Tag Archives: Lehman

Swaps, Repos, Shenanigans & Chicanery

As if the OTC derivative controversy needed more gasoline, here’s a few more barrels courtesy of  the report on Lehman.  I’m not going to get into the details, because the report is 2,200 pages long and FT Alphaville does a good job of hitting the highlights of the transaction here.

But let’s put things in perspective for a moment.  We’ve seen this song and dance before, albeit in a different form with sovereigns.  Greece had entered into swaps that, while legal at the time (phony speechlessness this year notwithstanding), were executed to minimize the external reporting of debt that the country actually had.

If you take these events together along with the crisis we’ve seen in the shadow banking system (off balance sheet structures that borrowed short and lent long, many of which have blown up since), Enron, AIG, and others, we can come away with a few conclusions:

1) SarbOx is a joke.  If you have enough money and enough people, you can find loopholes in implementing the rule.

2) Financial regulatory reform is desperately needed.  There seems to be even less trust in financial statements now than there was at the .com bust.

3) All of the wrangling and wrestling over the CFPA, jurisdictions of regulators, and other nonsense in the current debate about financial regulatory reform will do absolutely nothing to prevent these events from happening again.  None of the debates being held are dealing with the real issues that need to be addressed: rules and regs over off-balance sheet entities, market transparency, and market structure.  Notice that none of the things I highlighted are headline grabbers.  They deal with the minutiae.  They involve people rolling up their sleeves and getting their hands dirty, dealing with some real tricky issues.

And so I keep reminding myself of one axiom: never underestimate a politician’s desire to clean things up over a weekend.


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Hank Paulson’s Dry Heave | The New York Observer

This just makes me want to vomit!!

He solemnly describes how he dry-heaved in front of an American flag, in a bathroom stall and in front of Senator Judd Gregg. Other hour-by-hour details especially a chronicle of his work-related sleeplessness would be autobiographical triumphs if they didn’t contrast so grimly with the book’s void of thoughtful analysis. With the exception of a short and intensely dry afterword, it lacks any dissection of the intricacies of the crisis, its causes or its aftermath.

via Hank Paulson’s Dry Heave | The New York Observer.

I guess I’m not surprised. Thoughtful analysis or careful consideration of your options aren’t at the forefront of your mind when you panic. I’ve contended for a while that Tim Geithner panicked and I wouldn’t follow him when the bullets start flying. Reading “Too Big To Fail” it becomes clear Geithner’s sense of fear was lilliputian compared to Paulson’s.

Haven’t these guys ever heard of an Employee Assistance Program (EAP)? They’re confidential, helpful and usually just a toll-free call away. Guess not.

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Frank Rich Op-Ed: Were The “Aughties” The Age of Willful Ignorance? – One City: A Buddhist Blog for Everyone

This is rather cogent:

Frank Rich is a great writer, whether you agree with him or not. It struck me that so little notice has been paid so far to this decade coming to a close, and maybe that’s because we all want to forget it. Why dwell on the negative, after all?

So, if there was a primary klesha (mental affliction) of the aughties, what was it? My vote goes to ignorance, a willful and deep-seated habit to avoid looking truth in the face, even if the false brand creates more havoc than simple honesty ever would.

via Frank Rich Op-Ed: Were The “Aughties” The Age of Willful Ignorance? – One City: A Buddhist Blog for Everyone.

Recently, I read this blog about risk management. One of my tweeps, Lawrence MacDonald had a comment that got me thinking:

I think that’s been a common perception. Because risk management is just like any other skill: if you don’t practice it, you’ll eventually lose the ability to do it. Just look at Lehman. Or you can choose from this list if you need more examples of what not to do.

But is that all there is to it? Risk managers were just being blown off? I wonder if there was more to it. I’m inclined to believe there was a lot of ignorance going around. Largely because people just wanted to avoid facing problems.

Consider family members: how many of us have a member of our family with a chronic health condition that they must control on a hourly/daily basis, yet they refuse to do so? Ignorance and denial are very powerful if left unchecked. As an example, my family’s health history includes fun conditions like cancer (3 folks died of lung cancer, 1 had liver also), high cholesterol, Type I & II diabetes, and high blood pressure. Not pretty. But I don’t smoke, I’m not an alcoholic, and the other risks I control primarily through diet & exercise (although I did a poor job this year). I don’t bring this up to toot my horn or pat myself on the back, but the truth is, I felt it was important enough for me to know what my risks were and how to control them while I still had a choice in the matter.

And that’s the whole point behind effective risk management. Always putting yourself in position to control your response to situations – not have them dictated to you by the choices/actions of others.

I’ve said it before, I’m sure I’ll say it again: collectively, we need to get ourselves and this economy into rehab. The pain will be great as we subject ourselves to the withdrawal symptoms of breaking our habits that have been brought on by cheap liquidity and moral hazard, but we’ll be better off for it once it’s done.

Until then, I just hope we – like a junkie whose been ravaged by the availability of cheap opiates but truly sees themselves in the mirror for the first time – admit we have a problem and admit the way out of this mess will be different than the way we got into it.


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