Thursday, April 22, 2010

Money is not Speech, Corporations are not People, and Fee Speech is not Free Speech

'Hold everybody accountable? Ridiculous!'
- W. Edwards Deming

'I repeat... that all power is a trust; that we are accountable for its exercise; that from the people and for the people all springs, and all must exist.'
- Benjamin Disraeli

'No we're not the same
Cause we don't know the game
What we need is awareness, we can't get careless
You say what is this?
My beloved lets get down to business
Fight the Power.
-Public Enemy

'The Financial Crisis Inquiry Commission, the body set up by Congress to examine the cause of the system-wide credit crunch, said yesterday that it would use its legal powers for the first time to force Moody's, the credit rating agency, to produce documents.'
-FT 04/22/2010

'If they can get you asking the wrong questions, they don't have to worry about the answers.'
- Thomas Pynchon

'The two enemies of the people are criminals and government, so let us tie the second down with the chains of the Constitution so the second will not become the legalized version of the first.'
-Thomas Jefferson

The rating agencies are the enemies of the people.

Once upon a time I sat down in front of the agencies. Had an exclusive to place a'third'a billion face of a rather unique asset class. In order to get the buy side to bite, of course, we needed a rating.

It is not in any way embellishment to state that the work done by the agencies on this deal was so amateurish, so ephemeral, that a high school student with the toolkit of 'opposable thumbs and frontal lobes' could have coaxed Senor Google into producing a superior report.

Ultimately the squints created a white paper and slicks in my biz waved it around industry conferences as if it were gospel.

Of course the gospel was built on the bell curve and the curve was based on assumptions.

While seers like Taleb and Mandelbrot have shown that it is the flight of an arrow and that reality is the tail risk, the coin flippers have heretofore admitted no more than hey... it's a modified coin flip and our assumptions, which we provided to you in the King's English, why they're free speech babe!

But verily, Money is not Speech, Corporations are not People,and Fee Speech is not Free Speech.

Shame that there isn't a smoking gun.

Waitaminnit ...

by Jesse Eisinger Oct 15 2008
Portfolio Magazine

In December 1997, J.p. Morgan closed on its first big credit-derivatives deal, the Broad Indexed Secured Trust Offering, or Bistro for short. Insurance companies and banks, the initial customers, were enthusiastic, snapping it up in just two weeks. The deal was enormous for the time, off-loading more than $9.7 billion of J.P. Morgan’s exposure. Morgan had succeeded in reducing its balance-sheet risk and was able to free up capital to buy its stock back.

J.P. Morgan would go on to launch a credit- derivatives assembly line, becoming the Henry Ford of the new financial market.

Bistro “was the most sublime piece of financial engineering that was ever developed. It was breathtaking in terms of beauty and elegance,” says Satyajit Das, a risk consultant and the author of Traders, Guns, and Money, a financial history. But “in many ways,” Das adds, “J.P. Morgan created Frankenstein’s monster.”

For J.P. Morgan, Bistro worked wonderfully. But even in that first deal, the weaknesses in structured finance and credit derivatives that would come to the fore in the 2007 credit-market crash were already there.

Despite its blue-chip assets, Bistro didn’t perform pristinely. The initial slice, the equity layer that Morgan retained as a cushion against trouble, was so thin that it couldn’t weather even one default from one of the bigger companies in the bundle. That ultimately happened, wiping the slice out entirely. The investors who were one notch up, in what’s called the mezzanine layer, lost money as well. Even the buyers of the top-rated tranches, which were thought to be rock solid, had to endure bumpy periods before they got their money back.

During that first major deal, the credit-rating agencies, which were supposed to be impartial, were already deeply enmeshed in the give-and-take of the process.

A former Morgan banker who helped create Bistro recalls that Standard & Poor’s was giving the bank a tough time. The rating firm would run the deal through its models, and “each time, it came up with disastrous results. We did some tinkering and all of a sudden, it could rate the deal,” the banker says.

AM Here: Tinkering!

What an innocuous word for fraud.

Move along nothing to see here.

1 comment:

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