kottke.org posts about finance

Mixed signals vs. noiseJun 19 2014

Over the course of his 3000 columns at The Motley Fool, Morgan Housel has learned a few things:

I've learned that short-term thinking is at the root of most of our problems, whether it's in business, politics, investing, or work.

I've learned that debt can cause more social problems than some drugs, yet drugs are illegal and debt is tax deductible.

I've learned that finance is actually very simple, but it's made to look complicated to justify fees.

Unfortunately, the list is undermined almost completely by the get-rich-quick advertising on the site, including this bit at the end of the article, which I can't even tell is an ad or just a promotion:

Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Short-term thinking is at the root of most of our problems, click here now. Now!

Trending: insider tradingJun 17 2014

A new study finds that insider trading is much worse than commonly thought: a quarter of all public company deals may involve some kind of insider trading. From the NY Times:

The professors examined stock option movements -- when an investor buys an option to acquire a stock in the future at a set price -- as a way of determining whether unusual activity took place in the 30 days before a deal's announcement.

The results are persuasive and disturbing, suggesting that law enforcement is woefully behind -- or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.

The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading "arising out of chance" were "about three in a trillion." (It's easier, in other words, to hit the lottery.)

Only about 5% of the deals are ever litigated by the SEC. (via mr)

Reimagining MonopolyMay 14 2014

Mike Merrill reimagines the game of Monopoly to better represent the modern financial system by adding the banker as a player, convertible notes, and Series A financing.

Each player starts with only $500. That's a nice bit of cash, but it's going to be expensive to build your capitalist empire. Baltic Avenue will cost you $80, States Avenue is $140, Atlantic is $260, and that leaves you just $20. Even if you're the first to land on Boardwalk you won't be able to afford the $400 price tag. Another $200 from "passing Go" is not going to last that long. You need more money.

At the start of the game the banker will offer each player a convertible note of $1000 at a 20% discount and 5% interest*. Armed with $1500 the player is now ready to set out on their titan of the universe adventure! (Of course players are not required to take the convertible note.)

That sounds fun? (via waxy)

More on Michael Lewis and high-frequency tradingApr 02 2014

Michael Lewis's new book about high-frequency trading dropped on Monday with less than 24 hours notice and the media is scrambling to catch up. There's plenty of love for Lewis and his books out there, but Tyler Cowen has been linking to some critiques. For Bloomberg, Matt Levine writes:

In my alternative Michael Lewis story, the smart young whippersnappers build high-frequency trading firms that undercut big banks' gut-instinct-driven market making with tighter spreads and cheaper trading costs. Big HFTs like Knight/Getco and Virtu trade vast volumes of stock while still taking in much less money than the traditional market makers: $688 million and $623 million in 2013 market-making revenue, respectively, for Knight and Virtu, versus $2.6 billion in equities revenue for Goldman Sachs and $4.8 billion for J.P. Morgan. Even RBC made 594 million Canadian dollars trading equities last year. The high-frequency traders make money more consistently than the old-school traders, but they also make less of it.

And here's Matthew Philips on What Michael Lewis Gets Wrong About High-Frequency Trading:

1. HFT doesn't prey on small mom-and-pop investors. In his first two TV appearances, Lewis stuck to a simple pitch: Speed traders have rigged the stock market, and the biggest losers are average, middle-class retail investors-exactly the kind of people who watch 60 Minutes and the Today show. It's "the guy sitting at his ETrade account," Lewis told Matt Lauer. The way Lewis sees it, speed traders prey on retail investors by "trading against people who don't know the market."

The idea that retail investors are losing out to sophisticated speed traders is an old claim in the debate over HFT, and it's pretty much been discredited. Speed traders aren't competing against the ETrade guy, they're competing with each other to fill the ETrade guy's order.

And Felix Salmon:

This vagueness about time is one of the weaknesses of the book: it's hard to keep track of time, and a lot of it seems to be an exposé not of high-frequency trading as it exists today, but rather of high-frequency trading as it existed during its brief heyday circa 2008. Lewis takes pains to tell us what happened to the number of trades per day between 2006 and 2009, for instance, but doesn't feel the need to mention what has happened since then. (It is falling, quite dramatically.) The scale of the HFT problem - and the amount of money being made by the HFT industry - is in sharp decline: there was big money to be made once upon a time, but nowadays it's not really there anymore. Because that fact doesn't fit Lewis's narrative, however, I doubt I'm going to find it anywhere in his book.

Flash BoysMar 31 2014

Michael Lewis (The Big Short, Liar's Poker) is back with another book about the financial markets: Flash Boys: A Wall Street Revolt. It's the story of high-frequency trading and the traders who are fighting against it.

Flash Boys is about a small group of Wall Street guys who figure out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the big Wall Street banks. Working at different firms, they come to this realization separately; but after they discover one another, the flash boys band together and set out to reform the financial markets. This they do by creating an exchange in which high-frequency trading-source of the most intractable problems-will have no advantage whatsoever.

The characters in Flash Boys are fabulous, each completely different from what you think of when you think "Wall Street guy." Several have walked away from jobs in the financial sector that paid them millions of dollars a year. From their new vantage point they investigate the big banks, the world's stock exchanges, and high-frequency trading firms as they have never been investigated, and expose the many strange new ways that Wall Street generates profits.

From a Bloomberg article about the book:

His latest target, high-frequency trading, comprises a diverse set of software-driven strategies that have spread from U.S. equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralized exchanges. While the tactics vary, they usually employ super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the American equities market.

I don't know too much about it but from what I've read, high-frequency trading seems to involve huge Wall Street banks using the Office Space/Richard-Pryor-in-Superman-III trick of shaving fractions of a penny off of trillions of trades every year, except that it's perfectly legal. The NY Times has an excerpt of the book to further whet your appetite.

The First National Bank of GameStopMar 18 2014

An anonymous user of 4chan has come up with a brilliantly harebrained scheme for their personal banking. They use video game retailer GameStop as a bank.

Gamestop Bank

Here's how it works: whenever a paycheck comes in, this person goes to GameStop and pre-orders a bunch of upcoming video games. Whenever they need money, they go to the GameStop and cancel a game or two to make a withdrawal. Here's the entire scheme:

Does anyone else use Gamestop as a bank?

I got really pissed off with US Bank because I kept overdrafting my account even though I opted out, and the same thing happened with my credit union when I got a debit card.

Now whenever I get paid I go preorder a whole shitload of games. Whenever I need money, I go to the nearest gamestop and ask for my money back on a game I don't want and make a withdrawal. The lines are shorter at gamestop than at the bank and I can trade in old games and have money go straight to my savings account. Gamestops are just as prevalent as banks in my town and I work at a mall so it's even more convenient than running an errand to the bank or using an ATM and getting charged.

The gamestop people are starting to catch on that I'm just moving money around and only buying one preordered game a year, if that, but there isn't shit they can do about it. The best part is, since I always preorder every game coming out I'm still guaranteed to get all the exclusive content whether or not I'm sure I want a certain game. It's like they're rewarding me for banking with them.

I love the bits about the trade-ins and the rewards. (via @caseyjohnston)

All the personal finance advice you'll ever needSep 19 2013

After chatting with personal finance expert Helaine Olen, Harold Pollack wrote down all the personal finance advice you'll ever need on a 4x6 index card:

Finance Advice Index Card

Unless you're an insider or get particularly lucky, you're just not going to beat this. (via ezra klein)

Luxury handbag-backed lendingAug 19 2013

A Hong Kong lending company accepts luxury handbags as collateral for loans.

Yes Lady provides a loan within half an hour at 80% of the bag's value -- as long as it is from Gucci, Chanel, Hermès or Louis Vuitton. Occasionally, a Prada purse will do the trick. Secondhand classic purses and special-edition handbags often retain much of their retail prices.

A customer gets her bag back by repaying the loan at 4% monthly interest within four months. Yes Lady says almost all its clients quickly pay off their loans and reclaim their bags.

The company recently lent about US$20,600 in exchange for a Hermès Birkin bag, but Yes Lady's purse-backed loans start at about US$200.

(via marginal revolution)

Hot IPO: a pasta restaurantJul 02 2013

What has been the hottest IPO of the year so far? Some new-fangled technology perhaps? Or maybe a trend-setting company from one of the coasts set to take their product offering national and then global? Nope, it was a Denver-based, pasta-centric restaurant chain called Noodles & Co. The company's IPO bucked a lot of trends (including, it seems, the war on flour). Here's The Daily Beast on how a pasta chain punked Wall Street.

[That's Dave Pell's take from Nextdraft, but I have to weigh in here. I've eaten at Noodles & Co many times. I ate there last week, actually. The restaurants do well because the service is friendly & responsive, your order comes out quickly, and the food is remarkably good for the money you pay (like at Chipotle). No one would ever mistake the Pad Thai or Japanese Pan Noodles for the authentic thing, but they are both delicious. I like the Steak Stroganoff so much that I crave it even when surrounded by the amazing and varied food choices of NYC. No idea if Noodles & Co would do well in Manhattan, but they'd definitely have one customer. -jkottke]

Apple CFO Jerry Seinfeld: "What's the deal with our stock price?"Jan 24 2013

Apple reported their Q4 2012 financial results yesterday and here's what Apple CFO Jerry Seinfeld had to say about it.

OK, I need to wrap this up. But first, raise your hand if you use a computer. That's what I thought. Have you tried doing anything without a computer lately? It's impossible. You want money from the bank? ATM computer. You want gas for your car? Pump computer. You looking for a news story explaining why your shares dropped 5% even though our gross margin was over 40%? Computer computer.

Apple CEO George Costanza, who is also CEO and chairman of Vandelay Industries, added, "George is getting upset!"

Two gun control suggestionsDec 18 2012

Eliot Spitzer has a pair of suggestions related to gun control: pressure the owners of gun companies and regulate the sale of bullets.

There may be too many guns to rid the streets of guns, but there are not that many bullets, especially in the calibers needed for the types of weapons used in these shootings. Let's create a regime that makes sale of bullets to anybody not licensed to carry a gun illegal, makes resale illegal, micro-stamps bullets so they can be traced. No Second Amendment issues here.

There is some movement on the first issue already. Cerberus, a private equity firm that owns a large gun company, is selling the company because of pressure from their investors.

The private equity firm said it had made the investments in gun manufacturers on behalf of its clients, which include pension funds and other institutional investors. Cerberus added that it was the role of legislators to shape the country's gun policy.

"We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so," Cerberus said.

This is where the phrase "passing the buck" comes from.

Warren Buffett: a minimum tax rate for the wealthyNov 28 2012

In an op-ed for the NY Times, Warren Buffett proposes a minimum tax on high incomes, specifically "30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that". He argues that higher tax rates will not curtail investment activity.

Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent - and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.

Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation's economic output) increased at a rapid clip. The middle class and the rich alike gained ground.

(via df)

Time for some new economic rules?Nov 15 2012

From before the election, which seems like it was several months ago already, a piece from Clayton Christensen about how investors and companies should shift their thinking about allocating capital. Christensen's gist is that efficiency is creating pools of excess capital which is not being reinvested into the types of industry that create jobs.

The Fed has been injecting more and more capital into the economy because -- at least in theory -- capital fuels capitalism. And yet cash hoards in the billions are sitting unused on the pristine balance sheets of Fortune 500 corporations. Billions in capital is also sitting inert and uninvested at private equity funds.

Capitalists seem almost uninterested in capitalism, even as entrepreneurs eager to start companies find that they can't get financing. Businesses and investors sound like the Ancient Mariner, who complained of "Water, water everywhere -- nor any drop to drink."

It's a paradox, and at its nexus is what I'll call the Doctrine of New Finance, which is taught with increasingly religious zeal by economists, and at times even by business professors like me who have failed to challenge it. This doctrine embraces measures of profitability that guide capitalists away from investments that can create real economic growth.

Read all the way to end; Christensen offers some suggestions for shifting capital allocation.

The People's Bailout: Occupy is forgiving personal debtNov 09 2012

Occupy Wall Street continues to show that it's more than just a simple protest movement. They have been doing amazing work with Hurricane Sandy relief and now there's Rolling Jubilee. Here's how Rolling Jubilee works:

OWS is going to start buying distressed debt (medical bills, student loans, etc.) in order to forgive it. As a test run, we spent $500, which bought $14,000 of distressed debt. We then ERASED THAT DEBT. (If you're a debt broker, once you own someone's debt you can do whatever you want with it - traditionally, you hound debtors to their grave trying to collect. We're playing a different game. A MORE AWESOME GAME.)

This is a simple, powerful way to help folks in need -- to free them from heavy debt loads so they can focus on being productive, happy and healthy. As you can see from our test run, the return on investment approaches 30:1. That's a crazy bargain!

This has my vote for idea of the year. Well, until the debt sellers catch on and either raise the price due to demand or refuse to sell to untrusted brokers.

25 richest people of all timeOct 17 2012

From a site called Celebrity Net Worth (I know, blech), a list of the 25 richest people of all time, adjusted for inflation. Gates, Buffett, and Rockefeller all make the list but the big cheese is Malian emperor Mansa Musa I, with a net worth of $400 billion in today's dollars.

Mansa Musa I of Mali is the richest human being in history with a personal net worth of $400 billion! Mansa Musa lived from 1280 - 1337 and ruled the Malian Empire which covered modern day Ghana, Timbuktu and Mali in West Africa. Mansa Musa's shocking wealth came from his country's vast production of more than half the world's supply of salt and gold.

(via @DavidGrann)

The rise of the high-speed trading bots and "quote spam"Aug 08 2012

Technology Review has an animated GIF originally posted by Nanex Research that shows the activity generated by trading bots on US exchanges. It's pretty quiet for a couple years and then starts going nuts.

Algorithmic trading lets financial firms to spot and exploit market patterns at lightning speeds. This can bring a tidy profit, but it also puts computers in charge of making decisions that can cost a company millions, and that may have an unpredictable effect on the rest of the market.

If I'm reading the original source correctly, it seems like the vast majority of the activity is not trades but quotes -- Nanex calls it "quote spam". Basically the bots are asking for prices on stocks/options/etc. over and over again, looking for price advantages that they can then exploit via trades. The quote spam is swamping the communications systems:

Quote spam has exploded with no signs of stopping, while trade frequency has stalled and is actually lower than it was years ago. Each day is plotted in a separate color over the course of a trading day (9:30 to 16:00 Eastern): older data uses colors towards the violet end of the spectrum, recent data towards the red end of the spectrum. The gaps you see between color groups on the quote chart (left-side) is when system capacity was upgraded to handle the increase in traffic, and quote spam jumped to fill the new capacity that very same day.

(via @cory_arcangel)

Update: Quote spam is not about asking for prices, it's about sending out millions of buy/sell offers hoping for a small percentage to reply...just like email spam. (thx, @falfa)

A banking system in India run by kidsAug 01 2012

The Children's Development Khazana is a bank staffed and patronized exclusively by children. It started in New Delhi in 2001 and has since opened up more than 200 branches in half-a-dozen countries.

The branches are run almost entirely by and for the children, with account holders electing two volunteer managers from the group every six months.

"Children who make money by begging or selling drugs are not allowed to open an account. This bank is only for children who believe in hard work," said Karan, a 14-year-old "manager".

During the day, Karan earns a pittance washing up at wedding banquets or other events. In the evening, he sits at his desk to collect money from his friends, update their pass books and close the bank.

"Some account holders want to withdraw their money. I ask them why and give it to them if other children approve. Everyone earns five per cent interest on their savings."

Money, Power and Wall StreetApr 05 2012

Frontline is doing a four-hour show about the world financial crisis, which, according to many people featured on the program, is ongoing.

Since 2008, Wall Street and Washington have fought against the tide of the fiercest financial crisis since the Great Depression. What have they wrought? In a special four-hour investigation, FRONTLINE tells the inside story of the struggles to rescue and repair a shattered economy, exploring key decisions, missed opportunities, and the unprecedented and uneasy partnership between government leaders and titans of finance that affects the fortunes of millions of people around the world.

The program airs on April 24th.

Maximizing shareholder value is "the dumbest idea in the world"Dec 29 2011

Steve Denning, writing in Forbes:

In today's paradoxical world of maximizing shareholder value, which Jack Welch himself has called "the dumbest idea in the world", the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

Denning is summarizing the ideas contained in Roger Martin's new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL.

In Fixing the Game, Roger Martin reveals the culprit behind the sorry state of American capitalism: our deep and abiding commitment to the idea that the purpose of the firm is to maximize shareholder value. This theory has led to a massive growth in stock-based compensation for executives and, through this, to a naive and wrongheaded linking of the real market -- the business of designing, making, and selling products and services -- with the expectations market -- the business of trading stocks, options, and complex derivatives. Martin shows how this tight coupling has been engineered and lays out its results: a single-minded focus on the expectations market that will continue driving us from crisis to crisis -- unless we act now.

(thx, david)

Amazon's long-term thinkingDec 21 2011

Amazon is somewhat of an unusual company for American investors because it focuses on the long-term (10- 20-year timelines) instead of the short-term (quarterly earnings).

"If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people," Mr. Bezos told reporter Steve Levy last month in an interview in Wired. "But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We're willing to plant seeds, let them grow-and we're very stubborn."

Like Apple, Amazon is one of those large market cap growth stocks that investors don't really know what to do with. Both stocks are still undervalued compared to much of the rest of the market, IMO.

A chart of almost all the moneyNov 21 2011

An epic chart from XKCD: Money - A chart of almost all of it, where it is, and what it can do. It's broken out into "dollars, thousands, millions, billions, trillions"...here's just a little snippet of the billions section:

Xkcd Money

The Bank of StarbucksOct 20 2011

I read this the other day and didn't link to it because I thought it would get a lot of attention elsewhere...but it didn't, so here you go. Starbucks is starting a program to help their customers lend money to small businesses.

Here's the idea they came up with: Americans themselves would start lending to small businesses, with Starbucks serving as the middleman. Starbucks would find financial institutions willing to loan to small businesses. Starbucks customers would be able to donate money to the effort when they bought their coffee. Those who gave $5 or more would get a red-white-and-blue wristband, which Schultz labeled "Indivisible." "We are hoping it will bring back pride in the American dream," he says. The tag line will read: "Americans Helping Americans."

This should be a bigger story, shouldn't it? Banks seem less and less interested in lending money to people as their primary business and things like Kickstarter and this Starbucks initiative are taking their place.

Michael Lewis on Germany's economy (and possible fascination with shit)Aug 26 2011

Michael Lewis continues his financial tour of the world with a stop in Germany. What, he asks, will the Germans do about the weakening financial situation in Europe and, more to Lewis' point, why will they do it?

The deputy finance minister further disturbs my wild assumptions about him by speaking clearly, even recklessly, about subjects most finance ministers believe it is their job to obscure. He offers up, without much prompting, that he has just finished reading the latest unpublished report by I.M.F. investigators on the progress made by the Greek government in reforming itself.

"They have not sufficiently implemented the measures they have promised to implement," he says simply. "And they have a massive problem still with revenue collection. Not with the tax law itself. It's the collection which needs to be overhauled."

Greeks are still refusing to pay their taxes, in other words. But it is only one of many Greek sins. "They are also having a problem with the structural reform. Their labor market is changing-but not as fast as it needs to," he continues. "Due to the developments in the last 10 years, a similar job in Germany pays 55,000 euros. In Greece it is 70,000." To get around pay restraints in the calendar year the Greek government simply paid employees a 13th and even 14th monthly salary-months that didn't exist. "There needs to be a change of the relationship between people and the government," he continues. "It is not a task that can be done in three months. You need time." He couldn't put it more bluntly: if the Greeks and the Germans are to coexist in a currency union, the Greeks need to change who they are.

New book from Michael Lewis: BoomerangJun 22 2011

Michael Lewis' next book will be out in October; the subtitle is Travels in the New Third World. It's a business book about the economic bubbles he's been writing about in Ireland, Iceland, Greece, and the US.

The tsunami of cheap credit that rolled across the planet between 2002 and 2008 was more than a simple financial phenomenon: it was temptation, offering entire societies the chance to reveal aspects of their characters they could not normally afford to indulge.

Icelanders wanted to stop fishing and become investment bankers. The Greeks wanted to turn their country into a pi~nata stuffed with cash and allow as many citizens as possible to take a whack at it. The Germans wanted to be even more German; the Irish wanted to stop being Irish.

Michael Lewis's investigation of bubbles beyond our shores is so brilliantly, sadly hilarious that it leads the American reader to a comfortable complacency: oh, those foolish foreigners. But when he turns a merciless eye on California and Washington, DC, we see that the narrative is a trap baited with humor, and we understand the reckoning that awaits the greatest and greediest of debtor nations.

No Kindle version available yet, just like last time. If you'd like to see one, click on the "I'd like to read this book on Kindle" below the cover image. (thx, brian)

Update: Just got word from Lewis' publisher that the ebook version (including Kindle) will be available the same day as the hardcover.

Winning at the game of moneyMay 10 2011

James Somers noticed that his equity derivative-trading roommate was the only one of his young professional friends who comes home from work "buoyant and satisfied", so he accompanied him to work one day to see what his job entailed. Turns out he basically plays video games all day.

A trader's job is to be smarter than the market. He converts a mess of analysis and intuition into simple bets. He makes moves. If his predictions are better than everyone else's, he wins money; if not, he loses it. At every moment he has a crystalline picture of his bottom line, the "P and L" (profit and loss) that determines how much of a bonus he'll get and, more importantly, where he stands among his peers. As my friend put it, traders are "very, very, very competitive." At the end of the day they ask each other "how did you do today?" Trading is one of the few jobs with an actual leaderboard, which, if you've ever been on one, or strived to get there, you'll recognize as being perhaps the single most powerful driver of a gamer's engagement.

That seems to be the core of it, but no doubt there are other game-like features in play here: the importance of timing and tactile dexterity; the clear presence of two abstract levels of attention and activity, one long-term and strategic, the other fiercely tactical, localized in bursts a minute or two long; the need for teams and ceaseless chatter; and so on.

Athleticism and competitiveness are often downplayed when we talk about white collar careers but are essential in many disciplines. Doctors (surgeons in particular) have both those traits, founding a startup company is definitely competitive and can be as physically demanding as running, teachers are standing or walking all day long, and even something like programming requires manual dexterity with the mouse & keyboard and the stamina to sit in a chair paying single-minded attention to a task for 10-12 hours a day. (via @tcarmody)

Berkshire Anne HathawayMar 18 2011

When actress Anne Hathaway is in the news, shares of Warren Buffett's Berkshire Hathaway seem to go up in price.

Companies are trying to "correlate everything against everything," he explained, and if they find something that they think will work time and again, they'll try it out. The interesting, thing, though, is that it's all statistics, removed from the real world. It's not as if a hedge fund's computers would spit the trading strategy as a sentence: "When Hathway news increases, buy Berkshire Hathaway." In fact, traders won't always know why their algorithms are doing what they're doing. They just see that it's found some correlation and it's betting on Buffet's company.

(via @tcarmody)

2010 shareholder letter from Warren BuffettMar 01 2011

Warren Buffett's annual letters to Berkshire Hathaway's shareholders are always interesting to read; here's the letter for the 2010 fiscal year.

50 Cent moves marketsJan 10 2011

The share price for stock in H&H Imports, Inc. went up 290% between the close of market on Friday to the end of the day today. The reason for the move? Entertainer/investor 50 Cent, who owns a portion of the tiny company, tweeted all weekend about how enthusiastic he was about the company's success. (He also appeared on CNBC.) By one calculation, 50 made $10 million with those tweets.

"Much of what investment bankers do is socially worthless"Dec 03 2010

From the New Yorker a week or two ago, John Cassidy has an article about the social value of what Wall Street and investment banking. It's not a pretty picture.

Lord Adair Turner, the chairman of Britain's top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as "socially useless activity" -- a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled "What Do Banks Do?," which appeared in a collection of essays devoted to the future of finance, Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth -- payments that economists refer to as rents. "It is possible for financial activity to extract rents from the real economy rather than to deliver economic value," Turner wrote. "Financial innovation...may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori."

Turner's viewpoint caused consternation in the City of London, the world's largest financial market. A clear implication of his argument is that many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.

I particularly enjoyed the characterization of banking as a utility:

Most people on Wall Street, not surprisingly, believe that they earn their keep, but at least one influential financier vehemently disagrees: Paul Woolley, a seventy-one-year-old Englishman who has set up an institute at the London School of Economics called the Woolley Centre for the Study of Capital Market Dysfunctionality. "Why on earth should finance be the biggest and most highly paid industry when it's just a utility, like sewage or gas?" Woolley said to me when I met with him in London. "It is like a cancer that is growing to infinite size, until it takes over the entire body."

p.s. Thanks to Typekit, the New Yorker's web site now uses the same familiar typefaces that you find in the magazine. Looks great.

Michael Lewis on the Greek financial crisisSep 15 2010

Of all the stories I've heard about the recent financial crisis -- the high-risk mortgage loans, the CDOs, the credit default swaps, the Icelandic crisis -- the story of the collapse of the Greek economy by Michael Lewis in the October issue of Vanity Fair is the craziest. And it's the only one involving monks.

The tsunami of cheap credit that rolled across the planet between 2002 and 2007 has just now created a new opportunity for travel: financial-disaster tourism. The credit wasn't just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, "The lights are out, you can do whatever you want to do and no one will ever know." What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded to it in its own peculiar way.

As it turned out, what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a pinata stuffed with fantastic sums and give as many citizens as possible a whack at it. In just the past decade the wage bill of the Greek public sector has doubled, in real terms-and that number doesn't take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece's rail passengers into taxicabs: it's still true. "We have a railroad company which is bankrupt beyond comprehension," Manos put it to me. "And yet there isn't a single private company in Greece with that kind of average pay." The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland's. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as "arduous" is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average-and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.

Read the whole thing...it's insane.

Insider tweetingSep 02 2010

Commodity traders are following farmers on Twitter, hoping for clues about crop forecasts and such.

Last week Grisafi started receiving tweets from European farmers saying the weather was hotter and drier than weather reports indicated. He'd been short the wheat market on the assumption that prices would fall. After reading the tweets, however, he realized the commodity might be in shorter supply than the market expected and got out of his position, avoiding a loss as prices rose.

ATMs in AntarcticaJul 21 2010

There are two ATM machines in Antarctica. They are located at McMurdo Station and operated by Wells Fargo. Here's an interview with a Wells Fargo VP about the unique challenges of operating those machines.

You know, the other thing too that you may find interesting -- I don't know how much you know about folks that need to go down to Antarctica -- it's a huge process to do it. So when we're preparing for the vendor visit, it's like a ten-month process. The reason being is, they obviously go in the off-season when it's obviously warmer because no planes fly onto the ice in their winter months. And so anybody that goes to Antarctica has to be cleared with a physical, a dental, and a psychological evaluation, because if for some reason the plane can't get out, you're trapped down there until the next season.

(via jimray)

800 years of financial follyJul 12 2010

Unsurprisingly finding itself on the bestseller list is a book by Kenneth Rogoff and Carmen Reinhart called This Time is Different, an economic history of the dozens of financial crises that have occurred over the past 800 years. The NY Times has a profile of the authors.

Mr. Rogoff says a senior official in the Japanese finance ministry was offended at the suggestion in "This Time Is Different" that Japan had once defaulted on its debt and sent him an angry letter demanding a retraction. Mr. Rogoff sent him a 1942 front-page article in The Times documenting the forgotten default. "Thank you," the official wrote in apology, "for teaching the Japanese something about our own country."

The Big Short is out on KindleJun 01 2010

The Big Short by Michael Lewis is finally out for the Kindle (well, it came out two weeks ago, about a month after the hardcover). You might remember the hubbub about the lack of a Kindle version.

Anyway, the book is excellent; I read it pretty much nonstop until finished. Lewis cleverly recasts the story of one of the biggest financial disasters in American history as a heroic tale. Heroic!

A simpler bankMay 26 2010

BankSimple sounds promising...I hope they are able to deliver.

BankSimple is an easy, intuitive, and social bank for people who appreciate simple online services. Unlike other banks, we don't trap you with confusing products nor do we charge any hidden fees. No overdraft fees. We use sophisticated analytics to help you better manage your finances by providing you an individualized service, catered to your needs and goals.

It's a return to how banks used to make money before they started charging fees for everything: charge more for borrowing than you pay out in savings interest. From the BankSimple FAQ:

We make money from two sources: interchange and interest margin. Interest margin is the revenue earned from lending, less what they pay on deposits. For example a bank may charge a customer 12% to borrow money, but pay 5% interest on a savings account. The difference, less any defaults on the loan, is revenue to the bank. Interchange is a small revenue source that card issuing banks earn whenever that card is used at a store. Typically banks earn less than 1% for each time the card is used to make a purchase. These are both great revenue streams, but banks got greedy and started charging additional fees to bolster their revenue. Our operation is low cost, so we don't need to rely on extraneous fee revenue.

Early Twitter employee Alex Payne recently left to co-found BankSimple. See also Square (which was also co-founded by a Twitter alum).

The art of worldly wisdomMay 12 2010

Charles Munger, who works with Warren Buffett as Vice-Chairman of Berkshire Hathaway, gave a talk at USC Business School in 1994 that is very much worth reading. Although the main point of Munger's talk is how to pick stocks, he spends much of the time talking about "the art of worldly wisdom"...basically what you need to know to be a functional human being who can make informed decisions.

I have a name for people who went to the extreme efficient market theory-which is "bonkers". It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality. [...]

The model I like -- to sort of simplify the notion of what goes on in a market for common stocks -- is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what's bet. That's what happens in the stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.

(via the browser)

A short history of debtApr 28 2010

David Graeber has been researching the history of money and debt for a book he's writing. This abbreviated version of his findings makes for really interesting reading.

However tawdry their origins, the creation of new media of exchange -- coinage appeared almost simultaneously in Greece, India, and China -- appears to have had profound intellectual effects. Some have even gone so far as to argue that Greek philosophy was itself made possible by conceptual innovations introduced by coinage. The most remarkable pattern, though, is the emergence, in almost the exact times and places where one also sees the early spread of coinage, of what were to become modern world religions: prophetic Judaism, Christianity, Buddhism, Jainism, Confucianism, Taoism, and eventually, Islam. While the precise links are yet to be fully explored, in certain ways, these religions appear to have arisen in direct reaction to the logic of the market. To put the matter somewhat crudely: if one relegates a certain social space simply to the selfish acquisition of material things, it is almost inevitable that soon someone else will come to set aside another domain in which to preach that, from the perspective of ultimate values, material things are unimportant, and selfishness -- or even the self -- illusory.

Built to failApr 21 2010

When I pointed to the last week's news that the SEC was suing Goldman Sachs for fraud, several people pointed me to an episode of This American Life that ran a couple of weeks ago.

A hedge fund named Magnetar comes up with an elaborate plan to make money. It sponsors the creation of complicated and ultimately toxic financial securities... while at the same time betting against the very securities it helped create. Planet Money's Alex Blumberg teams up with two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger, to tell the story. Jake and Jesse pored through thousands of pages of documents and interviewed dozens of Wall Street Insiders. We bring you the result: a tale of intrigue and questionable behavior, which parallels quite closely the plot of a Mel Brooks musical.

The allegation against Magnetar is that they helped create extremely risky CDOs, bought the worst part (the lowest tranche) of those CDOs for a little money, and then bought a bunch of insurance against the CDOs for a lot of money. The CDOs were basically built to fail and when they did, Magnetar lost a little money on their purchase but made a bunch more from the insurance. Pro Publica has the whole story.

US Gov't accuses Goldman Sachs of fraudApr 16 2010

The SEC has filed a lawsuit against Goldman Sachs for fraud. Specifically:

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against -- the ones he believed were most likely to lose value -- and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

Goldman's stock price is currently off about 12%.

My First Toxic AssetMar 29 2010

The Planet Money podcast bought a toxic asset and is tracking what happens to the 2000+ mortgages that are bundled up into it over time.

We bought one of those things that no one wanted, one of those things that almost brought down the global economy: our very own toxic asset. This one has more than 2,000 mortgages in it. We paid $1,000, with our own money, for our piece. It used to be worth more like $75,000. Click on the timeline and roll over the states to watch a disaster in progress.

Somewhat of a surprise: they've made more than a third of their money back already.

Mountain ranges as stock market infographicsMar 22 2010

Photographer Michael Najjar took some of his photos from the Andes and turned them into stock market infographics. Here's Lehman Brothers stock price from 1980 to 2008.

Lehman Mountain

Boy, their stock price really fell off a cliff there, didn't it? The rest of the series is worth a look as well, although Najjar's site features the worst use of Flash I've seen in many months...it automatically fullscreens and generally wastes a bunch of time with transitions. To find the rest of the photos, wait until the map starts loading and put your mouse at the bottom of the screen. A menu will s.l.o.w.l.y. slide up...High Altitude is what you're looking for. (via info aesthetics)

Excerpt from Michael Lewis' new bookMar 15 2010

Vanity Fair has a lengthy excerpt from Michael Lewis' new book The Big Short (out today).

As often as not, he turned up what he called "ick" investments. In October 2001 he explained the concept in his letter to investors: "Ick investing means taking a special analytical interest in stocks that inspire a first reaction of 'ick.'" A court had accepted a plea from a software company called the Avanti Corporation. Avanti had been accused of stealing from a competitor the software code that was the whole foundation of Avanti's business. The company had $100 million in cash in the bank, was still generating $100 million a year in free cash flow-and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avanti would be worth a lot more than the market then assumed. To make money on Avanti's stock, however, he'd probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

"That was a classic Mike Burry trade," says one of his investors. "It goes up by 10 times, but first it goes down by half." This isn't the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn't do this if he was at the mercy of very short-term market moves, and so he didn't give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year.

Really fascinating. In a recent review, Felix Salmon called The Big Short "probably the single best piece of financial journalism ever written".

Warren Buffett's 2009 annual letter to shareholdersMar 11 2010

Worth a read as always.

We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.

When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure American businesses that needed -- without delay -- our tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere, panic reigned.

We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash-equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.

Here's to sleeping well.

Darth Vader opens Wall StreetDec 22 2009

Darth Vader and a number of Storm Troopers from the Star Wars Saga rang the opening bell at the New York Stock Exchange.

(via @kngofwrld)

Those big bank earnings explainedOct 19 2009

Phil Greenspun's finance buddy explains how JPMorgan Chase and Goldman Sachs made $6.8 billion in profit last quarter. Basically they borrowed money from the US Govt at 0% and then bought bonds from the US Govt that paid 2-3%.

What kind of bonds are they buying? Are they investing the money in American business? "No, they are mostly buying Treasuries." So the money is just being shuffled from one Federal bank account to another, with each Wall Street bank skimming off $1 billion per month for itself? "Pretty much."

(via @linklog)

The giant pool of money, an updateOct 02 2009

This American Life recently aired a follow-up to their well-received program about the recent financial crisis called Return To The Giant Pool of Money.

We catch back up with the people we met in 2008, to see how they've fared over the last 18 months. We talk to Clarence Nathan, who in 2008 received a half million dollar loan that he said he wouldn't have given himself; Jim Finkel, a Wall Street finance guy, who put together and managed complicated mortgage-based financial securities; Richard Campbell, the Marine who was facing foreclosure; and Glen Pizzolorusso, the mortgage company sales manager who led the life of a b-list celebrity.

Bringing the oyster back to New YorkOct 01 2009

Michael Osinski grows oysters out on Long Island, now an unusual pursuit in an area that used to support dozens of oyster companies...New York used to be the place for oysters (see also).

If you'd like to try them out, Widow's Hole sells their oysters to several NYC restaurants, including Gramercy Tavern, Union Square Cafe, and Bouley. Osinski achieved a bit of notoriety earlier this year when he wrote an article about his experience writing software for Wall Street firms called My Manhattan Project: How I helped build the bomb that blew up Wall Street. (via serious eats)

Interview with a lottery winnerSep 21 2009

On Reddit, an informal Q&A with a $30 million lottery winner about how the money has changed his life.

I went to the lottery's website after finding the ticket and realized that I had won. I freaked out ran up to my apartment's door and locked all the locks. It was completely irrational.

(via cyn-c)

Who won the recession?Sep 01 2009

Vanity Fair has released their 2009 list of the "top 100 Information Age powers"...Goldman's Lloyd Blankfein, Steve Jobs, Jeff Bezos, Warren Buffett, and the Google triumvirate make up the top five. Only 12 women made the list, most of them coupled with a man. A similar list from Business Insider has a better name: The 25 Who Won the Recession. I thought this recession business was supposed to kill the influence of the financial sector...funny how that never happens.

OverconfidenceJul 23 2009

Malcolm Gladwell's piece in this week's New Yorker about the psychology of overconfidence is pretty much a transcript of the speech he gave at the New Yorker Summit a couple of months ago. Gladwell's thesis is that the overconfidence of experts caused the current financial crisis.

"I'm good at that. I must be good at this, too," we tell ourselves, forgetting that in wars and on Wall Street there is no such thing as absolute expertise, that every step taken toward mastery brings with it an increased risk of mastery's curse.

Gambling your money away to a safe placeJul 22 2009

Eight Michigan credit unions are offering an unusual way to save: putting $25+ into a one-year CD comes with an entry to a raffle with a monthly prize of $400 and a yearly grand prize of $100,000.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.

This reminds me of a recent observation by Sam Arbesman:

An intriguing coincidence: The repayment rate of individual loans in Kiva (a broker for individual loans around the world) is 98.50%, which is quite similar to the payback percentage of Las Vegas slot machines.

Why not put the lottery effect to work with Kiva? Instead of straight-up loans, enter lenders in a raffle and slightly decrease the return rate to account for the prize money. I bet (ha!) the lending rate would increase accordingly. (via waxy)

Update: Several people pointed out that British Premium Bonds have worked this way for decades. (thx, christopher)

Online financial data APIs and resourcesJun 16 2009

A couple of weeks ago on Twitter, I asked about freely available financial data.

Anyone know where to get stock data in a standard API format (XML, JSON, etc)? Just looking for hi/lo/close data, not real-time.

I may or may not get around to doing the project I wanted the data for, but in the meantime, here's a list of the suggested resources that people sent in:

- Google Finance API.

- Google Finance's CSV output (example)

- Google Finance API for gadgets.

- Yahoo Finance's CSV output (example)

- There's a stock quote example in this IBM article on using YQL, JSONP, and jQuery.

- The Stock Quote web service from WebserviceX.net.

- Data from Infochimps: AMEX, NASDAQ, NYSE.

- Xignite finance APIs.

Update: Getting stock information with YQL. (via @jonathantrevor)

Michael Lewis' The Big ShortMay 19 2009

Michael Lewis' book about the ongoing financial collapse has a name: The Big Short: Inside the Doomsday Machine.

A brilliant account -- character-rich and darkly humorous -- of how the U.S. economy was driven over the cliff. Truth really is stranger than fiction. Who better than the author of the signature bestseller Liar's Poker to explain how the event we were told was impossible -- the free fall of the American economy -- finally occurred; how the things that we wanted, like ridiculously easy money and greatly expanded home ownership, were vehicles for that crash; and how shareholder demand for profit forced investment executives to eat the forbidden fruit of toxic derivatives.

It's not out until November 2 but you can pre-order it from Amazon. (thx, brian)

Update: The book is out on March 15 and there's an excerpt in the April issue of Vanity Fair.

Rats trading stocksMay 12 2009

Advice from rats who trade stocks..."the latest advice from our most successful trading rats for individual investors".

We are continuously crossing the best trading rats with each other in order to breed specialists in various markets for our clients. The second generation of top traders usually shows a much better performance compared to their parents.

Right now, the top trading rats are advising long positions on Exxon, UBS, and Caterpillar.

New Yorker Summit: financeMay 05 2009

The big themes of the day so far are confidence and experts: should we and do we have confidence in the experts? Malcolm Gladwell kicked off the morning with a talk about overconfidence. He talked about the three types of failure possible in a situation like the financial crisis:

1. Institutional failure. The regulators and regulations were not sufficient.

2. Cognitive failure. The bankers weren't smart enough and got in over their heads.

3. Psychological failure. The bankers were overconfident and failed to recognize the direness of their situation.

Gladwell argued that the financial crisis was caused largely by overconfidence, which has two key effects. One is that people become miscalibrated. They think that the predictions that they are making are actually a lot better than they are. Secondly, there's an illusion of control problem in which people think they have control over things that are impossible to control. Fixing the situation will be hard because overconfidence is a useful trait to possess and experts are hard to purge from systems (they're the experts!).

[Experts talking about how experts are wrong! My brain is seizing up.]

Next up were Nassim Taleb and Robert Shiller. Shiller believes that confidence drives the economy and that macroeconomics is flawed because there's no humanity in it. Taleb was very quotable and the most full of doom of all the panelists so far. He doesn't like economists. Like wants them gone from the world, or to at least marginalize their effects so that their opinions and decisions don't affect the lives of normal people. In talking about why this crisis is different than similar situations in the past, he argued that globalization, the Internet, and the efficiency of global financial markets has created an environment where very large and very quick collective movements of money are possible in a way that wasn't before. Taleb had the last word: "people who crashed the plane, you don't give them a new plane".

The panel moderated by Suroweicki was a little odd. Two out of the three panelists kept repeating in reference to the solution to the very complex financial crisis: "this isn't that complicated". There has also been a undercurrent to the discussion so far that the goal of any solution to the financial crisis is to get the economy back to where it was. I'm with Taleb on this one: where we were wasn't very good, why do we want to go back.

Up in a down marketMar 19 2009

Mother Jones magazine has a list of ten people who have profited from the current financial crisis.

[John] Paulson is a hedge fund manager who has been ridiculously successful betting against banks and other entities that had exposure to the subprime crisis: In 2007, his funds were up $15 billion. In 2008, he didn't do as well: His main fund rose 38 percent in a year when the S&P 500 fell almost 40 percent. His 2007 earnings were in the neighborhood of $3.7 billion. According to Forbes, while 656 billionaires lost money last year, Paulson was one of the 44 who added to their fortunes.

This is the peculiar thing about financial markets: if you know something bad is going to happen (you know, like the global collapse of the financial markets), you can either sound the alarm and save a lot of people a lot of grief or you can make a billion dollars.

Michael Lewis on Big ThinkMar 16 2009

Speaking, as we briefly were, of Big Think, they have several short video interviews of Michael Lewis about the current financial crisis and other things. Worth a look see.

What happened to Iceland?Mar 12 2009

Michael Lewis, who is seemingly cranking out 10,000 words a day about finance and sports these days, writes in the pages of Vanity Fair about the Icelandic financial collapse. It's an amazing story.

That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. "A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs," the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. "And apparently not very well." They bought stakes in businesses they knew nothing about and told the people running them what to do -- just like real American investment bankers!

But it was all essentially make-believe.

A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets -- the banks, soccer teams, etc. Since the entire world's assets were rising -- thanks in part to people like these Icelandic lunatics paying crazy prices for them -- they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. "They created fake capital by trading assets amongst themselves at inflated values," says a London hedge-fund manager. "This was how the banks and investment companies grew and grew. But they were lightweights in the international markets."

Warren Buffet's letter to shareholdersMar 02 2009

Warren Buffet has published his latest annual letter to the shareholders of Berkshire Hathaway, the giant holding company of which he is CEO and chairman. His letters are always a fun read.

The table on the preceding page, recording both the 44-year performance of Berkshire's book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

As the year progressed, a series of life-threatening problems within many of the world's great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: "In God we trust; all others pay cash."

Paging through, I was surprised at how much stock Berkshire owns in some major companies, including 13.1% of American Express, 8.6% of Coca-Cola, 8.9% of Kraft, and 18.4% of The Washington Post. Berkshire's stock price is of interest as well; the stock has never split and the current price for one share is more than $73,000.

The market movement in 2008Feb 18 2009

You may remember the Google Motion Chart from Hans Rosling's TED talk about Gapminder. Now 26 Variable has used the chart to graph the movement of the stocks in the S&P 100 in 2008. The strange thing is that with the default settings, you're left with the impression that those stocks were more up than down over the year...if you ignore all the dots sliding to the left towards zero market cap.

Michael Lewis interviewedJan 27 2009

The Atlantic's new business blog has an interview with Michael Lewis.

A related thing is that there was blind faith in the value of financial innovation. Wall Street dreamed up increasingly complicated things, and they were allowed to do it because it was always assumed that if the market wanted it then it made some positive contribution to society. It's now quite clear that some of these things they dreamed up were instruments of doom and should never have been allowed in the marketplace.

(thx, djacobs)

Recession is maybe not so badJan 14 2009

The Federal Reserve Bank of Minneapolis compares the current recession against some past recessions and, so far at least, it doesn't look too bad. However...

This page does not provide forecasts, and the information should not be interpreted as such.

(via mr)

Porsche's financial hackJan 12 2009

I'm mentioned the Porsche/VW financial incident briefly in October, but this is an excellent layman's explanation of what happened.

Porsche's move took three years of careful maneuvering. It was darkly brilliant, a wealth transfer ingeniously conceived like few we've ever seen. Betting the right way, Porsche roiled the financial markets and took the hedge funds for a fortune.

(via capn design)

Update: Not so fast there, Porsche. Bloomberg says that the company may not have the money necessary to exercise those options and realize $24.3 billion in profits.

The End of the Financial World as We Know ItJan 05 2009

In an Op-Ed piece for the NY Times called The End of the Financial World as We Know It, Michael Lewis and David Einhorn explore what checks and balances should have been in place to prevent the US financial markets from running themselves into the ground in search of perpetual short-term gain.

Our financial catastrophe, like Bernard Madoff's pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today's financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that's the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

Here's part 2, in which Lewis and Einhorn propose some possible remedies.

Interview with Michael LewisNov 25 2008

A short interview with Michael Lewis about the book he just edited, Panic: The Story of Modern Financial Insanity. In compiling the stories, Lewis was surprised at how little good writing he could find about upcoming financial hard times.

How little there was worth reprinting. I had six interns digging up all kinds of stuff, and I looked at 20 times the amount of material that appeared in the book. I assumed there would be lots of stories predicting each panic before the panics actually struck. But there was very little. Afterwards you'd have a flurry of literary activity, and then everybody was on to the next thing. Still, there was a common thread: You were watching America's growing financial insanity.

What would a contemporary depression look like?Nov 24 2008

With the Great Depression further removed from today than the Civil War was then, it's difficult to imagine what a contemporary depression might look like.

Much of a modern depression would unfold in the domestic sphere: people driving less, shopping less, and eating in their houses more. They would watch television at home; unemployed parents would watch over their own kids instead of taking them to day care. With online banking, it would even be possible to have a bank run in which no one leaves the comfort of their home.

Also, desuburbanization:

In a deep and sustained downturn, home prices would likely sink further and not rise, dimming the appeal of homeownership, a large part of suburbia's draw. Renting an apartment -- perhaps in a city, where commuting costs are lower -- might be more tempting. And although city crime might increase, the sense of safety that attracted city-dwellers to the suburbs might suffer, too, in a downturn. Many suburban areas have already seen upticks in crime in recent years, which would only get worse as tax-poor towns spent less money on policing and public services.

The Icelandic financial crisisNov 24 2008

The story is a bit out-of-date, but this overview of the cause and effects of the Icelandic financial crisis is still worth a read.

Picture a pig trying to balance on a mouse's back and you'll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland's financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: "The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland."

The end of Wall Street and Michael Lewis' new "fucking book"Nov 12 2008

Michael Lewis takes a look at the current financial crisis and traces its roots back to the 1980s and the events chronicled in his book, Liar's Poker. He begins by introducing us to some analysts and investors that saw the whole thing coming. One of those people is Steve Eisman.

"We have a simple thesis," Eisman explained. "There is going to be a calamity, and whenever there is a calamity, Merrill is there." When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman's logic-the logic of Wall Street's pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

It's a fantastic article, well worth reading to the end...the final dozen paragraphs are the best part of the whole thing. Who knew deviled eggs were so pregnant with metaphor?

As I was reading the article, Matt Bucher dropped a note into my inbox. As hoped for months ago, Lewis is writing a book about this whole mess.

MONEYBALL and THE BLIND SIDE author Michael Lewis's untitled behind-the-scenes story of a few men and women who foresaw the current economic disaster, tried to prevent it, but were overruled by the financial institutions with whom they worked, sold to Star Lawrence at Norton, by Al Zuckerman at Writers House (NA).

The Portfolio piece will definitely find itself into the book, as will this piece on Meredith Whitney, this one on Goldman Sachs, Lewis' subprime parable, and other pieces from Bloomberg, Porfolio, and his upcoming gig at Vanity Fair. One question though...what happens to Lewis' forthcoming book on New Orleans? Did that just disappear?

Something's fishy about these financial modelsOct 30 2008

Jonah Lehrer answers the burning question of the day: what do cod fish have to do with the current financial crisis?

The [cod population] models were all wrong. The cod population never grew. By the late 1980's, even the trawlers couldn't find cod. It was now clear that the scientists had made some grievous errors. The fishermen hadn't been catching 16 percent of the cod population; they had been catching 60 percent of the cod population. The models were off by a factor of four. "For the cod fishery," write Orrin Pilkey and Linda Pilkey-Jarvis, in their excellent book Useless Arithmetic: Why Environmental Scientists Can't Predict the Future, "as for most of earth's surface systems, whether biological or geological, the complex interaction of huge numbers of parameters make mathematical modeling on a scale of predictive accuracy that would be useful to fishers a virtual impossibility."

In the same way, incorrect but highly lucrative financial models caused people to take on too much risk and leverage.

Volkswagen = world's largest companyOct 28 2008

Volkswagen was briefly the world's largest company in terms of market cap today.

Volkswagen briefly became the world's largest company by market capitalisation on Tuesday as panic-buying by hedge funds desperate to cover losses caused its value to shoot up by up to €150bn.

Porsche revealed that it owned 74% of VW instead of the previously assumed 35%...which caused panicked buying by hedge funds. (via mr)

New blog by James SurowieckiOct 16 2008

James Surowiecki, who writes the biweekly financial column for the New Yorker, has started a finance blog on the NYer site called The Balance Sheet.

This American Life on the financial crisisOct 13 2008

This radio program made the rounds last week, but I finally got caught up this weekend so I'll add my voice to the chorus urging you to listen to This American Life's episode on the financial crisis, Another Frightening Show About the Economy. Paired with The Giant Pool of Money from back in May, this is an excellent overview of what's going on in the financial markets right now. The hosts of the two shows are also doing a daily blog/podcast thing at Planet Money In addition, the last half of this week's TAL concerns the political angle of the financial mess. I haven't had a chance to listen yet, but check it out if you're into that sort of thing.

Stock market charts, in contextOct 13 2008

Phil Gyford, wearing his finest pair of Tufte trousers, takes a chart of the FTSE that the Guardian ran on Saturday and places it on a scale that shows the fluctuations of Friday's market compared to the full value of the index.

This particular annoyance is the graphs of share prices in the press and on TV. It is standard practice to start the y-axis at a number much higher than zero, in order to magnify the ups and downs of the market.

The financial crisis, a Pokemon parableOct 08 2008

This is perhaps the most succinct explanation of the current financial crisis I had read: The Financial Crisis, as Explained to My Fourteen-Year-Old Sister.

Kevin: Imagine that I let you borrow $50, but in exchange for my generosity, you promise to pay me back the $50 with an extra $10 in interest. To make sure you pay me back, I take your Charizard Pokémon card as collateral.

Olivia: Kevin, I don't play Pokémon anymore.

Kevin: I'm getting to that. Let's say that the Charizard is worth $50, so in case you decide to not return my money, at least I'll have something that's worth what I loaned out.

Olivia: Okay.

Kevin: But one day, people realize that Pokémon is stupid and everyone decides that the cards are overvalued. That's right -- everybody turned twelve on the same day! Now your Charizard is only worth, say, $25.

The only thing that's missing is the part of the explanation where the parents swoop in and pay Kevin full value for that Pokémon card, which allows him to keep lending money in exchange for cardboard rectangles.

Best info about the financial crisisOct 03 2008

The Money Meltdown is a one-page site which aims to provide visitors with the best places to go online to get a handle on the current financial crisis. (thx, robin)

Map of the market: here be dragonsSep 30 2008

While following the market yesterday, I updated my Twitter account after a particularly precipitous mid-afternoon drop in the DJIA:

The DJIA trend line just kinda disappeared off the bottom of the chart there into Here Be Monsters territory about 30 minutes ago.

I meant "here be dragons" but you get the idea. Anyway, a reader sent in this chart that captures what many were feeling after the market closed.

Here Be Dragons

The Sea of Dread, indeed. (thx, margaret)

What the financial crisis means for high-end prostitutesSep 29 2008

High-end prostitutes see an uptick in business -- for a few months anyway -- during times of financial hardship and crisis.

Their clients were coming to them for a mix of escape and encouragement. As Jean, a New Yorker and a 35-year-old former paralegal turned "corporate escort" (her description) told me, "I had about two dozen men who started doubling their visits with me. They couldn't face their wives, who were bitching about the fact they lost income. Men want to be men. All I did was make them feel like they could go back out there with their head up."

Indeed, forty percent of encounters between high-end prostitutes don't involve sex...like therapy with occasional benefits.

Michael Lewis' mansionSep 26 2008

Michael Lewis rents a mansion in New Orleans and finds in the experience a parable about the thirst of Americans for better housing than they can afford, the subprime mortgage crisis, and the ensuing financial panic.

The real moral is that when a middle-class couple buys a house they can't afford, defaults on their mortgage, and then sits down to explain it to a reporter from the New York Times, they can be confident that he will overlook the reason for their financial distress: the peculiar willingness of Americans to risk it all for a house above their station. People who buy something they cannot afford usually hear a little voice warning them away or prodding them to feel guilty. But when the item in question is a house, all the signals in American life conspire to drown out the little voice. The tax code tells people like the Garcias that while their interest payments are now gargantuan relative to their income, they're deductible. Their friends tell them how impressed they are-and they mean it. Their family tells them that while theirs is indeed a big house, they have worked hard, and Americans who work hard deserve to own a dream house. Their kids love them for it.

(thx, kabir)

Michael Lewis' new book on financial insanitySep 24 2008

Ok, Michael Lewis *is* writing a book about the current financial situation. Sort of. It's called Panic: The Story of Modern Financial Insanity.

When it comes to markets, the first deadly sin is greed. Michael Lewis is our jungle guide through five of the most violent and costly upheavals in recent financial history: the crash of '87, the Russian default (and the subsequent collapse of Long-Term Capital Management), the Asian currency crisis of 1999, the Internet bubble, and the current sub-prime mortgage disaster.

It's out in December so I imagine that it won't include the current Lehman/AIG/Merrill/bailout kerfuffle, but that's what "with new material" paperbacks are for. (thx, paul)

Michael Lewis on the financial collapseSep 22 2008

Michael Lewis looks on the bright side of the current financial crisis and finds five positive aspects.

Our willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences. It underpins Wall Street's brokerage operations, for instance, and leads to a lot more people giving out financial advice than should be giving out financial advice. Thanks to the current panic many Americans have learned that the experts who advise them what to do with their savings are, at best, fools.

God I hope he writes a book about all this someday, sort of a Liar's Poker 2. He can call it Fool's Roulette or something.

Realtime Google stock pricesJun 09 2008

Google is providing real-time stock prices now...no page refresh necessary. So you can, for instance, watch Apple's stock price drop after Jobs' keynote. Now I know how daytraders feel...I can't take my eyes off of the screen.

Yay! Today is sub-prime mortgage day onJan 22 2008

Yay! Today is sub-prime mortgage day on kottke.org, I guess. The collapse of the sub-prime mortgage market took everyone on Wall Street by surprise...except Goldman Sachs, which earned $11.6 billion in 2007 when everyone else lost money. How'd they do it? Michael Lewis says that Goldman went against the flow in shorting sub-prime mortgages by assuming that the entire rest of the industry, including their own expert and extremely well-paid traders, were, as Lewis puts it, "a bunch of idiots".

Update: Here's the WSJ article mentioned by Lewis in the above piece. (thx, andy)

n+1 magazine has a fascinating Interview withJan 22 2008

n+1 magazine has a fascinating Interview with a Hedge Fund Manager. Topics of conversation include the sub-prime mortgage crisis. I gotta admit that I didn't understand some of this, but most of it was pretty interesting. (via snarkmarket)

Can You Explain How To Get Rich Quick?Jan 15 2008

Hedge fund manager John Paulson and investor Jeff Greene both became insanely wealthy over the subprime mortgage crisis. But how? (Parsing the Wall Street Journal is hard!) So Paulson "had to think up a technical way to bet against the housing and mortgage markets." His guys bought up "collateralized debt obligation" slices, which are repackaged mortgage securities. (Kind of lost already!) His firm also bought up "credit-default swaps." Paulson then opened a hedge fund shop, taking $150-million in mostly European money to back his scheme. Then he hung on. Now "he tells investors 'it's still not too late' to bet on economic troubles." Neat! Paulson's ex-friend Greene did much the same thing, getting an investment bank's participation for assets for the swap. Then... something happened and he bought three jets and a 145-foot yacht. Finance for idiots explanations eagerly sought! (And is there any small-scale way to do such things? Or do the abilities of regular people to make money on a crisis stop at short-selling and investing in Halliburton?)

Michael Lewis on a new way inSep 14 2007

Michael Lewis on a new way in which insurance companies are evaluating risk with respect to natural catastrophes.

The logic of catastrophe is very different: either no one is affected or vast numbers of people are. After an earthquake flattens Tokyo, a Japanese earthquake insurer is in deep trouble: millions of customers file claims. If there were a great number of rich cities scattered across the planet that might plausibly be destroyed by an earthquake, the insurer could spread its exposure to the losses by selling earthquake insurance to all of them. The losses it suffered in Tokyo would be offset by the gains it made from the cities not destroyed by an earthquake. But the financial risk from earthquakes -- and hurricanes -- is highly concentrated in a few places. There were insurance problems that were beyond the insurance industry's means. Yet insurers continued to cover them, sometimes unenthusiastically, sometimes recklessly.

James Simons, hedge fund manager, earned $1.7 billionApr 24 2007

James Simons, hedge fund manager, earned $1.7 billion last year. $1.7 fucking billion! His company charges fees of 5% of assets and 44% of profits while the fund grossed 84% this year. Can one person add $1.7 billion of value to the economy? Something is wrong here.

A record-breaking year for Goldman Sachs; they'reDec 13 2006

A record-breaking year for Goldman Sachs; they're setting aside $16.5 billion for salaries, benefits, and bonuses. That's $622,000 (!!!!!!) for each employee. Instead of the typical business puff piece telling us about what these i-bankers are going to do with their money (cars, houses, expensive dinners!), how about investigating where all this money is coming from and what, exactly, Goldman does that's so beneficial to the economy to earn such incredible profits.

You know those spams you get toutingAug 28 2006

You know those spams you get touting penny stocks? It turns out they actually work. "The team found that a spammer who bought shares the day before starting an e-mail campaign and then sold them the day after could make a return on his or her investment of 4.9%. If he or she were to be a particularly effective spammer, returns to this strategy would be roughly 6%."

Update: NPR report on the spam stocks study. (thx, jeff)

With their new finance offering, Google doesMar 21 2006

With their new finance offering, Google does for stock charts what they did for maps with Google Maps.

Daniel Gross on why the financial marketsJul 08 2005

Daniel Gross on why the financial markets reacted to the London bombings as they did. Stocks dropped (but not too much), oil fell sharply, and transportation and insurance stocks took a bigger hit than most.

Money Magazine on the 50 smartest things youJun 20 2005

Money Magazine on the 50 smartest things you can do with your money. Also includes a list of 15 dumb things to avoid.

The Neiman Marcus Paradox: How dumb richMay 13 2005

The Neiman Marcus Paradox: How dumb rich people end up in debt. "14 percent of people with more than $5 million in assets have credit-card balances [which is] mystifying since credit-card cash is perhaps the most expensive form of money legally available."

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