Posts filed under “Really, really bad calls”

The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits — in particular, the benefits of avoiding low-probability events with disastrous consequences.

Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human beings to underestimate the odds of such seemingly unlikely events — of forgetting that the 100-year flood is as likely to happen in Year 5 as it is in Year 95. And if there are insufficient data to calculate the probability of a very bad outcome, as is often the case, that doesn’t mean we should assume the probability is zero.

-Steven Pearlstein

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Fascinating quote that explains the game theory — and mathematical foibles — of the deregulatory free market extremists. This perfectly sums up the rationalizations used by those people who have emphasized the costs of regulation, but not the upside.

In a Democracy, when taxpayers have attempted to collectively protect themselves against corporate (and other) monied interests have had to argue against a growth storyline. That of course, turns out to have been a false narrative, but it carried the day for decades.

Pearlstein adds:

The biggest oil spill ever. The biggest financial crisis since the Great Depression. The deadliest mine disaster in 25 years. One recall after another of toys from China, of vehicles from Toyota, of hamburgers from roach-infested processing plants. The whole Vioxx fiasco. And let’s not forget the biggest climate threat since the Ice Age.

Even if you’re not into conspiracy theories, it’s hard to ignore the common thread running through these recent crises . . . regulators who were blinded by their ideological bias against government interference and their faith that industries could police themselves.”

What we have done, in essence, by following the ideologies of the Chicago School and others absolute Free Market believers, is to adopt the Victor Niederhoffer approach to trading risk. Niederhoffer writes puts on low probability events. This trades off short term gains over a period of time, in exchange for a longer term risk. He understands and accepts this. For a few years, he does very well — until he blows up spectacularly. Indeed, the way Nassim Taleb came to prominence was being on the other side of Niederhoffer’s trades, betting on the eventual reveal of a Black Swan.

The deregulatory approach is quite similar: We get faster growth, more profits, but occasional spectacular blowups.

Perhaps the best way to think about what (I have derisively termed) free market extremism and radical deregulation is to recognize what they are preaching: Its a high-risk, put writing strategy. Over the near term (A decade or 3), it guns growth and seems to be working. Mathematically, it is guaranteed to end in disaster . . .

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Source:
Time for industry to end its war on regulation
Steven Pearlstein
Washington Post, May 26, 2010; A13
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/25/AR2010052505154_pf.html

Category: Bailouts, Really, really bad calls, Regulation

BP Deepwater Spill = 4X Worse Than Exxon Valdez

There are a variety of estimates as to the total spillage from the Deepwater Horizon disaster.

As of yesterday, they were all significantly losses worse than the 10.8 million gallons of crude the drunk captain of the Exxon Valdez spilled. The range is 23.2 million gallons by the US government, to the worst case scenario of BP itself at 92.5 million gallons.

And counting.

When this is done, it will dwarf the Valdez in total spillage, economic an d environmental damage.

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Tracking the Oil Spill in the Gulf

click for interactive timeline

Graphic via the NYT

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Source:
Size of Oil Spill Underestimated, Scientists Say
JUSTIN GILLIS
NYT, May 13, 2010
http://www.nytimes.com/2010/05/14/us/14oil.html

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Category: Digital Media, Energy, Really, really bad calls

FT: GS Seeks to Pay “$100s of Millions” to Resolve SEC Charge

The FT is reporting that Goldie is on the verge of 9 figure settlement with the SEC: “Goldman Sachs is hoping to avoid the Securities and Exchange Commission’s charge of fraud by reaching a settlement on a lesser offence and agreeing to a fine of hundreds of millions of dollars, according to people familiar with…Read More

Category: Legal, Really, really bad calls

10 Most Corrupt US Capitalists

I left Vegas on Friday, but before I split, I took one final lap around the Skybridge Alternative Investment conference to say goodbye to a few people.

On the way out, I interrupt a tall old codger making time with Sandra, who works as Roubini’s Research Strategies Director. She is quite fetching, and since I was late, I bulled in, barking “Pardon the interruption.” I hurriedly air kiss her goodbye (European style, MWA! on each cheek), all the while thinking about my flight to San Diego. She introduces me to Lurch, but I’m only half listening, and I shake the old guy’s hand before bolting for my flight.

In the cab from the Bellagio to the airport, it dawns on me just what Sandra said: “Barry, this is Robert Rubin.” No bullshit, that’s who it was. He looked terrible; Clinton who just had quadruple bypass, looked much better.

Then again, Slick Willie’s biggest crime was sexual, not economic in nature. Whatever rationales Rubin’s conscious mind may have made about his role in the collapse, his subconscious knows better. And while no one else seems to be doing this, his subconscious is in the process of kicking his own ass. He seems to be slowly dying inside, at the behest of his own brain’s sense of guilt.

Regardless, I was reminded of that when I came across this list of the “corrupt corporate capitalists who leveraged their connections in government for their own personal profit . . . Today we know these opportunists as deregulatory hacks hellbent on making a profit at any cost.”

And look at this! Number 1 (with a bullet), turns out to be the former Treasury Secretary of State, whom I barely acknowledged while I was rudely interrupting his rap to a young hottie so I could say good bye to her:

America’s Ten Most Corrupt Capitalists

1. Robert Rubin
2. Alan Greenspan
3. Larry Summers
4. Phil and Wendy Gramm
5. Jamie Dimon
6. Stephen Friedman
7. Robert Steel
8. Henry Paulson
9. Warren Buffett

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Category: Bailouts, Really, really bad calls

Get Me ReWrite!

My approach to everything I have written, studied and analyzed in this space is pretty straight forward: Start with the data and evidence and go forward from there. Figure out what the “Truth” is; try to get as close to the objective reality beneath the noise in order to make intelligent investing decisions for myself…Read More

Category: Bailout Nation, Bailouts, Credit, Real Estate, Really, really bad calls

It was the CRA’s Fault After All!

I finally figured out how all of those right wing think tanks went so far off the rails — blaming the Community Reinvestment Act for the housing boom and bust, credit crisis and economic/market collapse.

This has all been a simple misunderstanding. You see, these Think Tanks screwed up their acronyms! They did not realize at the time that “CRA” stood for Credit Rating Agencies.

So when they were told to “go forth and lay all of the blame on the CRA” — they simply picked the wrong 3 letter acronym agency. Its funny how these misunderstandings can take on a life of their own.

Now, if only we can find a high frequency trader named Fred Fannie, we can solve two other mysteries in one fell swoop . . .

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Category: Bailouts, Really, really bad calls

Luskin: Sell Equities, Buy Gold

On Friday, the one man contrary indicator announced — AFTER the equity market collapse, AFTER a huge spike in gold — that it was time to dump stocks, and get long Gold. I told a buddy on hedge fund manager/Saturday that meant we were due to see gold correct and the markets rally. I had…Read More

Category: Really, really bad calls

Attention Mr. Bernanke:

I Direct Your Attention, Mr. Fed Chairman, to Exhibits 1 through 10: 1. Ultra low interest rates led to a scramble for yield by fund managers; 2. Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers; 3. Since they were writing mortgages…Read More

Category: Bailouts, Credit, Derivatives, Federal Reserve, Fixed Income/Interest Rates, Real Estate, Really, really bad calls

Trashing Rubin

I have regularly trashed Robert Rubin in this blog for quite some time. And while I further tarnish the name of Rubin in Bailout Nation — he is between Hank Paulson and Larry Summers in our blame list — I probably could have slapped him around even more had time and space pemitte.d No Matter….Read More

Category: Bailout Nation, Derivatives, Really, really bad calls

Double Triple Bubbles

This is a terrific chart (via Invictus) showing the past two — really three — asset bubble tops. 1. Tech/Dot.com bubble 1990s 2. Credit Bubble/Housing boom 2002-07 3. Finance collapse 2008-09 The second two are obviously related: The easy money, credit driven financialization of the economy led to two asset class peaks: Stocks and Houses…Read More

Category: Markets, Psychology, Real Estate, Really, really bad calls