Back on Track

Not to make excuses, but when you’re helping plan a wedding, it doesn’t leave a lot of time for things like blogging. I’ll keep posting as often as I can, though. So without further ado, here are three interesting news items that caught my eye today. The first, from the Seattle Post-Intelligencer is the suggestion that Harry Potter may not survive the series of books that bears his name. (LINK). At csmonitor.com, Amazon’s list of bestselling books among US Military Personnel (LINK). And, from the Guardian UK, John Updike tells the Brits that they don’t have to be jealous of American novelists any more because those Brits are pretty good after all (LINK).

Several years ago, before I even thought of moving to Los Angeles, my mother, on a whim, bought an Ed Ruscha book for me. I grew up in an art friendly house with frequent trips to galleries and museums, and in college I took a modern art history class and spent a day going to art galleries whenever I went to New York, yet I had barely ever heard of Ruscha. Nonetheless, I found his paintings intriguing. They have always seemed like disembodied signs coming from some void. Then I moved to Los Angeles and saw how this town is like a graveyard for signs and billboards and advertising and words. In certain neighborhoods, there are decaying signs everywhere you look. Some are still in use; others sit forlornly atop buildings advertising some long lost place. I think there is enough room in Los Angeles to not have to go the trouble of taking these signs down and replacing them. In this vast and flat landscape you can just put up a new sign and leave the old one up for decoration. Ruscha (pronounced roo-SHAY) celebrates and pays homage to this living graveyard of a city, and from what I understand, his reputation has blossomed of late as he has shed the limiting mantle of West Coast Artist. A new book, the first ever monograph of his work, has come out recently. It is a beautiful book and it represents an elevation of the stature of this deserving artist. Here are 13 pages of art by Ed Ruscha.I love reading about the behind the scenes machinations of politics and government. There are so many events of global significance that are swayed or even caused by the actions and words of the two or three most powerful men in the world at any time. The idea that most of our recent Presidents have taped their behind-closed-doors conversations is almost too good to be true for anyone interested in the inner workings of American power politics, and a collection of these tapes has come out. The White House Tapes: Eavesdropping on the President is a nine CD and book set that includes the taped conversations of every president from FDR to Reagan (excluding Carter). It chronicles some of he country’s worst moments (Nixon’s “Smoking Gun” tapes) and some of our best (Truman hashing out the Marshall Plan). The ninth CD is a companion documentary produced by American Radio Works. There are many amazing and readable books about history out there, but it’s not every day that you come across such compelling and significant source material.

A few weeks back the Rake posted a first look at Cormac McCarthy’s forthcoming No Country for Old Men that he spotted on the forums of the “Official Website of the Cormac McCarthy Society.” Now from those same forums comes news that an excerpt of No Country will run in the Summer 2005 Virginia Quarterly Review.

Last week, Max directed our attention to a major new piece of reporting on the financial crisis: a Portfolio article by Millions favorite Michael Lewis. The author of Liar’s Poker, among other books, Lewis is a gifted explainer of an industry badly in need of explanations. In the Portfolio piece, for example, he immerses us in the world of short-sellers who saw the subprime meltdown coming. However, the key paragraph – wherein trader Steve Eisman has an epiphany about how investment banks are leveraging subprime bonds – resorts to a sports metaphor, and thus fails to demystify an elusive instrument at the center of the financial crisis: the credit default swap (CDS).”When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats,” Lewis writes.But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans.’I’ve heard financial insiders inveigh against peons who “don’t know a credit-default swap from a turnip,” but how are we to wise up, if explanations only come in the form of metaphors (athletic or agricultural)? Grabbing a fig leaf from the N+1 playbook, as it were, I decided to ask a friend in finance to explain the Peyton Manning analogy, as simply as possible. Here’s what he had to say (wait for “the rub”):Assume the following: Eisman buys a crappy mortgage security (say, a $1,000 bond from a mortgage given to a strawberry picker who makes $14,000 dollars per year). Say the mortgage rate the strawberry picker pays is 15%. This means he’s agreed to pay $150 a year to Eisman. But Eisman is worried that the strawberry picker will default because the guy’s house value has collapsed and his income is drying up. Thus, Eisman wants to buy insurance on the $1,000 he’s loaned. The way he does this is via a credit default swap.A CDS is essentially an insurance policy on a loan, and here’s how it works. Eisman finds a counterparty willing to sell him insurance on his loan (a big investment bank like Lehman Brothers). Eisman agrees to pay the bank a fixed rate every year for protection of the mortgage security he owns (the crappier the loan, the higher the rate). Let’s say for the $1,000 loan to the strawberry picker, his rate will be 10%. The bank pays him nothing on a regular basis, BUT, if the borrower defaults, they pay him the full $1,000.So: if times are good and everyone makes payments on time, the payments are structured as follows: The strawberry picker pays $150 per year to Eisman; Eisman pays $100 per year to Lehman (which then uses some of the cash to provision for losses, and uses the rest to make more loans). The strawberry picker gets to keep his house, Eisman keeps $50 per year (loan payment from strawberry picker minus the insurance premium he pays to Lehman), and Lehman gets $100.Got the structure? Now here’s the rub.Imagine Eisman never actually had exposure to the loan in the first place. Being the brilliant skeptic he is, Eisman would never lend $1,000 to a strawberry picker with little income. He thinks that strawberry man is doomed to default on that loan, and he actually wants to bet AGAINST him. So instead of giving the loan and buying insurance, he just buys the insurance (hence the often used and rarely understood term “side bet”). To do this, Eisman still has to pay the “premium” for the insurance he’s bought, and since it’s a risky loan, the rate is high (e.g. $100 per year in the example above). [Though he stands to win $1,000 if the loan defaults.] In effect, Eisman is paying a “subprime-like” interest rate to Lehman every year! That’s what Lewis was getting at.I would have used a different metaphor. I would have said it’s like a New Yorker buying a bunch of home insurance policies in New Orleans because you are expecting that there will be a massive hurricane coming to wreck them. Now lets say that the insurance company took the money you were giving it, didn’t provision for the coming doom, and instead, used that money to lend to more people building and buying houses in New Orleans.That’s leverage upon leverage upon leverage. And that’s the mess that is unraveling before us.