Panic

Just getting back after a brief break, and we’re thrilled to see this.

Funds Will Support New Independent High School Offering Classical and Uniquely Integrated Curriculum

St. Louis Park, Minnesota, May 19, 2010 — Chesterton Academy, a private, independent college preparatory school, announced today that it has received an exciting fundraising opportunity from Andrew Redleaf, founder and CEO of Whitebox Advisors. Mr. Redleaf has agreed to match, dollar for dollar, any donations that come into Chesterton Academy between now and June 15, up to $75,000.

News of the challenge grant comes near the end of the second year of operation for Chesterton Academy, a classical high school ‘in the Catholic tradition’ started in fall of 2008 with just 10 students. Today, the school enrolls 20 students in grades nine, ten, and eleven, and expects to add 15 to 20 students when the 2010-2011 school year begins this fall. The result of a grass-roots movement of parents, the school is named for the great English writer, G.K. Chesterton, who, among many other achievements, was one of the first English-speaking writers to predict and condemn Adolf Hitler’s holocaust against the Jews.

“We’re deeply honored by Mr. Redleaf’s generosity and interest in helping us build a strong foundation for Chesterton Academy,” said Headmaster John DeJak.

Mr. Redleaf is a native of the Twin Cities and a graduate of St. Paul Academy and Yale University. A passionate supporter of classical education, Redleaf cites three particular achievements that led him to support Chesterton Academy.

Citing his concern with “the national decline in educational achievement among young men” Redleaf notes that at co-ed Chesterton “it’s cool to be smart, even for the boys. We need more of that.”

Redleaf, who is Jewish, adds that by ‘offering a rigorous classical education at a price middle class families can afford, Chesterton provides a huge service to our entire community. I hope many more non-Catholics in the Twin Cities will join me in supporting that effort.”

“Besides,” he points out, “what the folks at Chesterton call ‘the Catholic tradition’ are really foundational values of our civilization. And with all due respect to my Catholic friends, the Catholics weren’t the first to discover those values.”

Redleaf’s company, Whitebox Advisors, is an investment adviser located in Minneapolis. The firm manages approximately $3 billion and employs over 70 professionals. Celebrated by the New York Times and others for predicting the mortgage crisis long before it happened, Redleaf’s monthly client letter is avidly read and quoted not only on “the Street” but also in the financial press.

Redleaf’s gift is among the largest received by Chesterton Academy since its founding. The school relies heavily on fundraising, as it receives no public support. In order to keep the school affordable, the school charges only $5,500 in tuition, roughly half of the actual cost of educating a student.

Learn more at Chesterton Academy’s web site.

DONATE here.

We certainly do need to slow down markets. There is no possible economic justification for markets trading at their current pace. Hi-speed trading does not increase the intelligence of the market, it simply testifies to the meaninglessness of market prices, their complete detachment from value. See Chapter 9 of PANIC titled “Zoom, Zoom, Zoom”

AR & RV

As if there were ever any doubt that the worst banks on the block were the two run by Barney Frank and Chris Dodd, CBO now confirms that rescuing Fannie and Freddie will cost taxpayers at least $389 billion.

Of course lots of the money spent on the twins indirectly goes to bailing out the other mega banks not officially owned by the government. The new figures simply acknowledge what we’ve known all along—the twins will get stuck with the losses not only on mortgages they own but also on mortgages they insured, many of which are held by the TARPed banks. Of course the rest those mortgages are owned by your pension fund, your local hospital, your old college’s endowment, and the local symphony orchestra, which is a silver lining of sorts, depending on whether the orchestra is any good.

Nicole Gelinas is 100 percent right that rules are better than regulators–and she proposes three good rules. But though we’d vote for all three in a second none actually make markets themselves stronger. The only way to do that is to give markets more, better information.

One of the many reasons to hate Goldman is that it is hard to stop thinking about them. Sure a good paradigm is a terrible thing to waste, but at some point enough is enough.

Not yet apparently. Last night it occurred to us what this whole Goldman, Paulson, IKB (the German bank on the losing side of the trade) episode really is: a manifestation of modern gender confusion.

What Goldman did basically was beat up a girl. Even in our depraved modern world boys beating up girls really outrages people. But, in part because of our modern depravities, the government can’t charge Goldman with beating up a girl. Instead it is charging Goldman with fraud, a politically correct offense the government won’t be able to prove.

We understand this in part because we are old enough that one of us, Andy, actually started his education in an all-boys school. Like most boys’ schools it had a very clear mission: turn boys into men.

The boyz-to-men code was fairly straightforward. At bottom, what made you a man was that you protected women and children. At a minimum you gave them your seats on the lifeboat of the Titanic; if opportunity presented itself your chivalry might extend as far as administering the occasional horse whipping to the sort of males who trespassed the code.

Boys’ schools, being short on women to defend, developed a two-step “practice” version of the code:

1. Defend or at least do not oppress the weak, i.e. weaker or younger boys at school.
2. If you happen to be the weaker, younger boy getting roughed up don’t go crying to mother.

Before Andy graduated the school went co-ed, which complicated the code but did not fundamentally alter it. Beating up on girls was obviously a hanging offense; on the other hand girls were allowed to go crying to mother.

Flash forward forty years to a culture in which it is completely unacceptable to define masculinity as defending women and children, or perhaps even to define masculinity at all. It is, we suppose, still acceptable for men to come to the aid of women in actual physical danger, say from a mugger; but certainly not to give any hint that this is more proper than a woman leaping to the defense of a man, or that a self-respecting man would refuse such help and take his lumps so the woman could get to safety.

For any more humdrum circumstance, like the sort of muggings that might occur on the trading floor, the notion that men should defend the weaker sex has gone the way of, well, the weaker sex. And if you are tempted to think, ‘oh, well at least men still defend children’, consider that perhaps half of American children are effectively fatherless. And contemplate the fate of politicians who even fleetingly suggest that single-mother households are sub-optimal.

What does this have to do with Goldman? Start with the obvious: there was no fraud. All parties to the transaction knew that a synthetic CDO is a pure casino bet, created only to facilitate the trade in question. The notion that an honest, ethical synthetic CDO is one that favors the long bettor over the short, one that references more good mortgage securities than bad is exactly equivalent to the idea that the ethical way to build a roulette wheel is to ensure that black will prevail over red.

Everybody gets the obvious: If Paulson set conditions for CDOs he was willing to bet against, then IKB, the German bankers on the other side of the trade, could and should have set conditions for CDOs they were willing to bet on.

What really enrages people is the mismatch. They are enraged that Goldman didn’t tell the Germans “hey you might want to know that the guy you are betting against is the biggest, baddest, and way smartest dude on the playground and compared to him you guys are just a bunch of girlie-men.”

People are mad at Goldman for the same reason they are all too tolerant of the pathetic German dweebs who got what they deserved.

They are mad at Goldman because gentlemen don’t beat up girls. Goldman’s crime was not in “rigging” the CDO against the Germans, their crime was in throwing a couple of alumna of the all Deutschland synchronized swimming team into the ring with the heavyweight boxing champion of the world.

As for Germans crying to mother, girls are allowed to.

AR&RV



By Andrew Redleaf

Central to former Fed Chairman Alan Greenspan’s desperate efforts to restore his place in history—or at least to rewrite what currently looks like a pretty dismal chapter is the Greenspan Theory of Bubbles.  The Greenspan Theory makes several propositions, but the most important is this:

No merely human mind is capable of identifying a bubble as a bubble until after it has popped.

A churlish reader of this proposition might detect some self-serving motivation, since it effectively excuses Mr. Greenspan from any responsibility for either the tech or housing bubbles, which otherwise dominate his legacy.  But there is no need to go to motive to refute this proposition. We can think of no less than four signs that, taken together, suggest a bubble is a’ blowing.  All four of these marks of a true bubble were painfully obvious during both the tech and housing disasters:

1. Pervasiveness:  In a true bubble, huge swathes of the public, people not ordinarily transfixed by investment markets, become caught up in the fever and alter their behavior so as to participate.  That a now long forgotten Prudential securities analyst predicted, in late 1999, that Qualcomm stock would hit $1,000 was not infallible evidence of a bubble. That Qualcomm had become a hot topic of conversation not only at Manhattan cocktail parties but backyard barbecues in the heartland was. Ditto the constant real estate chatter of the last decade. When interest rates get more attention than box scores, that’s a mark of a bubble.

2. On the shoulders of the bull:  Pervasiveness takes time. Not all long-running bull markets become bubbles, but every bubble forms on top of a long-running bull market.  Crucial to sucking in the general public is the gnawing fear of having missed the boat. The sideline crowd is rarely even aware of an ordinary, short-lived, and perhaps quite legitimate spike in prices.  To get the mob’s attention the thing has to go on long enough for them to notice, at which point it often seems like it will go on forever.  By this measure the tech run was actually a bit on the short side. The NASDAQ did not begin to pull away dramatically from the Dow or the S&P until summer of 1998.  But this was on top of a bull market that had been running for 16 years during which the NASDAQ more often than not was the center of the action.  The bull market in housing began in late 1996, hit an inflection point in 2002, and did not pop until late 2006.

3. Prices dramatically detach from value:  The notion that it is impossible to call a bubble is derivative of the notion that it is impossible to outguess the market on prices generally. It is certainly quite difficult to get prices more right than the market when those prices remain within a reasonably tight range—say within one standard deviation—of traditional valuation metrics such as Price to Earnings, or, in the case of price changes, within similar boundaries of asset class volatility.  By late 1999 tech stock PEs exceeded historic norms by several standard deviations. From late 2003 onward annual housing price increases were multiple standard deviations above historic norms as reflected for instance by Robert Shiller’s research showing long-term real increases in housing prices hovering at less than one percent.

4. Explanations and expectations:  The final mark is that the explanations commonly offered for extraordinary prices range from the logically possible but extremely improbable to the flat-out incoherent.  For a bubble to be sustained people must believe that prices will continue to deviate even further from historic norms. This requires progressively more improbable explanations for what is driving prices. The notion, popular during the tech boom, that the “new economy” was making price to earnings—or for that matter any earnings at all— irrelevant is the sort of inanity that becomes conventional wisdom in a true bubble.

The four marks of a true bubble identified both the tech and housing booms as the real thing. Ditto the Japanese equities and real estate boom. The run-up of U.S. equity prices from July 1985 though September 1987, on the other hand, did not obviously pass either the pervasiveness or the price/value tests. It also failed the most reliable after-the-fact bubble test: bubbles do not un-pop. The S&P regained ground quickly after the 1987 crash and was back above all-time highs within less than two years.  The “nifty-fifty” craze of the late 60s and early 70s seems a better candidate, though perhaps we’d be more skeptical if we knew more about it.  The very fact of an investment strategy becoming a popular slogan does suggest a bubbly environment.

Is there another bubble on the horizon? The commentariat wants to believe yes, perhaps because the last two were such great stories. Their three most popular candidates for the next one seem to be gold and commodities, sovereign claims, and China. I am skeptical on all three: people flee to gold and sovereign claims out of pessimism not irrational exuberance, and China still seems a bit too exotic to enthrall the heartland.

Andrew Redleaf is CEO of Whitebox Advisors and co-author of Panic: The Betrayal of Capitalism by Wall Street and Washington

One more Goldman thought

How can the Senate think that it’s just really, really awful for Goldman not to tell one supposedly sophisticated casino player, that German bank, that there was another sophisticated casino player on the other side of the table; or to fail to disclose that Goldman was not tipping the odds in favor of the Germans, and just think that it’s fine and dandy for Goldman to keep American investors in the dark about everything else it does?

Why is it obvious that G should have held the hands of a bunch of German bank bureaucrats who should have known better, but not obvious that the megabanks should disclose to the American taxpayers the hazards lurking on the banks’ balance sheets, for which said taxpayers will be ultimately liable?

GOP succeeds in getting an “open amendment” debate.

Now all they need is an amendment!

Last night Republicans succeeded in persuading Democrats to actually allow the GOP to offer some new ideas during the debate on financial reform.

Now all the GOP needs are some ideas–always a challenge for the Stupid Party. But we have one for them.

As scandals continue to break they all have a single theme: the banks make money by deceiving their customers. Goldman did it. Lehman did it. Bear did it. Soon we’ll find out they all did it.

And they don’t even have to lie. All they have to do is comply with current law which allows them to keep secret nearly everything they do.

So open them up. Give citizens and investors the same access to the banks’ books that regulators are supposed to have–but apparently are too lazy and clueless to use.

Make the banks disclose it all, line by line: Every bond they own, every stock, derivative, swap, put, call and conventional loan. On balance sheet, off balance sheet. Everything.

If that were the law, none of this could have happened. No repo 105. No betting against your own customers. No front running. Because everyone would know.

CEO Blankfein says Goldman does God’s work. He must have meant bingo.

The legitimate function of financial markets is to efficiently move money from savers into business investment. This is true of primary issues—a newly issued stock or bond—but also of secondary sales (I sell you my pre-existing shares of SNAFU industries) because even in the secondary sale cash is freed at the end for new investment. (Not to mention that the primary sale was possible only because the first buyer knew he could re-sell.)

A synthetic CDO trade such as the one that caused all the Goldman hoo-hah, however, does not entail the purchase or sale of any existing security. It does not move capital from savings to investment. It is a pure bet on the performance of some other existing securities. To the contrary, rather than the seller receiving cash, which could be otherwise invested, both sides must or at least should set aside cash to guarantee their performance on the bet.

Goldman received a $15 million dollar fee for it’s facilitating role, making the firm surely one of the highest paid bookies in the history of the world.

Nevertheless the government’s legal case against Goldman is absurd as is most of the moral outrage over this particular case. The outrage centers around Goldman’s failure to tell the German bankers on the other side of the trade that John Paulson, a great American, helped choose the securities he wanted to bet against.  Supposedly this violated some rule of neutrality by which Goldman was supposed to abide.

But given that this trade was a pure bet, and the synthetic CDO was created just for this bet, what would “neutral mean”?  That Goldman should build the synthetic CDO to favor the long bettor over the short bettor?  That Goldman should construct the bet such that either side had an absolutely equal chance of losing its money, like the Red and the Black in roulette, with only the house guaranteed to cash in?

Sure Goldman should have told the truth. Sure they are sleaze bags. But the whining German bankers are worse, with their implication that Goldman was responsible for doing the bankers’ work for them. Paulson agreed to take the short position only because, knowing what he was betting on, he liked the odds. The Germans’ problem is that like all the other mega-bankers that almost blew up the world, they are a bunch of clueless bureaucrats who refused any responsibility for making sound judgments about investing the money with which they had been entrusted. They wanted to live in a world of “neutrality,” a world of “level playing fields” in which worthless, lazy, stupid, German bureaucrats can be billionaires too.

We all love to hate Goldman, but on this deal they were indeed doing God’s work: every dime the Germans’ lost was a dime taken away from the sort of witless, greedy bureaucrats that created the machinery of disaster.