In Search of the Perfect Investment

This was Friday’s trading. A veritable roller coaster.

Cramer claimed it was hedge fund selling until 2 PM, when you and I came in to buy. That’s total nonsense. That’s stuff made up after the event, to try to explain the event.

There is no explaining this market. It should be worse because the economy is not doing well. It should be better because earnings are better.

Earnings are better because of firings — 8 million plus have been let go since this started. But 70% of the GDP is the consumer and he’s unemployed. Hence not spending.

To me, this market is not cheap, and not clear.

When in doubt, stay out.

Whose fault was it all? An engrossing review of Joseph E. Stiglitz’s new book FREEFALL, America, Free Markets, and the Sinking of the World Economy.

Admittedly, indictments of Wall Street and the Fed have become a staple over the last six months. But Stiglitz’s virtue is that he minces few words. Fed policies worked only by “replacing the tech bubble with a housing bubble,” he says. “In virtually every interpretation of the crisis, the Fed was at the center of the creation of this and the previous bubble.” And “in the Frankenstein laboratories of Wall Street, banks created new risk products . . . without mechanisms to manage the monster they had created.” Meanwhile, innovation on Wall Street was “directed at “circumventing regulations, accounting standards and taxation.” Stiglitz, who fears that Wall Street still dominates Washington, is clearly a man outraged.

For the full New York Times review, click here.

Present at the Destruction. Here’s the Wall Street Journal review of Hank Paulson justification for all his actions as treasurer:

Bank rescues driven less by detailed analysis than by raw fear.

The case against former Treasury Secretary Henry Paulson is that he equated the health of giant Wall Street banks with the health of the United States. Further, his critics claim, he replaced the time-tested rule of bankruptcy law with opaque, ad hoc interventions in financial firms.

This case is made persuasively, if inadvertently, in a gripping book by first-time author Henry Paulson. In “On the Brink,” a principal architect of the bailouts that began in 2008 provides a revealing play-by-play account of the financial crisis.

To be sure, Mr. Paulson has not written a book intended to rebut the conspiracy theorists who claim that he was driven to help his old firm, Goldman Sachs, or to aid big investment banks generally. He acknowledges that throughout the crisis he remained “in constant touch with Wall Street CEOs,” and he reports no fewer than 50 phone conversations with Lehman Brothers CEO Richard Fuld between the March 2008 bailout of Bear Stearns and the Lehman bankruptcy in September.

All those Paulson-Fuld conversations should definitively answer the question of whether Mr. Fuld was expecting help from Washington when the financial reckoning arrived. Mr. Paulson also admits to trying to persuade Bank of America CEO Ken Lewis to buy the ailing firm, and the author says that he talked to Warren Buffett about a Berkshire Hathaway investment in Lehman. Remember: At this point Mr. Paulson was the Treasury secretary and no longer an investment banker.

One reason Lehman didn’t sell, according to Mr. Paulson, is that Mr. Fuld was determined to get at least the $10 per share that shareholders had received in the Bear Stearns bailout.

Later in the book Mr. Paulson reports that “one of my worries lifted” when Mr. Buffett decided to invest $5 billion in Goldman Sachs.

Highly detailed when it comes to call logs and meeting attendees, Mr. Paulson’s story nonetheless leaves readers wanting more regarding the big question: How did the government know that a particular business was too big to fail? The answer: Mr. Paulson’s gut told him so. His “market experience,” as he calls it in the case of the Bear Stearns rescue, made him realize that the firm could not fail. Mr. Paulson notes that “Bear had hundreds, maybe thousands, of counterparties—firms that lent it money or with which it traded stocks, bonds, mortgages, and other securities.”

Readers may wonder how deep went the analysis of Bear’s impact on trading partners if federal officials didn’t know whether such partners numbered in the hundreds or thousands. Mr. Paulson writes in the book that the staff of the Federal Reserve Bank of New York planned to “drill down” to investigate the market impact of a Bear failure only after regulators were already discussing how to prevent it.

By the fall of 2008, Mr. Paulson was aggressively supporting another New York Fed bailout, this time for the insurer AIG. He writes of Tim Geithner—president of the New York Fed at the time, now in Mr. Paulson’s old job as Treasury secretary—that “Tim and I knew that an AIG bankruptcy would be devastating, leading to the failure of many other institutions.” To this day neither man seems willing to name any of those institutions. Moreover, recent congressional testimony by Messrs. Paulson and Geithner suggests that the primary danger was to AIG’s insurance customers, not its trading counterparties.

Mr. Paulson’s book confirms the emerging picture of a series of interventions driven not by detailed analysis but by raw fear. This doesn’t mean that Mr. Paulson’s instincts were wrong. It can be argued that he was the perfect man to be in the cockpit when Washington’s grand experiment in housing finance exploded and America needed somebody to land the airplane with one wheel and gaping holes in the fuselage.

Long before Mr. Paulson arrived in Washington in 2006, Congress had nurtured Fannie Mae, Freddie Mac and a host of policies to drive capital into the mortgage market, building taxpayer risk by the trillion. The Securities and Exchange Commission and the Fed had enshrined the primacy of the dominant credit-ratings agencies, who would certify for investors around the world that pools of mortgages were safe. On its own, the Fed had been inflating a credit bubble since the beginning of the decade.

It’s true that when Mr. Paulson was CEO of Goldman Sachs his firm supported the Fed’s Basel capital rules, which encouraged Goldman and other Wall Street firms to increase leverage and bet on housing. But the ultimate responsibility rests with the Washington policy makers who instituted those rules.

The question regarding Mr. Paulson is how he responded once he became Treasury secretary. As bad as many interventions look now with the benefit of hindsight, we’ll never know how things might have developed in the absence of bailouts.

One matter the book does clarify, however, is that when it came to spotting the housing meltdown, Mr. Paulson’s gut failed him—as he freely admits. One of his first briefings as Treasury secretary to President George W. Bush in 2006 included a review of issues in the credit markets, but no warning about housing. Soon afterward he persuaded the president to abandon his plan to rein in Fannie Mae and Freddie Mac and to accept a compromise with Rep. Barney Frank. The two mortgage giants were allowed to continue exposing taxpayers to risks that now officially reach to infinity. Mr. Paulson continued to brush off warnings about Fannie and Freddie, including one delivered in early 2008 by Larry Summers, who is now President Barack Obama’s chief economic adviser.

Soon after, faced with the pending demise of Bear Stearns, Mr. Paulson says he told his wife, Wendy: “I’m worried about the world falling apart!” Historians will no doubt express some healthy skepticism that the end of Bear Stearns really represented the end of the world, but Mr. Paulson seems to have sincerely believed it did.

Love for Microsoft. An ex-employee loves his old firm. But he worries that his firm has lost it to bureaucracy, internecine warfare, and  lousy management. Dick Brass worries that Apple’s got it, and Microsoft doesn’t. He concludes “As a result, while the company has had a truly amazing past and an enviably prosperous present, unless it regains its creative spark, it’s an open question whether it has much of a future.” You can read the entire engrossing piece here.

Love for Microsoft — Part 2: Word blew up, again and again. It wanted to send error reports to Microsoft and start again. But every time it started again, it blew up. It didn’t tell what was wrong. But, after much wasted time, I found that Word’s normal.dot was busted. Solution: Delete normal.dot. Let Word re-create it. Lesson: Find normal.dot today. Copy to a backup place You may need it. Word is miserable.

Love for Mercedes. It was 15 degrees and blowing hard. We were in the middle of nowhere. My job was to change our Mercedes left back tire. Items: A $65,000 car is too cheap to provide its owners with a real tire and real tools. It provides them with a skimpy donut and tools you’d be ashamed to give your 10-year old.

Lessons: Get yourself a real tire. as spare — if it fits. Ours won’t! Buy yourself a large, long lug nut removal tool. Otherwise you’ll never loosen the nuts holding the tire. Don’t buy a Mercedes.

Bargaining revisited. Several of my bank CDs have come due. I was able to bargain most of them up a few basis points. Others are so low — “we don’t care what the other banks are paying” — it’s ludicrous. My favorites are The Park Avenue Bank in New York, which won’t renew on the phone. You have to schlep yourself physically into a branch. Wait. It gets even better. My son, who is a client of Charles Schwab, clipped this from the Schwab web site. Look where they’re steering your money — into their own products, which, ironically, are better than savings and checking accounts from most banks. Weird.

Sign of the times. The Obama Store in the Washington, D.C. Railroad Station has closed. It used to be mobbed with eager souvenir hunters.

Best weekend quote:

Washington was immobilized by snow on Friday. This is highly unusual. Normally, Washington is immobilized by senators.

The Rabbi’s widow
In a small town in the Old Country, the Rabbi died. His widow, the Rebbetzin, was so disconsolate that the people of the town decided that she ought to get married again.

But the town was so small that the only eligible bachelor was the town butcher. The poor Rebbetzin was somewhat dismayed because she had been wed to a scholar, and the butcher had no great formal education. However, she was lonely, so she agreed, and they were married.

After the marriage, Friday came. She went to the mikvah (a Jewish ritual bath to get rid of impurities). Then, she went home to prepare to light the candles.

The butcher leaned over to her and said, “My mother, Hana, told me that after the mikvah and before lighting the candles, it’s good to have sex.” So they did.

She lit the candles. He leaned over again and said, “My father,Shmuel, told me that after lighting the candles it’s good to have sex.” So they did.

They went to bed after saying their prayers. When they awoke, he said to her, “My grandmother, Rivka, said that before you go to the synagogue it’s good to have sex.” So they did.

After praying all morning, they came home to rest. Again he whispers in her ear, “My grandfather, Moishe, says after praying it’s good to have sex.” So they did.

On Sunday she went out to shop for food and met a friend who asked, “So how is the new husband?”