"The Epicurean Dealmaker" - 5 new articles
Compassion Fatigue
"No matter how many times you save the world, it always manages to get back in jeopardy again. Sometimes I just want it to stay saved, you know? For a little bit? I feel like the maid: 'I just cleaned up this mess! Can we keep it clean for ... for ten minutes?!'"
As witness, I offer for your reading pleasure select excerpts from the Conclusions and Lessons Learned section of the report, with a few helpful explanatory titles and glosses of my own design.
This bang-up example of tactical thinking and mental flexibility, of course, led directly to a threatened downgrade of AIG by the ever-helpful credit rating agencies, which in turn made it absolutely necessary for AIG to get out from under those nasty, collateral-sucking CDSs. This allowed the Fed staffers a stellar opportunity to affirm their collective membership in the phylum Platyhelminthes (spineless flatworms) by halfheartedly negotiating for haircuts on the CDOs underlying AIG's swaps with its recalcitrant counterparties.
AIG: "Would you be willing to accept, say, 70 cents on the dollar?" I kid you not.
The first, of course, is my personal favorite, for there is absolutely no tactic more effective at gutting whatever leverage and flexibility you might have in a negotiation—other than shoving a fragmentation grenade up your ass and pulling the pin—than refusing to treat different counterparties differently. I remember hearing hints of this preposterous limitation in earlier accounts of the AIG fiasco, but the Fed always seemed to imply it was a legal restriction inherent in its charter. Now, perhaps, we learn differently: FRBNY’s decision to treat all counterparties equally (which FRBNY officials described as a “core value” of their organization), for example, gave each of the major counterparties (including the French banks) effective veto power over the possibility of a concession from any other party. This approach left FRBNY with few options, even after one of the counterparties indicated a willingness to negotiate concessions. It also arguably did not account for significant differences among the counterparties, including that some of them had received very substantial benefits from FRBNY and other Government agencies through various other bailout programs (including billions of dollars of taxpayer funds through TARP), a benefit not available to some of the other counterparties (including the French banks). It further did not account for the benefits the counterparties received from FRBNY’s initial bailout of AIG, without which they would have likely suffered far reduced payments as well as the indirect consequences of a potential systemic collapse. Oh, yeah, that was a real winner.
Similarly, the refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely “voluntary,” made the possibility of obtaining concessions from those counterparties extremely remote. While there can be no doubt that a regulators’ inherent leverage over a regulated entity must be used appropriately, and could in certain circumstances be abused, in other instances in this financial crisis regulators (including the Federal Reserve) have used overtly coercive language to convince financial institutions to take or forego certain actions. As SIGTARP reported in its audit of the initial Capital Purchase Program investments, for example, Treasury and the Federal Reserve were fully prepared to use their leverage as regulators to compel the nine largest financial institutions (including some of AIG’s counterparties) to accept $125 billion of TARP funding and to pressure Bank of America to conclude its merger with Merrill Lynch. Similarly, it has been widely reported that the Government, while arguably acting on behalf of General Motors and Chrysler, took an active role in negotiating substantial concessions from the creditors of those companies. Gee, that sounds familiar.
Of course, then there is the whole "backdoor bailout" question, which arguably lies at the core of the persistent conspiracy theories percolating through our troubled polity.
And, lastly, the SIGTARP report blasts the Fed's continued ridiculous insistence on complete confidentiality for its actions, even in retrospect. Given the revelations we have been privileged with, I can only assume the Fed's diffidence has far more to do with covering up its massive, multidimensional incompetence in dealing with AIG than with any other purpose.
In fact, reading through this report, I find very little evidence that Barofsky et al. were even remotely swayed by the transparent nonsense the Fed used to justify its idiocy. Sure, they included it in their report, as they were no doubt required to do, but their conclusions seem remarkably impervious to the Fed's perspective.
"I am here to make a citizen's arrest of the Board of Governors of the Federal Reserve. We want our money back!" I would pay $12.50 to see that.
     
 Notes from a Presidential Address I Would Like to Hear As delivered from the bully pulpit long ago, in another time and place, which looks a lot like this time and place: Probably the greatest harm done by vast wealth is the harm that we of moderate means do ourselves when we let the vices of envy and hatred enter deep into our own natures. But there is another harm; and it is evident that we should try to do away with that. The great corporations which we have grown to speak of rather loosely as trusts are the creatures of the State, and the State not only has the right to control them, but it is duty bound to control them wherever the need of such control is shown. * * *
There is more: We stand equally against government by a plutocracy and government by a mob. There is something to be said for government by a great aristocracy which has furnished leaders to the nation in peace and war for generations; even a democrat like myself must admit this. But there is absolutely nothing to be said for government by a plutocracy, for government by men very powerful in certain lines and gifted with "the money touch," but with ideals which in their essence are merely those of so many glorified pawnbrokers. * * *
Where oh where is the Bull Moose for our time and place? © 2009 The Epicurean Dealmaker. All rights reserved.    
 Veterans' Day What passing-bells for these who die as cattle? Let us not forget those who have truly paid the price for our folly and our hate. Nostra culpa, nostra culpa, nostra maxima culpa. Photo credit: Great War Primary Document Archive: Photos of the Great War. © 2009 The Epicurean Dealmaker. All rights reserved.    
 Character Study Alfred Pennyworth: "A long time ago, I was in Burma. My friends and I were working for the local government. They were trying to buy the loyalty of tribal leaders by bribing them with precious stones. But their caravans were being raided in a forest north of Rangoon by a bandit. So we went looking for the stones. But in six months, we never found anyone who traded with him. One day I saw a child playing with a ruby the size of a tangerine. The bandit had been throwing them away." I have argued elsewhere at length that the bulk of commentators and regulators confronting the Panic of 2008 and its aftermath put far too much emphasis on the supposed causal effect misaligned compensation incentives had on these events. While these no doubt added to the problem in some instances, for the most part the focus on banker pay is poorly judged. Some of this error can be laid at the foot of natural envy, but some of it can be attributed to a fundamental misreading and simplification of the investment banker's character. People continue to be excessively worried about investment bankers who are greedy, grasping, and covetous. Bankers who think of nothing but money. Bankers who are just like Joe and Ethel Sixpack, only richer, more ruthless, and less constrained by conscience. But these are not the bankers we need to worry about. These bankers—who, make no mistake, do indeed exist—can be bought. If we cannot chase them out of too-big-to-fail banks where they make stupid or greedy decisions that harm our society and economy, we can encourage them to repay our bailouts to get out from under our yoke. These bankers are easy. We understand their greed and motivation, because it is essentially logical, and most of us share the same motivation to some degree, if only in paler, more attenuated form. These bankers are no challenge whatsoever. But anyone who has spent real time in the trenches of investment banking knows that this description does not come close to exhausting the character of its practitioners. There are people in the industry who, when you get right down to it, have no real interest in money. People who couldn't give a flying fuck in a rolling donut whether they make $3 million, or $10 million, or $100 million a year, as long as they make more than the next guy. People who look at income, and bonuses, and aggregate net worth as a scorecard in the great game of life. People who want to make the most. Or, those rare birds who do the business because they love it, because it's there, and because they can. People like a mentor I used to have who never should have worked a day in his adult life, according to any normal person's calculus. Someone who married into vast wealth, but who spent thirty years in sweltering Boardrooms, shitty motel rooms, and executive committee meetings which would make a dockside knife fight in Calcutta look like afternoon tea with the Queen of England because he loved the work. Finally, do not forget the psychopaths. Do you really think some bureaucrat's compensation limits are going to effectively constrain such people? Do you really think they will care? (I grant you, most of their wives will care. But that is what mistresses and prenups are for.) They will bitch and complain, but at the end of the day they will commiserate with compatriots over a 20-year single malt and a Cuban cigar and say "Fuck it." After all, most of these veterans were happy making 50%, 60%, or even 70% less money doing the same damn thing twenty years ago before Alan Greenspan turned on the liquidity spigot. At best, Kenneth Feinberg's compensation rules for the seven TARP firms and the Fed's proposed guidelines on pay for the entire industry might chase out the opportunistic rabble who poured into the industry over the last decade to take advantage of its well-advertised pay and growing social prestige. People who, in other times, would and have flocked to law, or medicine, or technology startups and who, like rats off a sinking ship, will swarm onto another platform as soon as Michael Porter, or Seth Godin, or Sergey Brin identifies it for them. Goddamn sheep. Extraordinarily well paid, well-dressed, and well-coiffed sheep, but sheep nonetheless. Good riddance to them, I say. Let them go "add value" to some other poor misbegotten segment of society. Just watch your wallet when they show up on your doorstep. But once these johhny-come-latelies leave, who will remain? I'll tell you who: people against whom your pitiful, transparent little compensation levers will have no effect whatsoever. People who do the business because they love it, because they are good at it, and because there are only so many slots open in the natural ecosystem for pinnacle predators, and the Great White Sharks and Polar Bears got most of them first. People who will work with their counterparts in law, accounting, taxation, and Corporate America to extend the edge of the envelope and push the legal and regulatory barriers as far as they can go, because that is what they are paid to do and because they can. Because they are smart enough, and driven enough, and because they love the game. Because they take pride in their work. Just like any goddamn pipefitter. These people are dangerous because they are smarter than you, because they are smarter than any regulator likely to be sent to control them, and because they hold in their hands the map and the controls to the vast and intricate system of pipes and valves which undergirds the global economy. Give them any reasonable set of legal and regulatory constraints—more stringent than the recent past, by all means, I implore you—and they will happily adapt and innovate around them in the future. Push them, and box them in, and reinstate Glass-Steagall if you must: they will grumble, but they will get over it. But can you imagine what would happen if you pressed them too far? If you tried to turn the entire financial industry into a bunch of unionized, rule-bound clerks? These are personalities who do not go gentle into that good night. All you would need would be for one or two of them to decide they would rather watch the world burn than crawl into a hole. And believe you me, you do not have enough water to put out that fire. Not that I'm making threats, or anything. I am a reasonable man. © 2009 The Epicurean Dealmaker. All rights reserved.    
 Shock and Awe I tell you honestly, Dear Readers, my afternoon conversation with this genial and intelligent gentleman started unremarkably enough, with a little playful banter in the Twitterverse on this and that. (I called myself a squirrel; he revealed himself to be a slime mold.) But then, something went horribly wrong. After trying to out me with an hurtful photograph of me wearing a hat I haven't owned in years (and an extra 20 pounds I have subsequently shed), he upped his attack on Your Peaceable and Equable Correspondent by trying to pick a fight between yours truly and the fearsome Economics of Contempt. Now, I have to tell you I consider this very bad form. For one thing, my physical constitution and pugilistic skills are far better suited to being the spotty faced provocateur shouting "Fight! Fight!" from the perimeter of an altercation than being one of the principals. For another, I make it a practice never to get into a fight with a lawyer, unless I can attack him unexpectedly from behind with a lead pipe, preferably in the dark. Furthermore, my unwelcome opponent in this imposed brouhaha was none other than a structured finance lawyer, which every six year old knows is the most dangerous specimen of that deadly species. Heck, I work with structured finance lawyers all the time, which is why I count my fingers every time I shake one's hand and go through six liters a month of hand sanitizer. So, suffice it to say I clicked through Mr. Waldman's incendiary link to EoC's post with a maximum of trepidation, calculating in advance just how many Russian hookers I might have to ply my opponent with to elicit mercy. But when I arrived, I breathed a virtual sigh of relief, for I discerned my opposite was far less formidable than I feared. For one thing, Mr. Contempt's main purpose seems to have been to tie hedge fund principal and commentator Janet Tavakoli to a post and whip her decisively with a wet noodle. This he accomplished admirably, and I have nothing to add to the central thrust of his argument; namely, that Ms Tavakoli overstated her case and overplayed her hand. I also have nothing to add to his speculation on the exact size and nature of Goldman Sach's exposure to AIG in the troubled days of last Fall because, frankly, who the fuck cares? However, I did note that Mr. C and I do in fact have a basic disagreement about the relative negotiating power at that time of Goldman Sachs and the other AIG counterparties, on the one hand, and the Federal government as owner of AIG, on the other. This, I think, is the core of his argument: [T]here's no way Goldman would ever have agreed to a "bankruptcy-like settlement" — why would they? As someone who has actually been involved in these kinds of negotiations, let me explain how the AIG/Goldman negotiations would have played out:He then finesses Tavakoli's argument that Goldman wasn't adequately hedged in such circumstances because AIG's collapse would have engendered widespread systemic disruption and called into question not only the capability of any counterparty to satisfy its obligations under a hedge but also the health and solvency of every participant in the financial system. He does this by saying: 1) Oh yes they could, because the hedges were adequately collateralized, and 2) the potential for total systemic meltdown wasn't the scenario Goldman's CFO was talking about when he said they were adequately hedged. While neatly parrying Ms Tavakoli's principal charge that Goldman lied about its exposure, you must see that this argument almost entirely begs the question. Mr. C also disagrees that Goldman—and, presumably by extension, the other counterparties to AIG's CDSs—faced any reputational pressure in these negotiations. He writes: Finally, Tavakoli argues that Goldman's exposure to AIG included "reputation risk." Yes, I'm sure that if AIG had failed, Goldman's reputation for having prudently managed its counterparty risk would've been devastating.While comprising an admirable example of sarcastic snark, this remark completely mischaracterizes the circumstances surrounding AIG's near death experience last year. All one need do is read a few pages in Andrew Ross Sorkin's hour-by-hour account of the collapse of Lehman Brothers and its aftermath to realize that "reputation risk" encompassed far more than each individual firm's performance of its fiduciary duties alone. More to the point, the CEOs and Boards of the principals involved were very well aware that business—or fiduciary duty, or contract law, or corporate governance—as usual was completely and utterly out the window: On the surface, Goldman looked like one of AIG's biggest counterparties, but earlier that morning, Goldman's Gary Cohn had boasted internally that the firm had hedged so much of its exposure to AIG that it might actually make $50 million if the company collapsed. The firm's decision to buy insurance in the form of credit default swaps against AIG beginning in late 2007 was starting to seem like a smart investment. The firm had conducted what it internally called a "WOW analysis"—a worst-of-the-worst case scenario—and it was quickly coming true. Even though Goldman had hedged its direct exposure to AIG, [Lloyd] Blankfein appreciated the larger problem: The collateral damage to its other counterparties and the rest of the market could expose the firm to untold billions in crippling losses.1 [emphasis mine]So, let us not be legalistic, or simplistic, or disingenuous here. Under normal circumstances, I would completely agree with my professional better and, indeed, would and have paid him and his kind mucho dinero to advise me on the way structured finance does and should work when all is right with the world. But virtually nothing was right with the world in the fourth quarter of 2008. Cats laid down with dogs, Paris Hilton matriculated at Oxford, and the thundering hoofbeats of the Four Horsemen could be heard in broad daylight throughout the canyons of Wall Street. The system was on the knife's edge of chaos, and everyone with half a brain—including Goldman Sachs and all of AIG's other counterparties—was very well aware of that. So, in the spirit of Mr. Contempt's entertaining post, I would like to propose an alternate transcript for what I think might have occurred during those dark days had I or one of my professional counterparts been in charge of negotiations with Goldman Sachs et al. Normally, I would not reveal a potential negotiating strategy such as this in public without an enormous and frankly obscene fee already marinating nicely in my personal bank vault, but I am feeling inexplicably charitable. Also, it is clear from the underwhelming response to my previous offer of assistance that the Federal government has the backbone and intestinal fortitude of an earthworm, so I'm not worried I am giving away potentially lucrative advice to a client who might actually hire me. Anyway, let's proceed: TED, as representative of the Federal government and AIG: Welcome, gentlemen. Please take a seat, and let's begin. Would this approach have recovered all 40% of the original discount AIG tried to obtain? Probably not. Tough talk or no, the assembled banks would balk at completely unreasonable demands by the government. And if they balked, they would have time to mobilize their vast lobbying apparatus to try to counteract the government's bid through Congress. Delay would be deadly. You could not allow the counterparties to regroup, or even collect their thoughts. You've gotta drop a daisy cutter on their ass, and roll the tanks in immediately thereafter. Shock and awe, baby. But you know why this could work? Because all those bank CEOs and CFOs would look across the table at me and realize: this guy is a mercenary, heartless, psychopathic bastard just like me. And he is getting paid to run a Roto Rooter up my ass. Let's get it over with, and then I can plan my revenge on this bastard later on. I'm an equal opportunity asshole, baby. I'll screw anyone over. Investment banks can deal with that. 1 Andrew Ross Sorkin, Too Big to Fail. New York: The Viking Press, 2009, p. 383. © 2009 The Epicurean Dealmaker. All rights reserved.    
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