Looks like art, smells worse

Here's a nice graphic over at Slate showing how much money has been committed to assorted bailouts and how much has been actually spent. Totals: ~$5.6 trillion promised; ~$2.3 trillion spent.


Slate's Flash graphic looks very much like a slick, Pop version of a Kenneth Noland abstraction. That's utterly not relevant to anything, except writing the word "Pop" and Noland's name in the same sentence gave me a unnatural rush of naughty glee.

Meanwhile, the New York Times' profile of Harvey Miller, the $1,000/hour bankruptcy attorney in charge of winding down the fetid corpse that once was Lehman Brothers, offers this harsh observation:

From his perspective as Lehman’s undertaker, Mr. Miller believes that the fallout from the firm’s messy bankruptcy could have been avoided. Regulators could have stepped in, he says, not necessarily to save Lehman, perhaps, but to head off the meltdown that followed. “They totally missed it,” he says. “Look what happened.”

When companies rushed to terminate contracts with Lehman, he says, investor confidence plummeted in just about everything — securities and the markets they trade on, corporate debts and the assets backing them, the power of the government and its readiness to use it. In the days after Lehman filed for bankruptcy, he notes, demand for corporate debt utterly evaporated.

The failure of a Wall Street firm poses its own special risks, because other companies that rely on it — such as counterparties to complex financial contracts known as derivatives — are all financially exposed to its collapse.

That’s why Mr. Miller says it was crucial for the government to head off the wholesale termination by counterparties of all their transactions with Lehman before the firm was forced into bankruptcy. “If the Fed or the Treasury said, ‘Let’s say to Lehman, there’s no bailout, we’re not going to save the company,’ they could have supported an orderly unwinding of all the transactions over a period of months,” he says. “It probably would’ve cost the economy a lot less money.”

Lehman owes counterparties and creditors $640 billion. A little planning and order when dealing with that fact beforehand would seem a good idea.

A little bit Moody about investing

A long article in the New York Times today looks into one significant factor in the credit market collapse: bond rating agencies' going too easy on their evaluations of the risks surrounding a slew of mortgage backed securities. In the abstract, it's interesting reading. In real life, it's cause for rage.

The article focuses on Moody's, one of the big rating agencies on Wall Street, and on its role in facilitating the housing bubble (the others are Standard and Poor's and Fitch). Basically, it goes like this: Mortgage originators securitized the mortgages they produced into various financial instruments like bonds, collateralized debt obligations, etc. so they could sell these instruments to investors eager to get a good return on their money. The sale of the instruments produced cash which loan originators could then use to generate more mortgages. It's the job of a company like Moody's to assess the risk associated with the securities and assign a grade to them based on an estimation of the quality of the underlying debt. In the words of a Moody's spokesman quoted in the Times:

“Moody’s credit ratings play an important but limited role in the financial markets — to offer reasoned, independent, forward-looking opinions about relative credit risk, based on rigorous analysis and published methodologies...”

Nice spin with that "but limited" bit, eh?

Whatever.

Let's look at the "reasoned, independent, forward-looking" part of the statement. Financial instruments built out of mortgages and other sorts of debt are often divided into slices called "tranches" (tranche = slice in French) with a heirarchy of risk and reward assigned to each slice. Higher tranches get paid before lower ones. When all the debts in the security are paying as they should everybody gets a piece of the action. But as mortgage holders get behind in their payments or (worse) default, the lower tranches get nothing while the upper guys still get paid. I know that's horribly complex, but that's the way they do things. And complexity can be profitable.

So the Times reports:

Consider a residential mortgage pool put together in summer 2006 by Goldman Sachs. Called GSAMP 2006-S5, it held $338 million of second mortgages to subprime, or riskier, borrowers.

The safest slice of the security held $165 million in loans. When it was issued on Aug. 17, 2006, Moody’s and S.& P. rated it triple-A. Just eight months later, Moody’s alerted investors that it might downgrade the top-rated tranche. Sure enough, it dropped the rating to Baa, the lowest investment-grade level, on Aug. 16, 2007.

Then, on Dec. 4, 2007, Moody’s downgraded the tranche to a “junk” rating. On April 15 of this year, Moody’s downgraded the tranche yet again; today, it no longer trades. The combination of downgrades and defaults hammered the securities.

Millions in debt were rated an excellent risk in 2006. The same -- exactly the SAME -- debt gets a not so good score in a year, and four months later it's junk. Now nobody wants any of it at any price. This one example of a scenario that has been repeated untold times since the boom went bust and would appear to be what passes for "forward-looking" in the world of risk assessment.

Then there's the issue of "independent" opinions. Used to be that Moody's got paid by the people who bought securities, not the guys selling them. That changed in the 70s. Now the issuers of credit instruments pay rating agencies for the rating service, and the conflict of interest is just about inescapable. Add to that the pressures to maximize shareholder profits (Moody's went public in 2000) and you get a real problem. From the Times:

By the time Moody’s became a public company in 2000, structured finance had become its top source of revenue. Employees in this unit rated bundles of assets like credit card receivables, car loans and residential mortgages. Later they rated collateralized debt obligations, or C.D.O.’s, yet another combination of various bundles of debt.

Moody’s could receive between $200,000 and $250,000 to rate a $350 million mortgage pool, for example, while rating a municipal bond of a similar size might have generated just $50,000 in fees, according to people familiar with Moody’s fee structure.

A standard of profitability at many companies is its operating margin, which measures how much of its revenue is left over after it pays most expenses. While operating margins at Moody’s were always enviable — in 2000 they stood at 48 percent — they climbed even higher as revenue from structured finance rose. From 2000 to 2007, company documents show, operating margins averaged 53 percent.

Even thriving companies like Exxon and Microsoft had margins of 17 and 36 percent respectively in 2007. But Moody’s and its counterparts were not founded to be profit machines.

Structured finance is a generic term for all those complex securities we've heard so much about as the financial markets spazzed out. The more complex the financial instrument, the more a rating agency could charge to assess its risk. A huge amount of money was on the line with each rating. This is what passes for "independence" in the world of risk assessment.

As to "reasonable," if we are to apply a pragmatic test -- say, looking at whether or not their ratings accurately reflected the realities of the products under scrutiny -- the verdict can't be kind. How could anybody claim that reasonable opinions about risk ended up with a global financial meltdown? As with the tech bubble before it, the housing bubble was irrational, and Moody's was integral to the irrationality.

There is ample blame for this mess. Subprime lenders who asked nothing regarding the credit worthiness of people who were buying houses they couldn't afford, government regulators who allowed big banks and other financial institutions to value their assets according to the "reasonable" opinions of rating agencies and didn't regulate like they should have, banks that leveraged every buck they had on deposit 30 times in reckless bids to maximize profits, doofus home buyers picking up properties on spec so they could flip them quick in an ever-rising tulip mania of a market -- all those guys and others had a big share in the mess.

But credit rating agencies like Moody's enabled a baseless boom by propping up false assessments of the underlying value of the securities that kept the credit flowing beyond any reasonable limit.

Past blast

Back in the early 1980s, a good friend let me use his computer to type up my resume -- my first experience ever with a word processor. The machine was a Kaypro (pictured above) which ran an operating system called CP/M on a Z-80 CPU. With a whopping 64 kilobytes of RAM and two 5 1/4-inch floppy drives, its capabilities were somewhat limited, but it worked as long as you remembered to save your document frequently.

I found the picture today here. Unfortunately, I've lost track of my friend.

Chuck, If you're out there drop me a line.

Money and art

UBS -- the Swiss banking giant which employs retired Texas A&M economics professor, former senator, handmaiden to high finance, and noted pissant Phil Gramm -- the Swiss banking giant which was the center of a recent tax-evasion scandal involving indictments of its Global Wealth Management division and Gramm's fellow UBS board member Raoul Weil over a scheme to allegedly hide $20 billion or more in assets belonging as many as 17,000 US citizens from the IRS -- that UBS -- is the main sponsor of this year's Art Basel Miami Beach. UBS was a sponsor last year's event in Florida, too.

UBS likes art. Or art collectors. Or art collectors' lucre.

ABC News reports:

According to the indictment, UBS bankers "solicited new business from existing and prospective United States clients at Art Basel Miami Beach."

"They sent their salespeople here. They have encrypted computers. They smuggled assets out of the country to help those people conceal what they should have paid the IRS," said Jack Blum, a Washington tax lawyer and consultant to the IRS. "So the question is, why should a bank like that be allowed to continue in business?"

So you go to an art fair to see some art? What're you some kind of schmuck? It's about the cash, numnutz. Sure you can pick up a Clemente at Mary Boone or a Sugimoto at Gagosian. Who can't? And what about a Francis Bacon doodle or a sweet sweet Larry Rivers bauble at Marlborough? Heck pal, with all those tax-free Swiss franks, why not get them both? But don't forget to drop by the smilin' folks over at the UBS booth. The can fix you up for some fine tax scams that'll make your capital gains -- aesthetic or financial -- just plain disappear.

Only chuckleheads play fair.



I don't know. It just came to me.

Grass fed

Not long ago my wife and I bought a quarter steer from our egg lady. One of the compensations we get for living in a very small east Texas town (a local monthly calls itself the voice of the Upper East Side of Texas, heh) is that we have access to some incredible tasting, sustainably raised meat and eggs. The egg lady delivers a couple dozen free-range eggs -- okay, the chickens range freely, not the eggs -- regularly. And annually she slaughters a steer, parts of which we have bought on a couple of occasions.

A word about grass-fed beef: it's delicious.

Since the animal spends his life walking around and not penned, it can be a bit chewy if it's over-cooked. On the other hand, exercise gets blood flowing in its muscles and a diet of carotene-rich herbage both adds flavor and makes the fat distinctly yellow. Cattle evolved as grass eaters. They have a digestive system designed by millennia of natural selection to get the most out of a very fibrous, low starch diet. This document from Colorado State begins:

The rumen is a fermentation vat par excellance, providing an anaerobic environment, constant temperature and pH, and good mixing. Well-masticated substrates are delivered through the esophagus on a regular schedule, and fermentation products are either absorbed in the rumen itself or flow out for further digestion and absorption downstream.

It continues:

Feed, water and saliva are delivered to the reticulorumen through the esophageal orifice. Heavy objects (grain, rocks, nails) fall into the reticulum, while lighter material (grass, hay) enters the rumen proper. Added to this mixture are voluminous quantities of gas produced during fermentation.

Ruminants produce prodigious quantities of saliva. Published estimates for adult cows are in the range of 100 to 150 liters of saliva per day! Aside from its normal lubricating qualities, saliva serves at least two very important functions in the ruminant:

• provision of fluid for the fermentation vat
• alkaline buffering - saliva is rich in bicarbonate, which buffers the large quanitity of acid produced in the rumen and is probably critical for maintainance of rumen pH.

All these materials within the rumen partition into three primary zones based on their specific gravity. Gas rises to fill the upper regions, grain and fluid-saturated roughage ("yesterday's hay") sink to the bottom, and newly arrived roughage floats in a middle layer.

Then comes an illustration that may owe a lot to Carroll Dunham:


Or maybe not.

The point here is that cattle evolved an extraordinary digestive tract that has nothing to do with eating and digesting grains like corn. Feeding corn to cattle is an industrial agriculture practice and owes its being to economic factors and not good animal husbandry. Basically you can get a steer fatter faster on less land if you feed him corn. But a corn diet can also make the steer sick, so he also gets frequent doses of antibiotics.

The economics of corn are downright Byzantine with market distortions arising from huge agribusinesses like Monsanto and from USDA farm subsidies. Growing corn is also intricately linked to America's consumption of fossil fuels (transportation, processing, fertilizer manufacture, etc.) Michal Pollan's book The Omnivore's Dilemma covers much of this info in engaging detail. Apparently there is molecular evidence that US citizens consume more corn (via corn sweeteners, animal flesh raised on corn diets, and so on) than do Mexicans.

Tonight I cooked a T-bone steak from our quarter steer for dinner. Grass-fed beef. I seared it in a steel skillet and let it rest while I fried some turnip pieces in the pan drippings. When they were nearly done, I added a chopped shallot and later some smoked turkey stock. After reducing the stock, I added some lemon juice and some grated horseradish.

I cut the meat off the bone and sliced it for serving with the turnips and juices. Nobody ate better. It was rich and flavorful and simple and right.

It was a huge steak. There is leftover meat for salads later and the bone and trimmings are in a stock pot simmering as I type.

Pimp my Prius

Over at Juiced Hybrid you can buy all sorts of widgets to make your Prius cooler, hotter and more efficient. Items range from a bolt-on chassis stiffener:


To a device you plug into the car's diagnostic system that promises to teach you how to improve your mileage:

To an electronic module that will make your Prius run on battery power only at speeds up to 34 mph:


To a $5,000 kit to convert your Prius to a plug-in EV car with 360 lbs of extra batteries and a huge increase in mileage:


Juiced Hybrid claims you can expect up to 100 mpg with the extra batteries.

I searched the site and found no offerings for Prius duallies:


They did have a link to a Prius autocross race, though:




Somebody should organize the Texas Grand Prius (Marfa to Terlingua, say). I'd enter.

Talking and writing

I'm actively procrastinating honoring a review commission. It'll happen, just not today. The ideas are coalescing. The images and wider-world references and associations have begun to arrange themselves. I've not written it, however.

Today instead I did a bit of yard work and noodled about in my studio and on the Web. Here's something I found on line this afternoon via a link at Smith Magazine:

Of course I don't think only about writing. I spend time with my wife, family and friends. I read a lot, watch a lot of politics on TV. But prose is beavering along beneath, writing itself. When it comes time to type it is an expression, not a process. My mind has improved so much at this that it's become clearly apparent to me. The words, as e. e. cummings wrote, come out like a ribbon and lie flat on the brush. He wasn't writing about toothpaste. In my fancy, I like to think he could have been writing about prose.

Yes, I had that cummings line in mind before I began. I knew I was heading for it. By losing the ability to speak, I have increased my ability to communicate. I am content.

The writer is film critic Roger Ebert. The quote is from a Sun-Times blog post that dates from late October of this year. I recommend it.