May 13, 2008

Liar’s Poker

Filed under: Anecdote — duncan @ 2:04 pm

Let me take a break from trying to get my head round whatever Marx is saying (thank you all who’ve tried to inform me…), and mention a couple of pot boilers I’ve also been reading, both about Wall Street.

First up, ‘Liar’s Poker’, Michael Lewis’s bestselling memoir of his time as a Salomon Brothers bond salesman. Lewis describes the years of the firm’s greatest success and decline – he describes, among other things, the creation of huge speculative markets in junk bonds and mortgages… and the repackaging of those mortgages as bonds… His book begins with a probably apocryphal anecdote about two of the firm’s partners – John Gutfreund, the chairman, and John Meriwether, a bond tradesman. Gutfreund challenges Meriwether to a game of ‘Liar’s Poker’ [something to do with betting on the serial numbers of one dollar bills…], “one hand, one million dollars, no tears”. Meriwether (supposedly) calls Gutfreund’s bluff, upping the stake to ten million dollars. Gutfreund declines to play. Victory for Meriwether – wouldn’t you like to be such a big swinging dick?

Lewis’s book ends with the crash of 1987 (“Time and time again someone stood up and shouted, for no particular reason, ‘Jeeee-sas Christ!” They were helpless as they watched their beloved market die.”) Lewis leaves the firm shortly afterwards, to become, I think, a freelance writer. (According to the author bio, he’s “served as editor and columnist for the British weekly The Spectator”, which doesn’t inspire confidence.) But although he describes the greed, mismanagement and suicidal short-termism that were at the heart of the firm he left, Lewis still has faith. “As it happens, I still own shares in Salomon Brothers, because I believe it will eventually recover. The strength of the firm lies in the raw instincts of people like John Meriwether, the liar’s poker champion of the world. People with those instincts, including Meriwether and his boys, are still trading bonds for Salomon.” With them on board, what could go wrong?

Move on to ‘When Genius Failed’, Roger Lowenstein’s account of “The Rise and Fall of Long Term Capital Management.” In 1991, Lowenstein tells us, scandal engulfed Salomon, when one of Meriwether’s traders was revealed to have lied to the US Treasury, about something or other. Gutfreund and Meriwether resigned; and Meriwether set about establishing another trading company – ‘Long Term Capital Management’, a hedge fund (the largest start-up ever) staffed by his former “boys” at Salomon.

Between March 1994, when it started trading, and April 1998, the height of its success, ‘LTCM’ was the brightest star in the finance firmament. “The firm had racked up returns of more than 40 percent a year, with no losing stretches, no volatility, seemingly no risk at all.” Then in August and September 1998, it imploded. The firm’s strategy, Lowenstein tells us, had been to bet, across all the markets it traded in, on the return of the market’s volatility to its long-run norm. In late 1997 “[w]ith Asia still in turmoil and stocks at nosebleed levels, investors were understandably jittery.” LTCM, believing that protection was therefore overpriced, became (in effect) a massive seller of insurance. But since “Long Term would have to settle up – paying or receiving monies according to how option prices moved every day”, the firm “wasn’t betting only on the extent of ultimate realized volatility, it was betting on the day-to-day inferred volatility, as determined by what other investors would pay for options.”

In mid August 1998, Russia defaulted on its debt. “Investors, at first singly, and then en masse, concluded that no emerging market was safe.” And investors fled “not just from emerging markets, but from investment risk wherever it lurked.” LTCM went into meltdown. “The losses came from every corner. They were so swift, so encyclodpedic in their breadth, so utterly unexpected that the partners felt abandoned.” In late September, with LTCM hours from bankruptcy, the Fed got the leading Wall Street banks together to bail out the firm – for fear of systemic crisis if it collapsed.

That’s the “raw instincts of people like John Meriwether, the liar’s poker champion of the world”. Now in that silly ‘Fooled By Randomness’ book I was reading a few weeks back, Nicholas Naheem Taleb remarks that the strategy that guided LTCM’s trades – like the strategy of a lot of investors guided by the ‘efficient markets hypothesis’ – is sort of a performative contradiction. Investors look for market mispricing, in order to profit from the market’s eventual readjustment. But whatever forces generate the mispricing, are also forces that can continue to generate the mispricing. In ‘The Alchemy of Finance’, which I’ve also been reading, George Soros argues that the whole idea of market equilibrium – and therefore of ‘correct’ market pricing – is flawed. The ‘reflexivity’ that governs market behaviour means, according to Soros, that ‘fundamentals’ are always produced, in large part, by speculation, expectation, belief, fear, panic, hubris, craziness.

“’No, John,’ he [Meriwether] said, ‘if we’re going to play for those kinds of numbers, I’d rather play for real money. Ten million dollars. No tears.’… Gutfreund declined. In fact he smiled his own brand of forced smile and said, ‘You’re crazy.’” Crazy. And these “crazy” gamblers don’t get decide “no tears”… It’s not their tears that are at stake.

April 2, 2008

A Crowd Flowed Over London Bridge

Filed under: Anecdote, Literature, Self indulgence — duncan @ 4:57 pm

I’ve been feeling in need of a wealthy, dissolute patron, lately. Somebody whose character I can assassinate in London taverns at three am, amid a crowd of literary winos, before writing grovelling letters of apology in the grisly-faced morning. Instead I have to work for a living – and it’s a bit of a struggle. You try mastering the fundamentals of economics while holding down a bank job; it’s fun, but it’s neither cake nor ale. So my conscious mind has recently shrunk to a single infinitesimal point, with just enough agency to move limbs and bowels, but without the wherewithal to talk or operate machinery.

Which is to say, I’ve been shirking my duties, and reading Macaulay on Johnson.

“Johnson grown old, Johnson in the fullness of his fame and in the enjoyment of a competent fortune, is better known to us than any other man in history. Every thing about him, his coat, his wig, his figure, his face, his scrofula, his St Vitus’s dance, his rolling walk, his blinking eye, the outward signs which too clearly marked his approbation of his dinner, his insatiable appetite for fish-sauce and veal-pie with plum, his inexhaustible thirst for tea, his trick of touching the posts as he walked, his mysterious practice of treasuring up scraps of orange peel, his morning slumbers, his midnight disputations, his contortions, his mutterings, his gruntings, his puffings, his vigorous, acute, and ready eloquence, his sarcastic wit, his vehemence, his insolence, his fits of tempestuous rage, his queer inmates, old Mr Levett and blind Mrs Williams, the cat Hodge and the negro Frank, all are as familiar to us as the objects by which we have been surrounded from childhood. But we have no minute information respecting those years of Johnson’s life during which his character and his manners became immutably fixed.”

And in case Macaulay seems a bit too Victorian, a bit too complacently outgoing, let me balance the scales with Beckett’s take on Cham.

“It isn’t Boswell’s wit and wisdom machine that means anything to me, but the miseries he never talked of, being unwilling or unable to do so. The horror of annihilation, the horror of madness, the horrified love of Mrs Thrale, the whole mental monster ridden swamp that after hours of silence could only give some ghastly bubble like ‘Lord have mercy upon us’, the background of the ‘Prayers and Meditations’, the opium eating, dreading-to-go to bed, prayers-for-the dead, past living, terrified of dying, terrified of deadness, panting on to 75 bag of water, with a hydracele on his right testis. How jolly.”

A crowd flowed over London Bridge. It flowed into the station, and through the stationers. Three years ago I worked there, selling cigarettes and chocolate to the crowd, before it flowed, millipedal, onto the trains and out into the suburbs, down towards Croydon. Now I work in a bank – offering loans and credit cards to people struggling to repay mortgage debts.

Q: Why is ‘The Love Song of J. Alfred Prufrock’ Eliot’s best poem?
A: ‘The Love Song of J. Alfred Prufrock’ is Eliot’s best poem because he’s candid there about the repressions, evasions and weaknesses that provide the foundation for his later ethereal art.

We summon an ocean of liquidity, with rites and dances. Then human voices wake us, and we find there is no water, but only dry sterile thunder without rain.

Proper posts to follow, hopefully.

May 29, 2007

So little time…

Filed under: Anecdote — duncan @ 9:26 pm

It turns out it’s almost impossible to write one of these blogs while doing anything else in your life. Posts might become from now on a little more intermittent. (Possibly no bad thing.)

A couple of Churchill factoids. In the early years of the twentieth century Home Secretaries were obliged to write a letter to the monarch describing the parliamentary events of the day. This was a ridiculous anachronism: as Home Secretary Churchill wrote to George V, “He [Churchill] ventures however to point out that very excellent summaries of the debates, far better than he could write in the time and space available, appear in all the newspapers, and that the use of the Parly letter has greatly diminished from this modern cause.” But Churchill was stuck with the letters, so he approached them with his usual energy. Jenkins: “What he did was to pour out a stream of uninhibited consciousness interspersed with whatever aphorisms came into his mind as he went along.” E.g.: “Friday was consumed in a very thin discussion of the remaining Army Estimates required at the present. The House assumed that listless air which indicated that the questions of interest lay outside the debates. Captains and Majors talked mildly to each other and the other Members took refuge in the smoking rooms.” Or: “As for tramps and wastrels there ought to be proper Labour Colonies where they could be sent for considerable periods and made to realize their duty to the state… It must not however be forgotten that there are idlers and wastrels at both ends of the social scale.” The latter produced a perhaps predictable eruption of fury from the King.

Churchill is certainly never short of an aphorism. His best so far is reported by Asquith’s daughter Violet, who met the young Churchill at a dinner party. Churchill, after lapsing for many minutes into gloomy abstraction, began holding forth on the brevity of human life – and his determination to achieve great things. “We are all worms. But I do believe that I am a glow-worm.”

May 20, 2007

Keynes’s Dahlias.

Filed under: Anecdote — duncan @ 7:55 pm

It’s always interesting to know how a ruling-class family established its wealth. To find the Economic Journal quote about Neville Keynes (in the post below), I re-read the opening chapters of Robert Skidelsky’s magisterial Maynard Keynes biography. Maynard’s grandfather was a self-made man. The source of his money? Gardening. “At seventeen he won his first prize – a pair of sugar tongs – for his pinks. Determined to profit from his green fingers he gave up bristles and turned to dahlias. His one-man dahlia exhibition at Stonehenge [!] in 1841 attracted thousands. This was the start of his reputation, and the foundation of his fortune. Dahlias made him. Cleverly developing new strains, he helped promote the dahlia boom; when the dahlia bubble burst, he switched with equal success to roses. As he prospered, John Keynes diversified into banking and other commercial activities.” The family never looked back.

There are books and books to be written (I’m sure lots of them already have been) about the role of gardening in the economy of the British empire. One of these days I might get round to writing a post about Joseph Paxton, an extraordinary self-made man if ever there was one. (Check out Kate Colquhoun’s biography, ‘A Thing in Disguise’.) Much 19th century exploration was fuelled by the insatiable market for exotic plants. Men fought and died over new species of orchids. It seems a striking instance of what one is tempted to call (following Bataille) a general principle: economic activity is fuelled, not by the desire for necessities, but by the desire for luxuries. The conquistadors were searching, not for food, but for gold; and in the early nineteenth century groups of hardened men set out on perilous expeditions to collect new kinds of pine trees. Many never returned.

May 19, 2007

Young Churchill

Filed under: Anecdote — duncan @ 7:47 pm

So I’ve just started reading the Roy Jenkins biography of Churchill. Highly recommended: it’s a hoot. I had no idea how adventurous his early life was. It turns out the young Churchill was determined to fight in as many conflicts as he could. He rushed to India as soon as possible, to oppress the populace. But apparently you needed to be independently wealthy to be an even medium-ranking military figure – at least you did if you lived as extravagant a life as Churchill. So he supported his escapades by working as a journalist. Churchill’s mum back in London was a famously promiscuous society beauty. She would pull strings so her son could do more or less what he wanted. As soon as some new conflict erupted, Churchill would abandon whatever post he held, and get the nearest train or ocean liner, often travelling for weeks in appalling conditions. He spent the time in transit writing: letters, articles, non-fiction books, a novel. On his occasional trips back to London he would hand in his latest manuscript, get a bidding war started, then dash off to further adventures. He would blag his way to the front line and, with tremendous physical courage, participate in whatever brutality was being perpetrated.

In 1899 he was in South Africa; the armoured train he was travelling in was derailed by the Boers. Churchill “established a fine morale-boosting ascendancy over the lightly wounded and anxious-to-flee engine-driver, persuading him to resume the controls”. Helping the wounded escape, Churchill remained with the derailed trucks and was captured. (“I thought I could kill this man, and after the treatment I had received I earnestly desired to do so. I put my hand to my belt, the pistol was not there.”) Anxious to be released, Churchill claimed, ridiculously, to be a non-combatant. (“I have consistently adhered to my character as a press representative, taking no part in the defence of the armoured train and being quite unarmed.”) Simultaneously, he lobbied the British military to be sure to count him as a full soldier, in case there was an exchange of prisoners. And while pursuing these avenues, he also cooked up an escape plan. Churchill and two fellow prisoners “would overpower the thirty rather dozy police guards, seize their arms, hurry to the race-course, do the same thing there, release the 2,000 other-rank British prisoners and with this sizeable force take over the whole capital city, incarcerate the Kruger government, and hold out for weeks or months, maybe long enough to bring the war to an end.” (Churchill devotes five pages to the plan in his autobiography). Churchill’s killjoy friends talked him out of the plan. Instead they formulated a more modest scheme for the three of them to escape by climbing over the fence. But this was postponed; the time was not ripe. Churchill was not a patient man. He abandoned his fellow plotters, earning their undying bitterness, and escaped on his own. Speaking neither Afrikaans nor Kaffir, he managed to travel the several hundred miles to Lourenco Marques. “He wore a brown suit and a slouch hat, and hoped that if he walked with confidence he would be unchallenged. His audacity paid.” Hiding out in a goods-train, Churchill made it to “a colliery with substantial outbuildings.” Needing food and shelter, he decided to ask for help. This was extraordinarily risky. “He knocked at a door… The man who sleepily answered was an English mine manager named John Howard.” Howard took him in, fed him, supplied him with “whisky and cigars”, then hid him down a mine shaft, “where he remained, accompanied by a troop of rats but well provendered, for several days until the excitement… appeared to be abating.” Then Howard hid him in another train, which carried him to safety. “He… immediately found himself a figure of world fame.”

And these are just the highlights. He’s only just turned 26! Surely nothing else this dramatic can happen in his life. (What’s he famous for, this ‘Churchill’, anyway?)

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