Saturday, August 20, 2011

Marshalsea Prison: Our Demise Will Not Be Televised

Work in Progress - Please Pardon the Dust

"The revolution will not be televised." - Gil Scott Heron

The dying process usually begins well before death actually occurs. Terminally ill patients often experience both a sense of euphoria and disorientation in the final stages. Likewise, many societies experience similar spasms of euphoria before they go into their final death rattles. How else but terminal euphoria can one explain the financial and political stew in which we currently boil.

Marshalsea Prison - The Series

Marshalsea Prison is a series devoted to the economic decline and fall of the West. Marshalsea Prison references this infamous debtors prison in London where Charles Dicken's father was incarcerated. In modern times, the debtors run the asylum that holds society hostage. Other posts in this series include:

Financial Repression and the The Fall from Grace
The Prodigal Son

Our Demise Will Not Be Televised

The title of this blog post is a play on the famous Gil Scott-Herron piece from the 1960s, "The Revolution will not be Televised":

Here Gil explains the meaning of his piece:

Gil explains that true change occurs in an individuals mind:

"You have to change your mind before you change the way that you are living and the way you move. So when we said that the revolution would not be televised, we were saying that the the thing that is going to change people is something that no one is going to be able to capture on film. It will be something that you will see and then all of the sudden realize, I am on the wrong page or I am on the right page but on the wrong note and I have got to get in sync with everyone else to understand what is happening in this country."

In the context of this blog post, the above quote is being used to highlight several aspects of how we find ourselves in our current economic predicament and how we can recover:
  • One will not learn about what is truly occurring from the mainstream media until it is too late. Case in point, it took a hedge fund manager in Florida to ring the alarm that signalled the beginning of the crisis not the regulatory agencies, the rating agencies, financial media nor Wall Street itself.
  • Wall Street often plays on this herd mentality to drive us off like lemmings off of a financial cliff.
  • Part of the problem lies in fundamental flaws in how humans perceive risk.
  • These poor risk assessment skills led our society to compound its mistakes via leverage.
  • In order to truly heal our society, a revolution needs to occur away from the follow the pack mentality. We also need to rethink our risk assessment framework.
Cry in the Wilderness

They asked him, "Then who are you? Are you Elijah?" He said, "I am not." "Are you the Prophet?" He answered, "No." -John 1:21 Finally they said, "Who are you? Give us an answer to take back to those who sent us. What do you say about yourself?"-John 1:22 John replied in the words of Isaiah the prophet, "I am the voice of one calling in the desert, 'Make straight the way for the Lord.'"-John 1:23

“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” -Ben Bernanke Quotes

"Yep. The great credit unwind is upon us. Credit default swaps on all brokers, particularly Lehman and Bear Stearns are blowing out, big time. Why?  -Bennet Sedacca

On March 20, 2008, the collapse of our financial system began when Bennet Sedacca, President of Altantic Advisors, a multi-billion dollar hedge fund based in florida, posted an article on the Minyanville Times web site questioning the solvency of Bear Stearns, a large investment bank based on Wall Street:

Credit Default Swaps Signal Brokerage Trouble

Bennett had noted that the cost of insuring Bears Stearns' short term obligations via Credit Default Swaps had risen dramatically:

Credit Default Swaps and The Big Swinging Dickette

"Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." -Warren Buffet, Excerpt from the Berkshire Hathaway annual report for 2002.

"The competitors better be scared shitless of us, because this is a platform that is going to win."-Blythe Masters, JP Morgan Executive credited with developing the Credit Default Swap

"Don't worry. No One’s Going to Get Screwed." -Blythe Masters,."-Blythe Masters, JP Morgan Executive credited with developing the Credit Default Swap

"I do believe CDSs [credit default swaps] have been miscast, much as poor workmen tend to blame their tools."-Blythe Masters

"Now I am become Death, the destroyer of worlds." -Robert Oppenheimer, Father of the Atomic Bomb, quoting from the Bhagavad-Gita

Blythe Masters

Before delving into the particulars of credit default swaps (CDS's), it is important to understand the mind set of the people that created and marketed these toxic financial instruments.

One cannot read an article concerning Blythe Masters, credited with conjuring up CDS's, without realizing that you are facing what the financial industry terms a Big Swinging Dick:

Big Swinging Dick

  Big Swinging Dick 

1. the financial industry's term for a rainmaker; a Wall Street executive who brings in enormous amounts of money for the firm, possibly because he has just screwed a customer.

An expression made famous by Michael Lewis in Liar’s Poker, published in 1989.
Here is how Michael Lewis summarized them in his book:

Wall Street Culture - Law of the Jungle

The below Wikipedia excerpt accurately describes the Wall Street Culture that led to the Savings and Loan Crisis in the late 80's and to the crisis that we face today:

Lewis attributed the bond traders' and salesmen's behavior to the fact that the trading pit required neither finesse nor advanced financial knowledge, but, rather, the ability and desire to exploit others' weaknesses, to intimidate others into listening to traders and salesmen, and the ability to spend hours a day screaming orders under high pressure situations. He referred to their worldview as "The Law of the Jungle."

He also noted that, although most arrivals on Wall Street had studied economics, this knowledge was never used; in fact, any academic knowledge was frowned on by traders.

Lewis also attributed the savings and loan scandal of the 1980s and 1990s to the inability of inexperienced, provincial, small-town bank managers to compete with Wall Street. He described people on Wall Street as past masters at fleecing and taking advantage of an undiscerning public, which the savings and loan industry provided in abundance.

Risk - The Black Swan

"Rara avis in terris nigroque simillima cycno." Latin for:
"A bird rarely seen on earth, and very like a black swan." -Juvenal

"Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others." - Micheal Lewis, Liar's Poker

"You are proof that some people are born to be customers (suckers)." -Michael Lewis, Liar's Poker

In 2007, shortly before the economic collapse, Nassim Nicholas Taleb came out with a remarkably prescient book, the Black Swan. In it, he explains his Black Swan theory:
  • Rare events have played a disproportionate role in history.
  • Scientific method often does not account for these hard to predict occurences.
  • Humans also are blind to these events and do not appreciate the disproportinonate role these events have played in history.

The book also has a remarkable section on the psychology that has allowed charlatans and psychopaths to take advantages of  the masses countless times in our history including this latest economic bubble implosion:

The Black Swan, Page 197

One only has to watch this glimpse of Nicholas Taleb trying these get these  points across to a clueless congress to know that we are doomed:

Nassim Nicholas Taleb - Scoop It

Nassim Taleb Speaks to a Clueless Congress (Part 2 of 2)

Financial Leverage and the Death of Bear Stearns

Give me a lever long enough and a fulcrum on which to place it, and I shall move the world. -Archimedes

"There is absolutely no truth to the rumors of liquidity problems that circulated today in the market." -Bear Sterns Press Release five days before it collapsed
You could detect a trace of fear in his voice. Mostly he seemed stunned. It was March 6, and one of Bear Stearns's top bond executives had dialed me up unprompted. The executive had dished about competitors in the past, but he had never initiated a discussion, much less one about his own firm. Now he explained that financial institutions that he dealt with - firms he had traded with for years - were suddenly asking him whether Bear had the cash to execute their trades.
The last days of Bear Stearns, Fortune Magazine, Roddy Boyd, March 31, 2008

Heaven Help Us All

"If it doesn't pass, then heaven help us all," -Hank Paulson, United States, Secretary of the Treasury

"The ultimate result of shielding men from the effects of folly is to fill the world with fools." -Herbert Spencer, English Philosopher (1820 - 1903)

“Socialism is indeed alive and well in America, but with a twist: This is socialism for the rich, the well connected, and Wall Street.”  -Nouriel Roubini, Professor Economics, New York University’s Stern School of Business

Eight Days: The Battle to Save the American Financial System, The New Yorker, James B. Stewart

Shock Forced Paulson's Hand: A Black Wednesday on Credit Markets; 'Heaven Help Us All', The Wall Street Journal, By DEBORAH SOLOMON, LIZ RAPPAPORT, DAMIAN PALETTA and JON HILSENRATH

House of Cards

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