Pawns of the Plutocrats

The Royal Society for the Arts, Manufactures, and Commerce (RSA) has been sponsoring lectures for 250 years. But only recently have they been producing a series of brilliant animations of the lectures themselves, including this one illustrating a talk on the financial crisis by controversial anthropologist and geographer David Harvey.




The analysis is frankly Marxist. I'm inclined to think he's right, though I don't know how much of a Marxist you have to be to think, "Some people have far too much money and are doing insane shit with it."

I couldn't help but notice, though, that Harvey is a little short on solutions. "We've all got to think and talk about this" is a little lame as a finale, though I guess "We should all have a big world revolution" is unlikely to fly with much of his audience.

Your Daily Dose of Paranoia

It's been a week since Wall Street's flash crash, when runamuck automated selling wiped out a tenth of my retirement fund--- and, somewhat less importantly, a trillion dollars of assets worldwide. The stocks have come back, but what I find interesting is that no one's actually found what triggered the manic selling. They seem to have ruled out mistakes by traders, so the whole "fat finger hypothesis" has been ruled out.

We are left with the rather obvious notion that Computers are Stupid. It's not a new idea. In Hardwired, written all the way back in the early 80s, I showed how automated stock trading systems could be stampeded into a stock panic.

Not that all those quants on Wall Street listened to me. They failed to learn the most important lesson of all: that I am smarter than they are.

No, that's not the real lesson. (Well, yes it is.) The real lesson is that they are not as smart as they think they are. (or as I am)

Leaving aside the question of whether you'd have to have a brain made of cottage cheese to now put money into a market that can lose a trillion dollars over a glitch--- and then shrug off whatever caused the glitch in the first place--- we have to ask ourselves if whether the flash crash was what I am pleased to call The Hardwired Scenario.

Which is to say that (as in the novel) the crash wasn't an accident at all.

The market wasn't burned all the way to the ground, so if the Flash Crash was deliberate, that means it was a proof of concept. It was someone proving to themselves, to a client, or to the United States that they had the means to cost our economy trillions of dollars and wipe out the investments of everyone in the U.S., and then some.

Who would do such a thing? The Chinese hackers who created Ghost Net and Shadow Network would do it just for fun. Russian hackers are all over the place, and often coordinate with their security services. Cybercriminals bored with their 419 scams might have decided to make some money shorting S&Ps. Or someone in a big Wall Street bank might have decided to show the government who's really running the country, and what the dangers of pursuing actual regulation might be.

Your guess is as good as mine. And your paranoia might well be better.

Return to Wall Street

Michael Lewis, author of Liar's Poker, returns to Wall Street for a thoughtful look at the meltdown.

"“You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold . . .

"But Eisman couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says . . .

"“You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says."

In other words, they were all crooks. They were all rotten. Top to bottom, from the biggest to the smallest, and the people who were supposed to separate truth from fact were a willing part of the con.

This is really worth reading.