assets? Bank positions in a non–mark-to-market book?], where can we reduce balance sheet and capital usage if needed without causing financial losses, etc.). The capital structure of the firm is usually managed under this post (given the interest rate and credit environment whether a firm should issue convertible debt, preferreds, common stock, or bonds if it’s looking to raise capital in the most efficient way possible? I don’t…). To have the C.F.O. calling together senior managers and advocating a position for the firm, that seems odd and interesting at the same time.

Another interesting note is how the senior executives knew the risk positions. For an illiquid product like the ABX, to have enough data for the VaR calculations to be meaningful AND the systems and infrastructure in place for a senior executives to know on such a granular level, pro-actively, hos much risk a desk has on the books shows a long-sighted investment. Let me explain how an assessment of risk occurs at firms that have made less of an investment in their risk organizations. As a matter of fact, I’ve seen this fire drill myself several times. First, someone very senior asks a simple and usually very odd question, like, “What is our exposure to [real estate/leveraged loans/CDOs/commodities]?” This question is the managerial equivalent of a parent asking, “How are you doing in Math, son?” If this parent were helping their child with their homework and was involved day-to-day, even in a very minor way, the answer would be both brief and specific, essentially a delta from the prior answer. If this is the kind of asset class listed above all kinds of people scramble to put together a long PowerPoint presentation that answers the question. Putting together this presentation takes days, if not a week or more. It is then several days if not MUCH longer before the presentation is actually delivered to whichever senior manager requested it. Now, read the difference in that and the process implied in the aforementioned article.