Occupy Galt’s Gulch

“Each of us in this room has warmed ourself at fires we did not build, and each of us has drunk from wells we did not dig.”

— Mark Shields, as heard, October 1997

I am not ashamed to confide, O Dearest and Most Equable of All Readers, that I have had a version of this particular post marinating in my brain for more than five years, from almost the first time I began laying finger to keyboard at this modest opinion emporium. Lord knows I have had numerous opportunities to release it over the intervening period, what with, in sequence, 20-something investment bankers, 30-something hedge fund traders, and 50-something private equity mavens each trumpeting to the stars the overweening brilliance and talent of their professional accomplishments to any and all who would listen, and to many who would not. For those among you who have noticed, the exposure and ridicule of hubris among the Great and Good, the not-so-great and not-so-good, and the patently pathetic yet surprisingly lucky has been an overarching concern and even gleeful entertainment in these pages. It is somewhat of a hobby of mine, undertaken and cultivated, if for no other reason, than to remind Your Humble Servant that he should indeed try strenuously to remain as humble as he can. Because he sure as shit isn’t anywhere near as clever or accomplished as he would like to pretend to be.

To date, what has typically stayed my hand is an acknowledgement that any efforts to puncture the iron-clad self regard of the self-appointed financial elite would be doubly futile. First, because they would blink stupidly at me (metaphorically) for completely missing the point of their unquestionable magnificence, and second, because it has always seemed to me that the only people impressed by these individuals’ autofellation have been themselves. In other words, my targets have historically been both too impervious and too self-evidently ridiculous to bother.

What has tipped my hand at last has been the appearance, at Megan McArdle’s blog site, of a really excellent guest post by entrepreneur and investor Jim Manzi. Mr. Manzi’s capitalist credentials are indisputable, so I was both impressed and heartened to read the words he excerpted there from his newly published book:

Many entrepreneurs hold the opinion that “I did it all on my own,” which may be well adapted to leadership success in certain situations, but it is objectively myopic. The entrepreneur relies on an ecosystem of venture capitalists, risk-taking purchasers, and so on. This ecosystem itself rests on a deeper foundation of collective, government-led enterprise. The delivery of our software, for example, depended on the existence of the Internet, which is the product of a series of government-sponsored R&D efforts, in combination with subsequent massive private commercial development. Government funding has been essential to much of the university science that entrepreneurs have exploited. Honest courts and police are required for functioning capital markets and protection of assets; physical infrastructure is required for the roads and running water without which we would not spend much time thinking about artificial intelligence software. At the absolute foundation, national armed forces protect the whole system against external aggression. All of our exciting technical and economic innovations ultimately require men to stand watch all night looking through Starlight scopes mounted on assault rifles—and die if necessary—to protect our commercial, law-bound society. Would you do this to protect a billionaire hedge-fund manager who sees his country as nothing more than lines on a map?

Add to this, in my world, the foundational infrastructure of global financial institutions and markets, the extraordinarily complex socioeconomic web of laws, regulations, and conventions which protect, foster, and enable investment and speculation, and the enormously capable and complex bureacratic platforms from which most traders, investment bankers, and investors operate, and you begin to appreciate that these self-proclaimed supermen resemble Prometheus wresting fire from Mount Olympus for the benefit of mankind far less than spoiled rich kids born on third base who grow up convinced they hit a triple. (Not to mention that most of these clowns got rich on a flying trapeze constructed over a free safety net composed of the taxes, retirement savings, and future debt repayment powers of tens of millions of their otherwise completely uncompensated and unrewarded fellow citizens.)

So let me just say that I remain completely unpersuaded that traders, bankers, and private equity investors who have made fortunes over the last ten years deserve to be unconstrained, unregulated, and untaxed because they did it all themselves. Bull—if I may be so bold—fucking-shit. Go pull the other one, sweetheart. I’ve worked in finance for more than two decades. You can’t fool me.¹

* * *

Now don’t get me wrong, children. I think America, for all its various and distressing faults, is a remarkable country. In most countries in most ages of the world, the rich made their money the old-fashioned way: they stole it or they inherited it. For the last 200 years or so, we have run an experiment here and in a few countries abroad where capitalists have been allowed to create vast wealth for themselves and others based on sheer effort, talent, and—undeniably—loads of good luck. This is a remarkably heartening history. It is the unyielding bedrock for the Rawlsian contract which we all seem to enter into at birth, a contract which states that we will not unnecessarily constrain or prevent the great accumulation of wealth in our fellow citizens, as long as we have, ab initio, some non-trivial reason to believe we ourselves could be such a winner.

Jim Manzi puts it well (emphasis mine):

the fundamental tension of democratic capitalism [is that] winners... require shared resources produced by the losers. That is, the market economy requires broad social consent. Why should those who lose out in market competition give it?

Why indeed? Because they hope and expect that they, too, have some chance to be winners. If society evolves in such a way that winning becomes hereditary, or winners can rig the game in their favor, or losers have no chance to become winners because the gap is too wide, watch out. Social contracts are only worth the paper they are written on. And paper can be torn up.

The Mark Shields quote featured above remains graven on my brain, more than 15 years after I first heard it at an otherwise forgettable conference. It is true on its face, to anyone who will admit it. The rich and the successful in any society enjoy their spoils and their comforts at the sufferance of those whose lives, sweat, and blood have helped them earn it. This is what makes the Randian fantasy of capitalist übermenschen living self-sufficient lives in a remote canyon in Colorado—or, for the less self-reliant, modern titan, a condominium on Lake Geneva—so ridiculous. Most of the fat, pampered hedge fund managers and private equity moguls I know couldn’t survive a week without access to Whole Foods’ prosciutto bar, much less potable water, heat, and edible foodstuffs.

The complex, modern, secure, comfortable, and predictable society which we all enjoy at this time in history comes at a cost. It is expensive. And yet that cost, at least in this country, is subsidized for the rich by millions of fellow citizens who charge them less than market rates solely in the hope that they, too, might win the lottery of hard work and success.² It would behoove you sundry Masters of the Universe—tech entrepreneur, corporate executive, and financial titan alike—to remember this fact. Because the rest of us have not forgotten it.

And we vote.


¹ And don’t try to pull the “self-made man” shit on me, either, bubeleh. I’m one, too. It’s not any kind of excuse.
² Would you deny this? How else do you explain that the aggregate tax burden in this country is so low compared to other advanced Western economies with comparable or superior standards of living? Please.

© 2011 The Epicurean Dealmaker. All rights reserved.

Prolegomena to Any Future Life

I.

His vision, from the constantly passing bars,
has grown so weary that it cannot hold
anything else. It seems to him there are
a thousand bars; and behind the bars, no world.

As he paces in cramped circles, over and over,
the movement of his powerful soft strides
is like a ritual dance around a center
in which a mighty will stands paralyzed.

Only at times, the curtain of the pupils
lifts, quietly—. An image enters in,
rushes down through the tensed, arrested muscles,
plunges into the heart and is gone.

— Rainer Maria Rilke, “The Panther” ¹

II.

Here’s another didactic little story. There are these two guys sitting together in a bar in the remote Alaskan wilderness. One of the guys is religious, the other’s an atheist, and they’re arguing about the existence of God with that special intensity that comes after about the fourth beer. And the atheist says, “Look, it’s not like I don’t have actual reasons for not believing in God. It’s not like I haven’t ever experimented with the whole God-and-prayer thing. Just last month, I got caught off away from the camp in that terrible blizzard, and I couldn’t see a thing, and I was totally lost, and it was fifty below, and so I did, I tried it: I fell to my knees in the snow and cried out, ‘God, if there is a God, I’m lost in this blizzard, and I’m gonna die if you don’t help me.’” And now, in the bar, the religious guy looks at the atheist all puzzled: “Well then, you must believe now,” he says. “After all, here you are, alive.” The atheist rolls his eyes like the religious guy is a total simp: “No, man, all that happened was that a couple Eskimos just happened to come wandering by, and they showed me the way back to the camp.”

— David Foster Wallace, This Is Water ²

III.

We cannot know his legendary head
with eyes like ripening fruit. And yet his torso
is still suffused with brilliance from inside,
like a lamp, in which his gaze, now turned to low,

gleams in all its power. Otherwise
the curved breast could not dazzle you so, nor could
a smile run through the placid hips and thighs
to that dark center where procreation flared.

Otherwise this stone would seem defaced
beneath the translucent cascade of the shoulders
and would not glisten like a wild beast’s fur:

would not, from all the borders of itself,
burst like a star: for here there is no place
that does not see you. You must change your life.

— Rainer Maria Rilke, “Archaic Torso of Apollo” ³

IV.

Du mußt dein Leben ändern: You must change your life. That much is certain.

But I cannot tell you the way; you must find it yourself. For I am not a wise old fish, either.

Nel mezzo del cammin di nostra vita
mi ritrovai per una selva oscura,
ché la diritta via era smarrita.

¹ Rainer Maria Rilke, The Selected Poetry of Rainer Maria Rilke, ed. & trans. Stephen Mitchell. New York: Vintage International, 1989, pp. 24–25.
² David Foster Wallace, This Is Water: Some Thoughts, Delivered on a Significant Occasion, about Living a Compassionate Life. New York: Little, Brown and Company, 2009, pp. 16–23.
³ Rilke, op. cit., pp.60–61.


© 2012 The Epicurean Dealmaker. All rights reserved.

Can’t Buy Me Love

Say you don’t need no diamond ring
And I’ll be satisfied
Tell me that you want the kind of things
That money just can’t buy
I don’t care too much for money
Money can’t buy me love

— The Beatles, Can’t Buy Me Love (1964)


The best things in life are free
But you can keep ’em for the birds and bees
Now give me money (that’s what I want)
That’s what I want (that’s what I want)
That’s what I want (that’s what I want)
That’s what I want

Your lovin’ gives me a thrill
But your lovin’ don’t pay my bills
Now give me money (that’s what I want)
That’s what I want (that’s what I want)
That’s what I want (that’s what I want)
That’s what I want

Money don’t get everything, it’s true
What it don’t get, I can’t use

— The Beatles, Money (That’s What I Want) (1963)

Peter Thal Larsen called my attention this morning to a rather remarkable document published on Wall Street Oasis, a website which doubles as the virtual water cooler for junior professionals in my industry. The usual stock-in-trade there are articles which ask for and share advice, peer-to-peer, about jobs, banks, getting into the investment banking industry, and the like. As one might suspect for a website dominated by ambitious, competitive twenty-something males, in addition to genuine empathy and assistance the comment stream is shot through with boasting, insults, and other forms of social signaling common to communities overrun with testosterone and immaturity.

Hence the piece which Stephen Ridley (aka “anonymousman”) penned about his recent decision to leave investment banking for the life of an itinerant musician is remarkable for its candor. His assessment of the life of an investment banking analyst and his environment is unsparing, and spot-on:

Banking is fucking brutal. I knew this after my internship, but I didn’t care. I wanted money. I wanted respect. I wanted to be a somebody in the eyes of myself and others. But most of all, I wanted money. Why? Because money is freedom. Money means I can wear what I want, live where I want, go where I want, eat what I want, be who I want. Money would make me happy. Right? Well... not exactly I’m afraid. In fact, money didn’t seem to make any of the bankers happy. Not one person in the roughly 200 I got to know in banking were happy. Yet all earned multiples of the national average salary.

The reality of banking is this. Like everyone there, I worked my ass to the bone, working mind numbingly boring work. My life was emails, excel, powerpoint, meetings, endless drafts and markups about shit I couldn’t give less of a fuck about, edits, drafts, edits, drafts, edits, send to printers, pick up, courier, meetings, more work, multitasking, boredom, boredom, tired, boredom, avoiding the staffer on a friday, more work, depression, tired, tired, tired, fucking miserable. 15 hour days were a minimum, 16-17 were normal, 20+ were frequent and once or twice a month there would be the dreaded all nighter. I worked around 2 out of every 4 weekends in some form. I was never free, I always had my blackberry with me, and thus I could never truly [detach] myself from the job. These are the objective facts, contrary to what any “baller” wants to tell you. The only models were excel models, the only bottles were coca cola, which I drank a lot of to stay awake.

Stephen’s tale of woe is the norm among recent graduates who have landed coveted jobs on the corporate finance and M&A side of my industry. Sure, everybody I interview at university who is desperate for a position “knows,” in an intellectual sense, that investment banking is hard work, that it’s not really glamorous at entry levels (although they secretly hope it gets so higher up), and that the hours are punishing. But almost none of these bright, shiny-faced children has any clue how the routine, boredom, and isolation of the job can drain the life and happiness out of your early twenties, just when most of them expect to expand into their roles as newly independent adults in the “real world.” Nobody really groks the fact that spending 15–20 hours in the office, seven days a week, for months on end crushes your social life, alienates your friends, and ruins your love life or the chance to find someone new. No-one predicts they will get fat, unhealthy, pasty-faced, and cranky, or that these characteristics will undermine the supposed social attractiveness of a prestigious job and surplus spending money. These are life lessons you just can’t teach; they must be lived.

Besides, we on the other side of the hiring table have no incentive to describe the size and caliber of the cannons facing our prospective fodder. We need bodies.

* * *

Mr. Ridley’s motivation to get into the industry is not unusual, either. Few people I know, including first-year analysts, come into investment banking with the (honest) expectation and desire to make a lifelong career out of it, no matter what they tell their interviewers. They think they will trade their time and freedom for a few years for money, money which can buy them the freedom to buy, have, or do other things later. But forget the (an)hedonic treadmill: it turns out that no money is ever enough. You almost never “strike it rich” in my business. You often make lots of money, but unless you are a solitary, unmarried, childless hermit who thrives on macaroni and cheese and tap water, you soon find that those mouthwatering bonus checks disappear frighteningly quickly into the maw of a life of comfort. You buy a house, you get married, and you have children who simply must have expensive private educations (and expensive private tutors to help them get good grades). You indulge in a couple nice vacations every year “because you deserve it” for working so hard, and because you realize you need to spend more time with the increasingly distant spouse and children you never see the rest of the year. Of course the quality (and expense) of your clothes, food, and petty indulgences drift ever upward too. Because, well, they do, don’t they? Also, you simply cannot be seen not to keep up appearances with your peers and your social equals, can you? If not for yourself, think of the children. You want to give them every advantage, don’t you? Of course you do.

And if you live in one of the few ridiculously expensive global cities like London and New York where most of the investment banking jobs are located, the basic cost of living to maintain a comfortable but not lavish lifestyle escalates alarmingly alongside your earnings, until the thought of spending $500,000 (after tax) per year just to live becomes unremarkable, even conservative. There’s always somebody you know who enjoys a better apartment, a nicer vacation, a grander country house; you’re not being unreasonable. Talk about “a cage made of money and dreams and greed.” It starts early, and the bars only get thicker with time. Trust me on this.

Meanwhile, the longer you stay in investment banking, the more dependent you become on the income which, while never seeming enough, is clearly superior to what you could earn in any other profession. And, as Mr. Ridley discovered on the lower rungs of the career ladder, lower-paying professions are not immune to boredom, drab routine, or even crushing work schedules. The higher up you get as a corporate finance or M&A professional, the more you see of the grey flannel life of non-financial corporations. It ain’t pretty. Your clients’ cages have bars just as thick as yours, with only perhaps a little less gilding. No wonder Mr. Ridley could see no-one above him at his bank who seemed other than “sad middle class bland people, with unexciting lives, and unexciting prospects” or “pathetic old farts.” For most of us, there’s no way out.

There is a reason investment bankers nickname the nest egg they calculate they need to leave the business “Fuck You Money.” Spend a few decades rolling that boulder up the hill, and all most of us have left is hostility.

* * *

And yet, as I regale you with this litany of woe (to the tune of an orchestra of thousands of tiny violins, no doubt), it occurs to me that this situation is not much different than the situation most people face in their lives. Perhaps investment bankers have more money, and nicer toys, but it is not clear that our quiet desperation is much different from yours. People who have to work for a living, whatever their profession, have to work. And, as my old grandpapa told me, the reason they call it work is because no-one could mistake it for play. I suppose the envious can take comfort that my industry will likely suffer severe secular decline for many years. By the end of it, our calculus of misery may look very similar to yours.

But whatever your chosen path, Children, don’t buy the old canard that money buys you freedom. Money always comes with strings attached. If you are not careful, you just might find those strings have wound themselves into steel cables before you notice.


© 2012 The Epicurean Dealmaker. All rights reserved.

A Good Offense

Kind-hearted people might of course think there was some ingenious way to disarm or defeat the enemy without too much bloodshed, and might imagine this is the true goal of the art of war. Pleasant as it sounds, it is a fallacy that must be exposed: war is such a dangerous business that the mistakes which come from kindness are the very worst.

* *
If defense is the stronger form of war, yet has a negative object, it follows that it should be used only so long as weakness compels, and be abandoned as soon as we are strong enough to pursue a positive object.

— Carl von Clausewitz, Vom Kriege

Consider, Dear Reader, the question embedded in the mouse-over caption to the photo above: Should we consider a tank destroyer—a machine designed to destroy tanks—to be a defensive weapon or an offensive weapon? The Jagdpanther was designed and employed by the Wehrmacht during World War II primarily as a hunter-killer of Allied tanks. Heavily armored against frontal assault, highly mobile, and equipped with a powerful main gun fixed in a low-profile, turretless unibody chassis, the Hunting Panther was designed to lie in ambush for enemy tanks and knock them out in one-on-one frontal duels. Its design was ill-suited for infantry support, general patrolling, or massed attack across open country. Given that the tanks it opposed were usually employed in offensive thrusts, one could say the Jagdpanther was primarily a defensive weapon. And yet it was also a mobile cannon par excellence: a weapon purpose built to deliver armor-penetrating or high explosive shells against sundry targets mobile and fixed, none of which necessarily had to be an opposing tank. (Eighty-eight millimeter rounds could kill enemy infantry and destroy artillery emplacements just as neatly as they disabled tanks.) Of course the Germans could and did use the SdKfz 173 for offense. It was a weapon.

It is true that most weapons and implements of war are usually designed to be primarily offensive or defensive in nature. A shield’s primary use is to defend, a sword’s is to attack. And yet a sword can be used to parry; a shield can be used to bludgeon or chop. Offense and defense are different modes of use—that is, tactics—not intrinsic properties of the tools we employ.

The same is true, by analogy, of financial instruments and trades. A trade can be made for offensive purposes—speculation or investment¹—or defensive ones, as a hedge. Speculation increases an investor’s risk exposure; hedging reduces it. And yet the same trade or financial instrument can be used in either way at different times and under different circumstances. Selling a thousand shares of Apple Computer can either be a perfect hedge, when it liquidates an existing long position, or rank speculation, when it initiates an open short sale. Context—and the other positions in an investor’s portfolio—is everything. This is very poorly understood by the common man or woman.

* * *

Hence we get the recent spectacle of financial journalists and market participants falling all over themselves to condemn with morbid fascination the large scale market interventions of J.P. Morgan Chase’s London-based chief investment office. Adding to the camera-ready copy of these stories, this trading team reportedly roiling the markets with its enormous volume and net positions apparently enjoys the leadership of a man some call the “London Whale” and others “Voldemort.” An eager journalist on the financial beat could not ask for more.

Of course the solitary string of outrage which journalists and their hedge fund sources—pot, meet kettle—keep harping on is that somehow J.P. Morgan is using the trading activities of its CIO to circumvent the regulatory and moral limitations on proprietary trading by systematically important financial institutions embodied if not yet enforced in the Volcker Rule. Jamie Dimon, as befits the fiduciary duties which accompany his lofty pay grade and authority in J.P. Morgan’s executive suite, of course denies that the London Whale or any of his minnows are doing any such thing. I am sure it will disappoint the anti-capitalist firebrands in my audience to hear that, subject to further stipulations, qualifications, and cautions noted below, I feel compelled to give ol’ Jamie the benefit of the doubt here.

For the assertion, which Mr. Dimon seems to be promoting, that his chief investment office is putting on massive securities and derivatives trades to hedge the bank’s already existing underlying risk exposures makes complete sense. Have you looked at J.P. Morgan’s balance sheet lately, O Curious and Inquisitive Reader? As of March 31, 2012, the redoubtable House of Morgan boasted total investments (consisting of deposits with other banks, debt and equity instruments, derivatives, and securities) of $953 billion, net loans outstanding of $687 billion, and other assorted doodads which added up to an impressive-in-this-or-any-other-world-you-can-think-of 2.3 TRILLION DOLLARS of total assets. That’s a lotta simoleons, children.

And while the mysteries of generally accepted accounting principles, trade secrets, and legal smokescreens prevent a humble outsider such as Your Humble Bloggist from penetrating the veil of opacity to any meaningful extent, I think it’s safe to assume a hell of a lot of those bright, shiny assets represent proprietary risk trades which the House of Dimon put on for the sake of its beloved and long-suffering corporate, governmental, and investment clients. Most people just don’t seem to get it, but even normal, everyday corporate lending is proprietary investing. A bank creates an income-producing asset for itself by lending money to a client. Loans are risky assets: the borrower may not pay principal and interest back on time (or at all), and the lender exposes itself to market-based interest rate risk either directly through the form of the loan’s interest payment mechanism (fixed or floating) or indirectly via its own funding requirements (banks borrow money to lend it, you know) or both. A normal commercial lending bank is by definition shot through with all sorts of risk, even when it shuns the racier ends of the swimming pool like securities and derivatives trading or structured products.

This becomes especially clear when you consider the funding side of a normal bank. J.P. Morgan did not create or purchase all those assets with $2.3 trillion in loose change it just had lying around the house. It borrowed over $2.1 trillion from anyone it could get its hands on—retail and commercial depositors ($1.1 trillion), corporate lenders ($726 billion), and trade creditors, plus $182 billion from gullible common shareholders—and went shopping. The bank is, to use an industry term of art, leveraged up the wazoo.²

But this is just the ordinary magic of a traditional bank’s business model: borrow cheap, flexible funding from as many naive savers as you can muster, and lend it out at higher rates to the desperate and underfunded. The magic—and the returns—come from the fact that the risks a modern bank assumes on the funding and the lending side are very different, often highly volatile, and incommensurate with leaving early on Thursday for afternoon golf. Identification, management, and control of borrowing and lending risks are core to the activities of lending banks. That is what they get paid for; that is how they earn their returns.³

* * *

Now given that Jamie’s Army is brooding over something slightly more than umpty bajillion dollars of proprietary investment assets tottering precariously on their balance sheet, you can be damn sure that I and everyone else with a natural aversion to Stone Age living conditions sure as hell hope J.P. Morgan is hedging the shit out of those assets. You can also be sure that a loan book of $687 billion and an investment portfolio a cat’s whisker shy of a trillion dollars offers numerous and substantial opportunties for its risk management group to put on enormous hedging trades in the markets. I would be shocked to learn that J.P. Morgan wasn’t moving the markets.

The only caveat to mention is that hedging is a tricky and mercurial thing. As I alluded above, the only “perfect” hedge for a trade or position is to unwind it completely, with the original counterparty or one who carries no residual risk. You can perfectly hedge your purchase of 1,000 shares of Apple only by selling them completely, for cash. The same is true for each and every individual financial asset: it can only be completely and irrevocably hedged by unwinding that particular asset or, as is sometimes done in the derivatives market, by immunizing it with an identical, offsetting mirror-image asset with the same counterparty. Anything else introduces one or more forms of what is broadly known as basis risk. Basis risk can take many different forms: credit risk, from different counterparties; interest rate risk, from different durations (e.g., long vs short); collateral risk; and, overarching and encompassing most of these, correlation risk. The latter is easiest envisioned in the case where an investor hedges her portfolio of individual stocks against a general market decline by buying a notional amount of S&P index puts equivalent to her portfolio value. But her success will depend entirely on how her individual stocks behave in relation to the portfolio hedge. If they move down in lockstep with the S&P, she will have protected her portfolio’s value, but if they decline while the S&P stays flat or rises, she will have suffered the worst of both outcomes, loss on both her portfolio and her protective puts.

The trick is that portfolio hedging is normally far more efficient and cost-effective than hedging each and every individual position in a risk book. While this concept seems to befuddle the occasional journalist, it seems to have penetrated even the thick skulls of the rule makers in Congress, who have carved out aggregated position hedging from activities banned by the Volcker Rule. After all, if one looks at commercial and universal banks as entities which manage the mismatch of assets and liabilities in their business for fun and profit, one can see that, in some important sense, it is the job of such financial intermediaries to generate returns by managing basis risk. In the argot of the market, banks are long the basis risk of financial intermediation.

But by that very token, examining the risk portfolio of a large financial institution can never be as simple as totting up each individual portfolio position and netting it against its very own particular hedge. Banks and investment banks manage risk across multiple dimensions, and one hedge or set of hedges may have (partial) hedging properties for numerous unrelated positions. They do so dynamically, too, since the basis risk which was well understood yesterday may diverge or uncouple drastically tomorrow. Market crashes and financial panics seem to have the nasty effect of driving return correlations to one across all financial assets and asset classes, which can bollocks up an otherwise nifty risk model no end. The monitoring and control function of regulators is made more problematic by portfolio risk management practices, too, since a trade which looks like a sensible and effective hedge in the context of the overall risk book may look like the rankest proprietary speculation in isolation. Needless to say, the counterparty to a trade by a big commercial or investment bank usually doesn’t have the beginning of an inkling of a whisper of a clue why and for what purpose Big Mondo Bank is calling him up. And you can forget about journalists.

In like fashion, a Russian tank commander on the outskirts of Warsaw in 1945 probably didn’t have the least notion whether the Jagdpanther fired its 88 at him because it was attacking, defending, or just range finding. Sorry to say, the reason didn’t matter much if an antitank round blew him to smithereens.

Fortunes of war.


¹ For the purposes of this discussion, I consider “investment” and “speculation” to be one and the same thing. Both entail the assumption of risk in pursuit of return, as opposed to hedging, which entails the reduction of risk. That investment has a respectable connotation in our current culture and speculation does not is none of my concern. All investment—which constitutes a bet upon an uncertain future—is speculative. It would be wise for everyone to remember this.
² Although by the standards of its industry, its profligate European peers, and the wild-eyed lunatics in pure investment banking, J.P. Morgan is downright conservative in its leverage ratio. The absolute numbers are what give any prudent person the bends. It’s all how you look at it.
³ Never forget, children: risk and return are conjoined twins. You can’t have one without the other. If you can’t identify the risks underlying a particular return, you’re either missing something, or I have a very attractive bridge crossing the East River I would like to sell you.

© 2012 The Epicurean Dealmaker. All rights reserved.

Odalisque

Dogs are our link to paradise. They don’t know evil or jealousy or discontent. To sit with a dog on a hillside on a glorious afternoon is to be back in Eden, where doing nothing was not boring—it was peace.

— Milan Kundera

A happy and peaceful weekend to you all, dogs included.


© 2012 The Epicurean Dealmaker. All rights reserved.