Lions and Tigers and Bears, Dubai!

Fresh off Thanksgiving, still stuffed with Butterball and Wild Turkey and familial angst, a ragged collection of hardcore traders shuffled into the shortened Friday session squeezing rubber balls and oozing tryptophan from their eyeballs. This mutant collection of veiny, red-faced Orcs, those who yell "Buy" and "Sell" in their sleep, were looking for a reason to belch reverberating echoes across the hallowed halls of the NYSE and they found one in the desert of Dubai.

Dubai World, a quasi state-owned investment entity, had asked its creditors for a moratorium on debt payments for six months - all $59 billion of its liabilities. When this news came across the wires, the flecks of spittle were flying as sell orders screeched like an osprey descending on a minnow in a tide pool. What started as beach break escalated into the north shore of Oahu as low volume combined with massive paranoia to drive the Dow onto the rocks. It would take a day or two for the Xanax, single malt, and Viagra to wear off, but when it did, a rational realization took hold of the situation by taking Dubai World (DW) in a proper perspective.

DW builds islands for the ultra-rich, erects hotels for the ultra-rich, invests in casinos for the ultra-rich, and operates ports for the goods being shipped by the ultra-rich. They financed all of this activity because Dubai doesn't have a lot of oil left; estimates are that it will run out in 20 years. So, in the midst of a global economic crisis, a company that caters to the ultra-rich and is built on a mountain of debt is having trouble? As the port operators in New Jersey would say, "fuggedaboutit."

Truly "Free Market" = Anarchy & Chaos

For those who believe that the "free market" is one without any government interference or pesky regulations, I'll let this AP story speak for itself:

LONDON -- Rogue employees at a major mobile phone company illegally sold millions of customer records to rival firms, Britain's information watchdog said Tuesday.

Christopher Graham, the information commissioner, said the case was a serious breach of data privacy, and he called for harsher punishments for offenders.

"The existing paltry fines ... are simply not enough to deter people from engaging in this lucrative criminal activity. The threat of jail, not fines, will prove a stronger deterrent," he said.

The mobile phone company -- which Mr. Graham said couldn't be identified because an investigation was ongoing -- alerted Mr. Graham's office after it found out about the suspected trade. Personal data, including customers' contract expiry dates, were sold to several rivals, which then used the material to cold-call customers to offer them an alternative deal, the office said.

"The number of records involved runs into the millions, and it appears that substantial amounts of money changed hands," the government body said in a document submitted to the Ministry of Justice.

Mr. Graham said his office was considering the evidence and preparing to prosecute those responsible.

The Data Protection Act prohibits the selling on of data without prior permission from the customer. Offenders could be fined thousands of pounds.

Copyright © 2009 Associated Press

Everything You Wanted To Know About CMBS

The history of mortgage-backed securities, from the RTC to the impending commercial real estate collapse, is available for reading online.

Rather than examine this uniquely detailed look at the commercial real estate market, I'll just put up a link instead.

The Lloyd's Prayer

Thanks to Richard Ambrose for this adaptation of the Lord's Prayer as spoken by the executives at Goldman Sachs. I found this at Barry Ritholtz's blog "The Big Picture," a site that every business student should bookmark immediately.

THE LLOYD’s Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

Darkness Before the Storm

David Rosenberg, ex-chief economist for Bank of America-Merrill Lynch, has made some dire predictions concerning the economic outlook. He believes that we are headed for an unemployment rate, the exclusive U3, between 12-13%. This would place the U6, consisting of people who have given up looking for work and those who have taken part-time jobs, at around 20%. Compounding this prediction is Edward Harrison's belief - whose "Credit Writedowns" website is considered one of the top financial sites on the Internet - that we are now headed into a real depression.

Harrison's view is that debt is the underlying feature of this downturn, which coincides with Yale economist John Geanakoplos theory of collateral and the lack thereof that led to this global meltdown.

Harrison wrote, "When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades. This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity."

We all know that the subprime mortgage market in conjunction with pyramidal layers of derivative gambles contributed to this monetary malaise, but it is only the precursor of two more real estate implosions: 1) the prime loans that were made with 'exotic' conditions - these reset next March - and 2) commercial real estate, which is already starting to crumble.

Lest you think that I'm here to incite suicidal thoughts, my motive is quite the contrary; there is money to be made during crises, but the businesses have to be carefully chosen. Here is a list of recession-proof business ideas, and here is a compendium of career choices from which to focus your MBA and skills during bad economic times.


"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."

John F. Kennedy, Speech in Indianapolis, April 12, 1959

Meet the New Boss, Same as the Old Boss

The Wall Street Journal published an article today about the pioneering work of Yale University economist John Geanakoplos. Working in the academic version of a rat-infested basement with sooty windows letting in streaks of dim light, he has toiled for years trying to redefine the nature of collateral in our modern economy. His ground-breaking work? That when investments contain overleveraged or synthetic collateral as backing, the efficient market hypothesis is no longer valid, i.e. investors no longer have access to all pertinent information, and the price will no longer reflect an accurate market assessment of value. Financial derivatives, collateralized debt obligations, and a whole odd-lot assortment of "casino" investments qualify, explaining in part the economic collapse. Wow, on the surface, this seems like big news.

According to Geanakoplos, when there is a margin call because of concern over future expectations and collateral is short, prices drop, which further exacerbate the situation. Mmmm, this sounds very familiar. In fact, this "new paradigm" seems to have its roots in the 1929 stock market collapse, which was triggered by margin calls because the collateral to cover didn't exist.

There's no "new thinking" here. Investments, whether in a Wall Street casino or a Main Street home, had no down payment, no collateral. This is nothing short of fraud. What he's really saying is that when you defraud investors, they get burned. And when you defraud an entire industry, the global economy gets burned. Yet, no one has been charged with this crime, a transgression that makes Bernie Madoff seem like he stole penny candy. Why?

Let's not forget the words of Jean Rostand, French experimental biologist and philosopher: "Kill a man and you're a murderer, kill many and you're a conqueror, kill them all and you're a god."

Insider Scathing

Galleon hedge fund founder, Raj Rajaratnam, has been in the news lately for operating a ring of hi-tech corporate insiders and analysts who willingly divulged nonpublic information, which in turn allowed Galleon to reap less-risk, mo'-money profits. In his case, the moniker "hedge fund" was used to describe a hedge against the efficient-market hypothesis by obtaining illegal information to consistently outperform the broader market through "sure bets."

There are a number of academics and pundits who believe that Rajaratnam's transgressions are in fact helpful to the markets; after all, it was he who first provided information that brought prices into equilibrium. Besides, he really wasn't an "insider," but an outsider who got insiders to talk freely by, in some cases, paying them tens of thousands of dollars. Of course, he made $8 million short-selling Google from this information, among many other prescient trades.

The Securities and Exchange Commission defines illegal insider trading as the "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security." It seems that they are behind the times, outmoded, and anachronistic; they actually believe that insider trading "undermines investor confidence in the fairness and integrity of the securities markets." The SEC seems to be enamored with this thing called risk; they think that if risk is equally distributed, then the markets will operate as they should. But more advanced minds disagree, saying that if everyone traded on nonpublic information, then our markets would be absolutely lighting-fast and efficient. Or perhaps we wouldn't have markets at all because very few will buy shares for which a select few are guaranteed a risk-free profit.

Rajaratnam's public service by trading in advance of released news should be examined - perhaps we should all sell out our fiduciary responsibility in order to provide the fastest possible correction in the markets. Just imagine, every insider from every public company selling materially significant news to outsiders whose role is to provide rapid price equilibrium. But if the company is not making fraudulent representations of its financial performance, does it matter how quickly the news is acted upon? If everyone has the same information, a price correction that occurs next Tuesday will have exactly the same effect as one occurring this afternoon. Sure, someone could buy an equity 10 minutes before a catastrophic free fall, but they could also purchase 10 seconds before a huge uptick. Armed with identical information, everyone has a equal risk, the definition of a level playing field. Here's the difference: unless they're a small-time player, anyone acting with insider information will telegraph news through their large long-buy or short-sell orders. The market will then react to this risk-free adventurer with the timidity of having news in advance of its official release, dramatically increasing the buy or sell orders that would have occurred under normal circumstances, which then increase the volatility of the price swings.

In effect, insider trading increases beta for everyone but the insider, whose beta is almost zero.

The reason why we have so many commerce regulations is because most businesses want to manipulate risk, and many executives will do anything to lower their risk profile. Unfortunately for society, risk is a zero-sum game; when a single entity lowers their beta through illegal means, the risk goes up for everyone else.

Personally, I believe that insider trading should be treated the same way that old-school Las Vegas casinos handled card cheats, loaded dice, and rigged slots. If you've seen the movie "Casino," you'll know that the lucky ones got the hammer.