Mangan’s memoirs

Credit crisis not explained

The New York Times tries to explain the credit crisis, but can’t really, but can at least give an idea of what went wrong. This alludes to the post about leverage and hedge funds I mentioned the other day:

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.

Joe Sixpack got into the act by borrowing more than he could afford against his house, figuring the price would go up forever. Bad idea:

The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything.

Hello, Bear Stearns. Well, goodbye. Read the whole thing to fill in more of the blanks.

This is new: pre-emptive admission of adultery

Remember how Barack Obama said essentially from the get-go that he smoked pot as a teen-ager? Well, the new governor of New York is saying up front that he and his wife both had extra-marital affairs a few years back, but they sorted things out.

In a stunning revelation, both Paterson, 53, and his wife, Michelle, 46, acknowledged in a joint interview they each had intimate relationships with others during a rocky period in their marriage several years ago.

In the course of several interviews in the past few days, Paterson said he maintained a relationship for two or three years with “a woman other than my wife,” beginning in 1999.

The New York Daily News, recipient of this priceless scoop, thoughtfully placed the story above the one about the meltdown of one of Wall Street’s most important investment banks.  Priorities in order, I like that in a newspaper.

Bear Stearns, hedge funds and the latest Wall Street follies

The big investment bank folded over the weekend and got sold for pennies on the dollar. Basically, Bear was heavily involved in securities tied to the mortgage meltdown, and last week there was essentially a run on the bank. By Friday all of Wall Street was avoiding it like Superman avoids kryptonite.

To understand what killed the Bear, you have to understand — to the extent that this is possible for non-financial types — how hedge funds and derivatives speculators make money. The book about the failure of the hedge fund Long Term Capital Management explains that hedge funds make money by borrowing against securities with a leverage ratio far, far beyond anything the rest of us would ever dare to try.

To wit: if your house is worth 100,000 and you owe 100,000, that’s a 1-to-1 leverage ratio. But the assurance that you’ll pay it off — because you have a strong motivation not to default — means you could, in theory, borrow against the assurance of payback on the note, because that assurance is in essence a kind of collateral. You know, something with market value. Say you talked your bank into loaning you another $100,000, then you’d have a 2-to-1 leverage ratio.

Hedge fund managers, who have billions to play with and the best brains and computers in the business, can find ways to make money off that assurance of payback in ways that would make your head spin. A single security could have a 15-to-1 or even 30-to-1 leverage ratio. These seem like stupendously risky bets when a measly million dollars, say, has 15 million dollars borrowed against it. Thing is, in ordinary circumstances, there’s no realistic risk of having to pay back all these loans at the same time.

To visualize this, imagine the Flying Wallendas with their Human Pyramid: it had four guys on the base, two people in the middle and one on top. Now, imagine the pyramid upside down, with one very strong beefy guy on the bottom and everybody else balanced on his shoulders. Theoretically, such a balance is possible, but it’d probably take a computer and the world’s greatest acrobats to pull it off. A long as everybody keeps their balance, everything’s fine. But if anything highly unusual happens — like, perhaps, one of the biggest investment banks in the world collapsing — the pyramid falls and there’s blood under the Big Top.

Bear Stearns wasn’t a hedge fund, but it was in the hedge fund business, and it had billions in borrowings out there that it couldn’t pay off with cash on hand. Late last week, Wall Street turned on Bear with a vengeance, and everybody wanted what Bear owed them, and they wanted it now.

A bank or hedge fund can survive if it can get its hands on enough cash to survive till the panic subsides. That’s where the Fed came in, offering to stand behind $30 billion worth of Bear securities till Wall Street stops acting like cattle in full stampede mode.

Long-Term Capital Management was rescued by a deal in which the biggest investment Wall Street Banks chipped in a few billion apiece to provide a cash life line to the fund until the run on its securities ended. Bear Stearns refused to participate. Cosmic payback arrived over the weekend.

I can’t help wondering how many leveraged-to-the-hilt securities out there presume the continued existence of Bear Stearns, and what happens to them when it disappears. Then again, I’m not too sure I want to think about that.

Where housecats come from

Washington Post has the scoop:

In one of the most comprehensive explorations of cats’ origins to date, Lyons and her colleagues spent about five years collecting feline DNA, poking behind the whiskers of more than 1,100 Persians, Siamese, street cats and household tabbies around the world to swab inside their mouths. The genetic samples came from 22 breeds of fancy cats, mostly in the United States, along with an assortment of feral and pet cats in Korea, China, Kenya, Israel, Turkey, Vietnam, Singapore, Sri Lanka, Tunisia, Egypt, Italy, Finland, Germany, the United States and Brazil.

By analyzing 39 genetic signposts in the samples, the researchers were able to investigate a variety of questions, including which breeds are most closely related and where they most likely originated.

The first thing the group did was confirm a report published last June in the journal Science that the domestication of cats about 10,000 years ago appeared to have occurred in an area known as the Fertile Crescent, which stretches from Turkey to northern Africa and to modern-day Iraq and Iran.

Speaking of Iran, Persians don’t seem to be from Persia, the researchers found. So how come people and cats seem to get along so well (mostly)?

Cats probably started living close to humans when people evolved from nomadic herding to raising livestock and crops and started storing food, which attracted mice and other rodents. Cats found good hunting there, and humans surely appreciated the sly little predators’ help protecting their stocks.

“There was a mutual benefit,” Lyons said. “There was a food source of mice and rats all around the grain. So it was beneficial for both cats and humans as the cats came closer to human populations and kind of domesticated themselves.”

That is to say, the cats domesticated the people.

I love it when a plan works out

Remember how some folks thought we could use Iraqi oil profits to fund the war? Must’ve been a swell proposition because that’s how it’s being funded — by crooks funneling profits to the insurgents. From this morning’s New York Times:

The sea of oil under Iraq is supposed to rebuild the nation, then make it prosper. But at least one-third, and possibly much more, of the fuel from Iraq’s largest refinery here is diverted to the black market, according to American military officials. Tankers are hijacked, drivers are bribed, papers are forged and meters are manipulated — and some of the earnings go to insurgents who are still killing more than 100 Iraqis a week.

“It’s the money pit of the insurgency,” said Capt. Joe Da Silva, who commands several platoons stationed at the refinery.

You know how the saying goes, there’s no power on earth stronger than a bad idea whose time has come.

Confessions of a debt hater

There might be a $200 balance on my MasterCard. It gets paid automatically every month. My car is 18 months old and paid off.

I don’t have a mortgage because the payment on condos as nice as my apartment is almost double what I pay in rent — and it’s somebody else’s job to mend the roof, replace the carpet and repair the fridge. Strikes me as pretty good deal.

I used to think my dad was a skin-flint because when we were kids, getting money out of him for toys, ice cream and candy was like pulling teeth. One time when I was in my 30s I told him I thought he was penny pincher.

He got a little hurt at the accusation, but said, “Well, I don’t spend money I don’t have. If that makes me a penny-pincher, so be it.”

Later I realized he wasn’t being tight with a buck so much as he was trying to teach us rugrats an important life lesson: if you ask for money you haven’t worked for, one of the most likely replies is “no.” This was good preparation for growing up in a world where asking for money can bring a “yes,” but you have to pay it all back and reward the giver with a bunch more because he has it and you don’t.

I also read something else later in life that stuck with me: Rich people earn compound interest; poor people pay it. I’d rather be an earner than a payer.

It’s strange being out of debt in a society so thoroughly greased by it. I read the other day that because the United States imports more than it exports, it’s in a perpetual state of debt. All those foreigner-bashing Republicans probably would just as soon not admit that China and Saudi Arabia are paid-up partners in the American Experiment. (Interestingly, this actually makes them much friendlier to us, because their fortunes are riding on our continuing to keep borrowing to pay for stuff we don’t need and can’t really afford. See, it’s always good to have partners).

I think the main reason I avoid debt is that it’s just one more complication. I pay what I owe every month and the issue’s settled. I don’t have to worry about my neighborhood going to hell, I don’t have to worry if my roof needs to be replaced, I don’t have to worry about getting fired, getting foreclosed on and having terrible credit the rest of my life.

It’s also nice to have a good rating for all that credit I’ll probably never use.

Scenes from downtown San Jose

I had occasion to be downtown on Sunday morning and decided to squeeze off a few frames. Among the highlights:

Marriott hotel in a water puddle

Thats the skinny tower of the Marriott Hotel reflected in a water puddle on Market Street.

Ferris wheel, Sunday morning

Down the street a ways, a Ferris wheel stands as part of the local Christmas in the Park festivities. Nothing happening this early in the morning, of course. The city’s central park is full of cheesy Christmas displays and gazillion Christmas trees decorated by local school kids. The best parts are the animatronics, which look variously vapid and diabolical. To wit:

Figurine

Somebody’s cake’s making a run for it.

Elf

Keep your children away from this guy.

Another figurine

The most evil of the bunch, if I do say so.

Carolers

If I didn’t know she was supposed to be singing, well, I don’t know what I’d think. (Well, I do but this is a family Web site.)

City Hall

Later I wandered over to San Jose’s City Hall, which always has promising photographic possibilities.

Great thing about downtown San Jose: you can take in all the highlights in about an hour’s walking.