Too Big To Fail

Too Big to Fail > Too Big to Save = Too Big

I am a free market capitalist who recognizes the need for oversight and regulation of financial markets, but who also embraces the concept of "little government"; at least as far as market interference is concerned. One lesson I have taken away from the epic events of these past 18 months is that if or when a financial institution becomes "too big to fail", in the parlance of our be knighted times, then it is too big.

No one institution should be so big and so powerful that its demise would pose catastrophic systemic risk. It is ironic that the Chinese and Japanese now hold so much of our debt that they could never "dump" these securities on the market and indeed have no choice but to keep buying Treasuries because: the USA is "too big to fail".

Hard Questions About "B" School

In watching the CNBC documentary on Harvard Business School recently- now somewhat dated since it was first aired in the Fall of 2008- just as the current economic crisis entered its "terminal" phase; I wondered:

1. Is an MBA necessary?

2. Is a Harvard MBA that much better than one from a university less celebrated in popular culture?

3. What do you make of the fact that Bill Gates, Warren Buffet, Larry Page and Sergey Brin, Michael Dell and many other very successful business people did not go to any business school?

Yet I also wondered what has happened to all of the graduates of Harvard "B" school? Have all of them gone on to fame & glory? Does a Harvard MBA guarantee success? No, of course not. So what are the statistics? How many of those who matriculate at Harvard Business school, or any accredited business institute of higher learning for that matter- go on to distinguish themselves in business or in life? How many go on to disgrace themselves?

Aside from Jeff Skilling, that is...Despite all of the knowledge you gain from 2 years at Harvard "B" school (wisdom only comes with real world experience), could it be that one is ultimately handicapped by hubris? By the very sense of self-satisfaction- indeed the arrogance that one feels simply because you made it through the vaunted MBA program at Harvard? Conferring as it does an elite status upon its graduates?

You are now a "master of the universe"; or soon will be. An interesting comparison to Harvard "B" school is West Point- easily the most elite of all US military academies. So how many Robert E. Lees and Douglass MacArthurs did West Point actually mint? How many went on to fame and glory and conspicuous accomplishment? And how many went onto utter obscurity, or worse- ignominy?

Have there been U.S. military heroes, covered in glory from real world sacrifice- who would never have made it through the program at West Point?

On Complex Financial Modeling

"Those whom the gods wish to destroy, they first make mad." (ancient proverb, falsely attributed to Euripedes)

"Those whom the gods wish to destroy, they first teach math." (modern variation on ancient proverb / Niall Ferguson)

American Values Redfined?

The more I read in the media these days about a secular, cultural shift away from the greedy and wicked ways of the past to a more practical way of life- rooted in simple Yankee austerity and time spent around the dinner table with family, the more I am reminded of the zeitgeist following the Crash of '87. For that is exactly what some wondered aloud in its aftermath. "As long as we have a roof over our heads, food on the table, family and our health then does the money really matter?"

Yeah, sure. "Maybe we can forget about the Hamptons and start a gift card business?" Right! I realize that at the age of 48 my speaking about the Crash of '87 to the 20 and 30 "somethings" of today I must sound like a guy who spoke about the Crash of '29 to the 20 and 30 "somethings" in 1987 (me). Yet as the subsequent bubbles and bursts have shown, the money does matter. We are only human. History does not repeat itself- it is the nature of humans which is constant.

After the fall of Rome someone might have wondered if the age of obscene self-indulgence and mob blood lust had passed forever into history; after all the barbarians were quite literally at the gate. The lost empire extant only in partially ruined marble, surely lessons had been learned! Been to a hockey game lately? Or any sporting event, for that matter? Please tell me that the mobs who pack our stadiums today are really any different than those who packed the Coliseum in imperial Rome.

Ancient Romans had no Blackberries and fantasy sports teams but I am quite certain they ate peanuts, tried to sit in the shade and went wild when their "team", or man either prevailed in the arena or was eaten by a lion. Forgive my cynicism (I warned you in my blog title!), but if the law today allowed for gladiatorial battles to the death in public arenas, there would be season tickets available on eBay. We have cage fighting though!!!

And clandestine dog fighting. Of course "Wall Street" has created far more than just citadels of money- it has helped create new businesses that have transformed our lives for the better in every field- from health care, to education, to communication and transportation. But just look at what the unfettered excesses of "Wall Street" have wrought: after witnessing the demise of "the financial world as we know it" comes the grim acceptance that the "too big to fail" crowd enriched themselves so far beyond what ordinary people can even imagine.

It's staggering; and as it now transpires, they did it in part with "our" taxpayer money or at least with the reassurance that they could always get bailed out. I cite the pension funds that were destroyed by the so-called "custodians", firms such as Lehman Brothers, who gambled it all away at 40:1 odds. I do not got to sporting events. I have no team, but I just might buy season tickets, peanuts and try to sit in the shade to see some of the Wall Street "oligops" fed to the lions!

Perhaps it's little more than a platitude, or statement of the obvious to say: there will never be an end to fear and greed, as long as the population of humans exceeds the material resources necessary for supporting itself in relative luxury. I realize this sounds quasi Marxist, but I am a capitalist! I don't like big government; but I also don't like revolting self-indulgence, especially when 97.825% of our citizenry lives in comparative poverty.

You have 7 houses, a helicopter (or 2), a Gulf Stream, 5 kids in elite private schools, eat out at the most exclusive / expensive restaurants in Manhattan almost every night of the week- maybe you even have a second family on the side, a personal fitness trainer, 17 in staff and gobs of money in the bank; yet even when you are full at the sushi bar, you cannot resist that 3rd plate of $125 O-toro sashimi.

The trouble with humans- one of many actually, is that we don't really know when to say "enough" until it is painfully obvious that you have had too much- often too late. Another manifestation of our communal self-indulgence? Gluttony and obesity in America today. One of the great ironies of this latter-day, bygone "gilded age" is that one of its princes, Henry Paulson ultimately became Secretary of the Treasury.

Not as ironic a development as Joe Kennedy morphing from predatory insider trader to head of the SEC under FDR, perhaps but ironic nonetheless. In 2000, when Paulson was the "top banana" at Goldman Sachs he led a delegation of other like-minded Wall Streeters to petition the SEC to relax its net capital rule from 15:1 to 40:1. Denied at first he got his way in 2002 and as a result suffered a near Dante-esque fate, spending his last days of public service sorting through the detritus (somewhere down the hall from Sisyphus with his rock).

I defy anyone to argue that, had 40:1 worked and the financial world as we knew it still been "printing money" today, another supplicant would now be petitioning the SEC for 85:1 leverage. So again- pardon my cynicism. Just as I embrace the maxim of "trust, but verify" I will believe that we have changed and will never go back to the obscenely self-indulgent ways of the immediate past, when I see it. And if I were a betting man.......

Custom Made Sofas as Alternative Investments

I am not recommending this! In fact I have just determined that investing in custom-made sofas is not good retirement planning. Today I received a check for $1,163; the proceeds from a consignment we made in December of 2 beautiful, custom-made sofas from Lillian August of Greenwich (O.K., I had never heard of them either, until we moved to Greenwich). We spent $6,000 + on these 2 sofas, upholstered in a lovely champagne colored damask fabric, and to my chagrin they were hardly used the entire time we owned our home.

In fact I bet no more than 27 "bums" settled into those sofas in the 3 years we had our house. My wife found them way too formal. My Dad thought they were too big. I now gather all of our relatives, friends and guests did not like them. I was sold! And my wife did nothing to stop me buying them! Everyone seemed to prefer the family room for congregating; where the big custom made sofas weren't, and where the big screen TV was; and where you could eat pizza, drink beer out of bottles and put your feet up.

People would sit down on these beautiful, champagne colored sofas with a look of consternation: "Please don't let me be the one to spill my red wine on these!" They looked like the belonged in the drawing room of some mansion- and while we had a very nice home, it was no mansion. So when I received my check today I admit that I was very happy- not because I had $1,163 to go and spend but because I was relieved of the obligation of collecting them in May and storing them again, or of having to cart them off to another consignment house- if no buyer could be found.

But this caused me to reflect: was our $6,000 investment better off in framing and stuffing 2 sofas, or would it have been better invested in the stock market? Had I invested the $6,000 in Google, RIM or Apple or in a cluster of other companies, I would have been much better off......If however I had invested the money in Bear Stearns, Lehman Brothers, Citigroup, AIG, Fannie or Freddie or in any number of other ravaged public companies I would have lost it all. So my wife should thank me for investing our money in the sofas. I think.