Economics

October 16, 2008

Frankie Say: Relax (Don’t Do It)

The first time I saw a swan we were on a class trip to Central Park (Look, kids!  Nature!)  White and fluffy and graceful, that swan was nothing like the flying rats we had back in Brooklyn.  I remember, too, that our teacher said a pair nested every September over at the 79th Street Boat Basin.  I bet this year those swans are black, though.  After all, can there be any other explanation for daily market moves that look like annual returns? 

Of course, volatility decreases with the square root of time — but increases Pepto-Bismol sales exponentially — and spreads a pall over the land.  Go find a trader at day's end; they're a mess.  Better yet, go find a lender looking to make a loan to a PE-backed company.  Good luck: I'm told they've all called it a year.  Nor has the innovation economy been spared: even my neighbor here in Silicon Valley who's working on some cold-fusion, perpetual motion, flux capcitor gadget has his own personal raincloud nowadays. 

But I try to keep upbeat.  Isn't that my duty as an American (or is it to go out and shop?  I forget).  And I was doing a pretty good job of staying positive until my old buddy Copter called.  (Back in the day, we called him Copter because because he was unflappable, he had no flaps.  Get it?)  Anyhow, Copter lives the Wall Street life, complete with pocket square, and he rings me every now and again to take the pulse of an institutional (or as he would say, "institutionalized") investor.  And this time, after some chit-chat, he swooped in on me with some blood pressure-raising questions.

"So how do you think people are fixed for liquidity?" he asked.  "You think cats are going to start defaulting on capital calls?"

"Naaaah," I said.  "We're talking about professionals.  Things would have to get pretty extreme." 

"But what if it got to that?" probed Copter, "Would it make sense for funds to start pre-emptively calling capital to build a cash cushion in case people did default?"

And with those words, a wave of dread washed over me; I suddenly felt like the green-eyeshade bank teller who slides open his window only to be greeted by a line of angry depositors stretching out the door and around the block.  "Copter, you're talking about a run on the LPs.  That's madness!  You quit that right now!  Relax."

"Relax, don't do it?" Copter said.

"Yeah, relax, don't do it,"  I replied.  But quoting 80s songs felt kinda lame when talking high finance, so I decided to go for some gravitas and drop some B. Franklin on old Copter: "Remember, Slugger, LPs and GPs are partners in this thing and if we don't all hang together, surely we shall all hang separately."

"On that note, bruddah, I gotta go hang at Gotham Grill with my girly-girl," and Copter hung up the phone and whirred off into the New York night.

As I sat there in a vortex of prop wash a continent away, I was relieved to see a email from my buddy Peter that turned the day right around and contained some of the best advice I've seen so far.  Fabricated or not, I gotta say the screen below contains perhaps the best Bloomberg headline ever.  Forget the Fed, I got my bailout from the BOJ (that's Bank of Jamaica, not Bank of Japan):

Image001

[Hey, mon, if you created this and own a copyright – or if you're Bloomberg – and want this taken down, email me at the link above]

September 29, 2008

Economic Analysis, Silicon Valley Style

I dig lingo.  Sure, a picture might be worth a thousand words, but a nice hunk of jargon has got to be worth at least a few hundred.  And if it's jargon you're looking for, I'd bet there's no better place to find it than Silicon Valley. The cocktail of business and technology – with a splash of disregard for the rules of grammar and spelling – make this place a jargoneer's paradise.  (Although sometimes the whole thing goes too far:  One.  Word.  Sentences.  Quit.  It.  Srsly.  Hey, I wonder if grammr.combeta is taken?) 

Anyhow, there I was at the Fall potluck dinner at mini-LP's nursery school, feeling a smidge out of place since I was the only one not sporting gear emblazoned with the logo of a NASDAQ 100 company, and the topic turned to (bum bum bum buuuuuum) The Subprime Crisis!  Suddenly, all eyes were on me: Financial Dude.  One dad growled, "so how did it get to this?" in that same exasperated tone that TV detectives use as they toss the legal pad and bic pen toward the perp demanding: "write it all down, just like you told me."

And so I started talking about what I thought had really gone on.  At first it was kind of cathartic, but then, the more I talked the worse I felt about the whole thing.  It was like I was describing a case study in the principal-agent problem.  Make that the World's Biggest Principal-Agent problem.  And that's what got me down: professional investors should be attuned to agency issues.  Everyone should've seen this coming, but the good times were rolling and there was always a greater fool in another time zone to take the mess off your hands.  Of course, that's a game that works until it doesn't.  But I digress.

So I'm going on and on about marginal borrowers (my favorites were the NINJAs: No Income, No Job or Assets), CDO tranches, investors looking for spread product, and mark-to-whatever accounting when I notice a few eyes starting to glaze over.  And right then, one dad pipes up: "So it sounds like they were overclocking the financial system."  Now I didn't quite know what that meant, but I sensed some good jargon coming on and I was eager to unpack that box like a kid on Christmas morning. 

Your Humble Narrator: "Overclocking?  What's that?"

Really Smart Dude: "It's when you mess with your computer's processor to get some more performance out of it."

YHN: "Why do that?"

RSD: "Well, most overclockers are gamers looking to push the limits.  Exceeding the processor's specs can result in a major framerate bump.  Others do it for ego reasons; you know, they just want to have the fastest processor on the block.  And some people even go out and buy old processors on the cheap, overclock them and sell them as the latest chip to unsuspecting buyers."

YHN: "Srsly?"

RSD: "It gets pretty crazy!  The problem is that overclocked processors run really hot – often hotter than conventional heat sinks can handle – so overclockers sometimes build crazy structures to keep the whole thing from blowing up."

YHN: "Blowing up?  For real?"

RSD: "Well, blowing up is a bit extreme, but the processor can catch fire for sure.  And once you get a fire inside the machine, the whole system could be at risk.  Either way, if you get to that point it's an expensive fix."

Expensive, indeed.  Aside from the magnitude of their blow-ups, overclockers of the processor and financial variety sounded a lot alike.  Of course, it looked like the financial overclockers were going to get all of us to pick up the tab for their blow-up . . .

When I was a kid, a bank in my neighborhood got robbed and the block was abuzz with talk of the brazen heist.  Among all the hand-wringing and fist-shaking, Old Man O'Malley, ever the neighborhood cynic, dropped a nugget through the fog of Garcia Y Vega smoke that continually encircled his head.  "Morons," O'Malley growled, " . . . if you're going to rob a bank,  don't take down the one on the corner, go hit the Federal Reserve.  That's where the money is."  I've thought of that line a lot recently and I can't help but feel that's exactly what just happened.