A podcast about books, art & life — not necessarily in that order
I’m off to the optometrist, now that I’ve learned that you can’t order contact lenses without a prescription. Thanks, opti-cartel!
I was saving this for the right occasion. It is really not safe for work, if you work in a cubicle farm.
Of course, I don’t endorse any of the aforementioned behavior.
It’s gettin’ so a businessman can’t expect no return from a fixed fight. Now if you can’t trust the fix, what can you trust? For a good return, you gotta go bettin’ on chance, and then you’re back with anarchy. Right back inna jungle.
—Johnny Caspar, Miller’s Crossing
In the midst of massive writeoff & layoff announcements from major U.S. banks, France’s Societe General SA announced a $7.2 billion writeoff (14% of its market capitalization), much of which was blamed on the actions of Jerome Kerviel, a low-level trader who had somehow managed to place $73 billion on stock-market bets (the bank’s market cap is $50 billion). The case is under investigation, and many outsiders are wondering exactly how one “rogue trader” could put that much money at risk.
A lesser-noted aspect of SG’s writeoff is that it also includes $1.6 billion in subprime mortgage exposure, $800 million in U.S. insurance bond exposure, and another $580 million set aside for future liabilities in those two areas. The bank is trying to raise around $8.0 billion in funds through a new share offering. So, sure, SocGen got wrecked by Kerviel’s improper bets, but it also managed to torch itself for almost $3.0 billion in losses based on bets that were perfectly proper.
And that brings me to the topic of risk. A few months ago, I wrote in my magazine (and reposted here) about the subject in light of quantitative hedge funds, subprime mortgages and Hudson Hawk:
Funnily enough, while we’re free of gold, we haven’t gotten over alchemy. Instead of la machina oro, we have “quant funds,” those hedge funds that employ statistical models so sophisticated that they can “find winning trade strategies,” as the Wall Street Journal puts it. From equations to money, like magic!
Turns out one of these winning trade strategies was investing in financial instruments that were based heavily on subprime mortgages (that is, the practice of giving large loans to people who have poor credit). Some of these sophisticated investing models managed to underestimate the risk of — repeat after me — giving large loans to people who have poor credit. [. . .]
Evaluating risk — the true foundation of finance — lost its meaning. For a while.
Now, I know a lot of readers’ eyes tend to glaze over when I try to write about business and/or finance on this site, but I really think
In this instance, I’ve been trying to understand what risk is and why the risk management systems at so many financial institutions determined they could afford to take on the investments that have led to billions of dollars in losses.
For instance, an article in the Wall Street Journal (pay-only, I think) discussed the breakdown in risk protection by companies like Citigroup, Merrill Lynch and Morgan Stanley:
“Until recently, every investment bank believed it had built an outstanding risk-management system,” Ken Moelis, former head of investment banking at UBS, wrote in a November letter to his new firm’s investors. Mr. Moelis now runs his own investment bank. “Through computer models and endless analysis, the banks believed they could measure every risk to the nth degree.” But reliance on such models and manuals “overlooked” the importance of “human judgment and the ability to evaluate the numbers being generated,” he added.
Like there’s no interesting metaphor in that? Come on!
Actually, as I did more reading on the subject in the last few weeks, I discovered that a much better writer than I did the heavy lifting for me! Earlier this month, John Lanchester (author of The Debt To Pleasure
Lanchester does a fantastic job of explaining how credit markets work and why they can fail to work. It’s an awfully long piece, but I highly recommend it for a variety of reasons.
In the midst of the article, Lanchester cites writer Peter Bernstein
And I realized that’s where my fascination lies: this idea that the world is knowable.
Whether for the purpose of dismantling fate or “making our fortune,” isn’t that the goal of so much of our art, so many of our sciences?
* * *
Bonus Reading! Joy!
Cityphilia – The article by John Lanchester that kicked this off.
My Theory of Everything – Friedrich von Blowhard on the New Class, which reaps rewards without taking capital risks.
How Real was the Prosperity? – If it turns out that much of the economic growth was based on obviously flawed lending practices, then how real was the money? (Of course, I think about that in a more existential manner than this reporter, but I’m not writing for BusinessWeek.)
Fraud Costs Bank $7.1 Billion – One of the first articles on Jerome Kerviel’s transactions that may or may not sink Societe General SA.
SocGen Had Been Warned About Kerviel – Is 164-year-old SocGen gonna get blow’d up?
Once Again, the Risk Protection Fails – Let’s “manage” “risk”.
Good and Bad Capitalists – Sebastian Mallaby argues that hedge fund managers are more responsible than banks. Go back to Cityphilia and check out the section on Long Term Capital Management.
Tuesday Morning Quarterback – Gregg Easterbrook has a great section on CEO pay, even after companies get rocked for tremendous losses. (Search for the phrase “suppose the general manager”.)
What’s $34 Billion on Wall St.? – In that same vein . . .
French Trader was Forced To Work 30 Hours a Week – The horrible truth on why Kerviel made all those disastrous market bets.
Double-bonus! Now you can buy Jerome Kerviel t-shirts, ladies! 4.9 billion Euros: Respect!Â
What I’m reading: John Lanchester’s Mr. Phillips
What I’m listening to: Sing You Sinners
What I’m watching: almost finished with the first season of The Wire
What I’m drinking: Balgownie Estate 2004 shiraz
Where I’m going: No trips planned this week, although we’re thinking of visiting our friends in Providence next weekend
What I’m happy about: that the heavy push to get my Jan/Feb combo issue done in time for Informex has left me a little more leeway in putting together the March issue and planning out April and May
What I’m sad about: that one of my best pals just deployed for “parts unknown” with his carrier group, and the dad of another of my pals just had surgery to remove some not-so-good cells from his pancreas
What I’m pondering: how awesome it is that, when I felt a twinge of nostalgia for my old college stomping grounds on Saturday, I was able to zoom in the satellite view on Google Maps, retrace my old travels, and remember that the Amherst Cinema is where I first watched Miller’s Crossing
Reading over the morning papers online, I came across a WSJ story about the FCC’s five-year-long crusade to fine ABC and some of its affiliates over an episode of NYPD Blue for showing a woman’s butt onscreen before 10 p.m. Takeaway line:
“Although ABC argues, without citing any authority, that the buttocks are not a sexual organ, we reject this argument, which runs counter to both case law and common sense,” the FCC said in its complaint.
Picking up my mail this afternoon, I noticed a Pottery Barn catalog with the tagline, “NEW REDUCED DELIVERY CHARGES ON MORE THAN 65 ITEMS!”
My reaction? “Why, if I order more than 65 items from these jokers, I sure hope I would get reduced delivery charges!”
Then I thought about it a minute and, um, realized that they reduced the delivery charges on more than 65 individual items, not on orders of 65 items or more.
At the Licensing Expo in 1997, I met with some Sony executives about properties they were licensing for merchandise. (I also met Gary Panter at that event, but that’s another story). I asked why they were so excited about their new Godzilla flick. Grinning from ear to ear, one of the Japanese execs told me, “Because this time Godzilla destroys New York!”
That movie may’ve been the first to violate my rule that Jean Reno makes any movie good, but it seems to have helped kicked off a trend of movies about New York getting smacked down. This post from a NYTimes Cityroom blog offers a timeline of great New York ass-whompings, pre- and post-9/11, and links to a New York mag Top 10 list of ’em, too.
I’m just glad New Jersey tends to get off easy. Lex Luthor’s the only one who tried blowing us up.
Man, I thought I had hangups about flying.
(Note: I was perfectly at ease with flying until a really rough takeoff on a flight to Phoenix in 2003. Since then, I’ve had varying degrees of jitters.)
I first noticed the Hearst Tower during ferry rides over to NYC about a year ago. Last April, I meandered by the building and snapped some pictures. I thought it was a neat-looking building, especially as it poked out of an existing structure like a giant f***-you:
Last November, when I was nearby for the black-tie event where I concluded that I really need to buy myself a tuxedo, I was happy that I’d get the opportunity to see the tower by night.
Boy, was I disappointed. The building was utterly lifeless against the cityscape. Without daylight reflecting off the panes, the structure seemed to flatten, resembling nothing but a standard glass office building, illuminated by fluorescents. I didn’t post — or even bother keeping — the pix I took of it. I was charitable enough to figure I was just missing something. Or maybe I caught it on a bad night.
Not according to Robert Campbell, a fellow at The American Institute of Architects and a critic for the Boston Globe. In Why I Hate the Hearst Tower, starts off by comparing the building to a missile silo, goes on to write,
[N]othing about the Hearst, as seen from outdoors, suggests the possibility of human habitation. It appears to be a cage for a single massive object. [. . .] One of the problems with Modernism, as a stylistic method, is that it tends to ignore the fact that buildings look like other things. And that’s how most people understand them. People say the abstract boxlike shapes of Modernist office towers look like the cartons the real towers came in. The world we live in is a world of resemblances.
and ultimately bashes the heck out of the idea of architecture without context:
[T]he message the Hearst broadcasts to me [is]: that it’s a prototype invented for no particular site or program which was, then, pulled out of its sketchbook and plopped down on this site. Its form not only communicates but insists that it ignores its solar orientation, its site, its Deco footrest, and its internal program of uses. “Put me anywhere, fill me with anything, I’m fine with that,” the tower seems to be telling us. It’s a throwback to Mies [van der Rohe]’s concept of universal space. And let’s remember that Mies’s concept, which worked well at Crown Hall in Chicago, created, in Berlin, an art museum that is as hopelessly impractical as it is handsome.
Longtime readers know that I like me some failure. But I’m a failure when I measure up to Nathan Rabin. This guy has managed to review more than 100 movie-failures in a year. I’ve been following his My Year of Flops feature for a while, after he caught my attention with he skewered Hudson Hawk, my favorite terrible movie.
You should probably check out his afterword to the whole affair, and then wind your way through some of these amazing writeups. And make sure to spend some time with North. . .
