"Profits, like sausages, are esteemed most by those who know least about what goes into them."
This morning Mike at MarketSci pondered why mutual fund managers just can't seem to get it right, yet he can (he has an audited track you can check):
Sometime around 5am this morning (sleep is for the weak) I read a week-old post from our favorite
economist liberal acolyte, Nobel Laureate Paul Krugman. Beginning his career as a caterpillar economist (churning out paper after paper by candlelight from the drafty Princetonian economics basement) he apparently cocooned sometime ago and morphed into a beautiful butterfly (aesthetically pleasing, but lacking substance or utility) for the NYT and democratic party.
His post was an exercise in Japanese efficiency, and Cinema Code era innuendo.
Its title: Sixteen Years.
Its lone content:
"A Tale of two presidents."
The sinister elegance of his post is just how little Mr. Krugman says. By intentionally structuring his "argument" (Clinton > Bush => Liberals > Conservatives) without actually forming a logical line of reasoning or corroborating commentary he is able to "appeal to popularity", since he knows his readership, and then compel the reader to draw Krugman's known conclusion, which was probably presupposed by said readers.
Now, before I get any further, you, dear readers, must realize that this I am not about to argue the merits of one party's policies versus another, or the merit of our previous two presidents. As always we welcome and enjoy your comments, but if you want to argue about the efficacy of economic policies, POTUS' effect on the economy, etc wait for another post.
This is about intellectual dishonesty.
"There are lies, damn lies, and statistics." -- Mark Twain (Attributed)
"Torture the statistics long enough and they'll confess to anything." --Widely Attributed
Mr. Krugman surely tortured these statistics, but like a first year associate in AG Cuomo's office, it didn't take long for the data to cave. And we all know, because John McCain reiterated ad nauseum during the elections, "Coerced confessionals are of limited value." While this kind of "analysis" may be acceptable in the nether regions of New Jersey (and the newly mortgaged NYT basement) I am pretty sure most high school math teachers would fail a student this intellectually dishonest.
To wit, his chart:
Utilizing the exact same data set he used I came up with the following...and this tortured soul confessed to a different crime entirely:
NB: 1) Party in Control is defined in the spirit of Krugman's post and reflects the party of the sitting POTUS.
2) As mentioned in the chart, all years are offset (t+2) to account for economic lag/momentum.
|Average Growth (PIC)||2.32%||-0.38%|
|Avg. Growth (month)||0.07%||-0.01%|
If you look in the expanded data series you can see a few things
No doubt some of you will rail that I am reading my own story into his blurb, and that may be true, but if you look at the comments on his post he succeeded in drawing out the reactions he wanted without even making an argument. Go ahead, read them, you can leave 1-2 for a second.
What was so irking about his post wasn't his conclusion (I couldn't have cared less), but rather the way he played with cheap synecdoche, ambiguity, and blatant intellectual dishonesty.
One thing I know for sure is that compliance would have my head were they to find a chart this blatantly cherry-picked in a deck.
You're better than this, Krugman.
Check out this PDF ,which appears to be the summary sheet for a $2,000 Kaplan course on Asset Backed Securities. I'm at a complete loss for words, for a change, to describe the epic fail at hand, one that must be evidenced first-hand to truly appreciate its sheer magnitude.
Perhaps achieving even a fleeting familiarity with the English language before trying to understand, nay, structure, trade, and value complex securities and derivatives would be a good idea, learn to crawl before you learn to walk, so-to-speak.
Just a hint.
Methinks those in Washington D.C. would be well-served to remember the law of unintended consequences.
Posted by Anal_yst on February 14, 2009 at 02:47 PM in Anal_yst, Congressional Economics, Current Affairs, Everything Old is New Again, Everything You Know is Wrong, Hating Liberals, Rants, Wall St. Meltdown | Permalink | Comments (3) | TrackBack (0)
Tags: Game over man! Cynical optimism, hope & prayer
This week, I received what I can only presume will be my final copy of Trader Monthly (November/December 2008). Pay no attention to the fact that we're in mid-February, there is far more important information, historically-relevant information, at hand.
Front cover, "Special Report:"
Congratulations to management on this momentous achievement, and best of luck to all employees currently trying to get back in the game.
Back in March, 2008, I sent an emal to Gretchen Morgenson regarding the Bear Stearns/JPM debacle, and her populist, Wall Street-hating coverage surrounding the situation. For some strange reason though, I hoped, despite all indications to the contrary, Mrs. Morgenson would clean up her act, knowing that people who actually have some semblance of financial/economic knowledge read her nonsense work.
Alas, almost a year later, she's one-upped herself, this time with a new, more vengeful ignorance that by now I've regrettably come to expect from the paper that employs such Financially illiterate (arrogant, annoying, etc) types as herself and Floyd Norris.
Curiously, now Mrs. Morgenson fancys herself an expert not only in all things Wall Street, but all things involving compensation, incentives, and policy. While I'm not particularly surprised or dissapointed at this point, readers should understand the righteous indignation with which I'm tempted to rain down upon her with, and the restraint I'm showing by avoiding the use of expletives, ALL CAPS, various other means of expressing such feelings in text. To clarify, explicitly, the following is not an attack on an individual (per se), but on the argument(s) which she presents, and will be sent to her in an email, again.
Regarding your recent article, "Fair Game: Bailout Needs Some Strings Attached to Limit Pay", I'm not quite sure where to start? At the beginning, perhaps:
“The panel’s analysis revealed that in the 10 largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66,” the report said. “This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.”
More taxpayer money down the drain, alas. And all the more reason to focus closely on executive pay restrictions at any bank that receives TARP funding.
Lets ignore, for a second, the fact that claims of "value" are for all practical purposes useless, given that no one can actually value the instruments in question, but frankly, I mean, holy non-sequitur Batman! If I'm following your "logic" here, because the Treasury overpaid for assets to which no one can accurately value, you conclude that we should limit the pay of the bank Executives that convinced them to do so, despite the fact that their job is to do precisely that, to get the highest possible price for assets? Seriously? Give me a break.
I think you'll agree that most of the ladies and gentlemen who sit at or near the tops of these firms are already financially well-to-do, no? Your plan is, to summarize, that we give the people who have the knowledge, ambition, and wherewithal (if anyone can be said to posses such things), a disincentive to fix the mess they may very well be responsible for creating? This, sense does not make.
Given the enormity of the task at hand - restoring the stability of the Global Financial System - perhaps we should be primarily focused not on punishing those deemed "responsible", but on creating an incentive structure to make sure those to which this task is left are those best equipped, and most likely to succeed.
I realize, however, because this concept makes sense, it has no place in your column, especially since it does so without fueling the indignation of the ignorant pitch fork & torch anti-capitalism crowd.
Much to my chagrin, It gets worse (much):
Although our long-running financial despond has produced few real positives, surely this is one: Investors are finally seeing just how regally executives live on their shareholders’ dimes. Maybe now they will do something about it.
Yes, Gretchen, making it, per your own admission, the Shareholders' problem, not the Government's.
During good times, banks either hide or try to justify such perks as fleets of corporate jets and Las Vegas junkets. But as companies run to taxpayers for their bailout billions, they are now being forced to forgo the Gulfstreams, the tee times at Pebble Beach and those sumptuous spa treatments.
No, Gretchen, these perks are not restricted purely to the Executives and Employees of Financial firms. As a matter of fact, firms (yours included, I'd imagine) rely on such perks in their every-day course of business. Are you suggesting that, at a time when Banks are already up the proverbial creek in terms of retaining, nay, generating new business, that we further restrict their ability to do so? Do you ever engage your brain before you put pen to paper (or fingers to keyboard, as it were)?
Considering this suggestion, if put into practice, would necessitate further layoffs and bankruptcies amongst the very firms that depend on corporate travel and entertainment spending, which we do not need any more of, I highly doubt it.
Could shame, that long-lost American character trait, be making a comeback? Not likely. So it’s important to make Washington’s plan to rein in executive pay airtight. Loud rebukes against executive excess are amusing, but a $500,000 cap on salary means only that the executives will be paid some other way. And requiring companies to recover compensation only if an executive is found to have lied on financial statements? Good luck with that.
Well, the voice of reason speaks, kind of. This is really the best part though, where you, Gretchen, presume to teach us all how you think we'll get out of this mess, thank god!
Here’s an alternative approach. How about requiring that any severance pay over $1 million be subject to an excise tax of 20 percent? This is the amount levied on golden parachutes, and it could easily be applied to severance at companies tapping the TARP.
Ahhh, the inevitably arbitrary, yet impressively chosen "million dollar" threshold, what better way to rile the masses? Far be it from me to point out that this approach simply amounts to a redistribution of money to The State, which I should remind you has such a great track record when it comes to deciding how best to allocate capital, but let's not let things like "logic" or "history" get in the way of your arguments here.
Furthermore, why not extract a 20 percent tax on all perquisites exceeding $50,000 that are given exclusively to top executives each year? These include such delectables as cars and drivers, country club memberships and personal use of corporate aircraft. If the government won’t bar perks outright, then executives should have to give something back for the freebies.
Gretchen, by what calculus did you arrive at these numbers? Even if you're speaking only of use of jets, drivers, and the like for personal use, $50,000 is still an arbitrarily low number, when a country club membership alone can cost $100,000+/year for a mid-to-fairly high-level club around a major metropolitan area. A driver, often included in compensation packages since an Executive's role is sometimes a 24/7 job, can cost substantially more than $50,000.
And while we are on the subject of excise taxes, the government should ban the deplorable corporate practice known as the gross-up, in which shareholders pay to cover an executive’s tax bills. Rank-and-file employees at these companies, who have been hit hard by the crisis, don’t get these deals. Why should anyone?
Gretchen, I'm sorry, you are either a shameless pandering hack playing to the already-angry masses to sell Papers, or an ill/un-informed idiot.
If shareholders don't want the executives of their portfolio firms receiving gross-ups as part of their compensation, then can - get this - not hold, or sell their shares in that firm or firms. Incredibly, they can also attend what we call a "shareholder meeting," among a variety of other ways they can air their grievances. Feel free to return to the realm of reality at any point, we'll be waiting for you.
IT is also important for the government to provide as many incentives as possible to get taxpayers’ money paid back quickly. So any executive pay restrictions might also state that if TARP funds are returned within a certain period — say, 18 months — the penalties can be avoided or refunded.
Oh, because this proposition won't incentivize Executives to do anything silly, like maximize short-term results to the detriment of long-term sustainability, no, we'd never expect anyone to do something so preposterous! Of course, this says virtually nothing of the fact that as long as Banks keep paying interest (preferred dividends) on TARP funds, repaying loans later, rather than sooner, may actually work out better for shareholders, as over a more distant time horizon, many asset values will likely increase closer (albeit likely not to) par. This is a gross oversimplification for which I apologize, but you should be comfortable with such shortcuts, so bear with me.
That which does not kill you makes you stronger, as the saying goes. If out of this near-death economic experience, shareholders emerge stronger and tougher on directors about me-first executives, more to the good.
Yes, you've hit the nail on the head, finally! Shareholders, not the Government, need to demand more accountability and results, more performance for the pay, so-to-speak. I do not disagree with the basic premise that when Government (or, as you're careful to say, "Taxpayer") funds are used, certain restrictions may be a good idea to ensure that said funds are not abused. However, not a single suggestion if your article comes close to making any sense whatsoever. If adopted, your proposals would, as I've already pointed out, likely accomplish the complete opposite results for which we should be desperately hoping.
Please, I implore you, issue a public defense of my criticisms, of your work. Nothing would make me happier than to see some actual supporting evidence or logic to back-up your claims and suggestions, that is, to prove my criticism unwarranted; I am not excited about my seemingly ever-declining faith in traditional media outlets and traditional Journalists like as yourself. Seriously, please, I beg of you, restore my confidence once more!
The latest bullshit populist bill to come out of the brain trust that is the U.S. Senate, per the WSJ, is aimed at those dastardly Private Equity and Hedge Fund robber-barons, o noesssss!
That this issue is once again on the table is hardly surprising in and of itself, but - and I didn't think this possible - somehow, the proposal is actually more ridiculous than it was the first time we heard about it, ya' know, back in the good ol' days when Steve Schwarzman was still ballin' out, and Trader Monthly was actually still in business.
Anyhoo, the gist of the Hedge Fund Transparency Bill, introduced last week by Chuck Grassley (R - Iowa) and Carl Levin (D - Michigan), essentially comes down to forcing Hedge Funds, Private Equity, Venture Capital, and similar funds with > $50mm AUM to disclose to the SEC, at minimum:
The rationale here is that hedge funds have gotten so big, and so entangled that they pose a serious systemic threat to the U.S. and Global financial system. One would be hard pressed to refute this basic allegation, although methinks its hardly enough to rationalize raining down with righteous regulatory indignation on the bulk of the alternative asset management industry. Unsurprisingly, we see our old friend, the classic Bloomberg-esque "Hedge funds for dummies" introduction, below which they cite several other factors (non sequiturs, mostly) supporting their call, among them:
The best part of this whole clusterfuck might be that necessarily, these guys must be delusional/dense/retarded to think that the Securities & Exchange Commission, which failed so epically over the course of the past several yours, is up to the lofty task of doubling (or worse) their responsibilities and workload. Clearly, the same group that totally missed the boat on Madoff, despite being spoon-fed 10 years worth of virtually every detail of the scam is up to the task.
For sure, all criticism should end here, QED, but just for shits & giggles, we move on...
Given the requirements spelled out in the numerical list above, the only thing this Bill actually achieves is to guarantee employment of the lawyers, bankers, and accountants whose job it is to devise ways to obfuscate relationships between owners, clients, affiliates, and investors. Someone should remind these two asshats to be careful what they wish for, since given the populist leanings of those in power, they very well might just get exactly what they're wishing for.