finance

This is your Sunday required reading, two days early (or three days late).  Michael Lewis gets to the bottom of it all.  Here is one of many passages I particularly appreciated:

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

It will be interesting if it happens.  From FINalternatives:

Hedge fund giant Citadel Investment Group is teaming up with the Chicago Mercantile Exchange to launch an electronic credit derivatives market with a central counterparty clearing facility.

The joint venture between Citadel and the CME Group, both based in Chicago, comes ahead of the debut of a central clearing house for credit default swaps planned by The Clearing Corporation. The Federal Reserve met with industry participants in New York yesterday to discuss a central clearing facility.

“It is imperative to bring stability and transparency to the CDS market,” Citadel CEO Kenneth Griffin said. The Citadel-CME venture will “reduce much of the systematic risk inherent in the current CDS market structure.”

The marketplace and clearing house is expected to launch within 30 days. Citadel and the CME have invited banks and hedge funds to become founding members of the exchange, offering equity stakes in it of as much as 30%.

Yesterday saw pure market panic in the morning followed by euphoria in the afternoon when word leaked out on CNBC TV that Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke would meet with Congressional leaders of both parties at 7 p.m. last night.

You would never guess what actually happened in the meeting from the positive statements made afterward around 8:20 p.m.  No plan was presented other than in the most general terms to have the federal government acquire distressed assets of financial institutions.  No cost estimate was presented.  When pressed, Paulson and Bernanke said "hundreds of billions."  When asked how many hundreds of billions, they just repeated themselves, "hundreds of billions."

I think that Louis Uchitelle commits the mild journalistic offense of burying the lede in his article in today's New York Times, "Pain Spreads as Credit Vise Grows Tighter."  The thrust of the article is that the flow of credit is drying up for borrowers who may have in the past been able to get loans.  Some examples he cites:

Richard Parsons, chairman and former CEO of Time Warner, visited the Rockefeller Center at Dartmouth yesterday to meet with students and give a public lecture on "Entrepreneurship in the Digital Age."  There is no one who has been closer to the interface between the old and new economies over the last decade, and his remarks did not disappoint.  The theme of the talk is well summarized by this passage from the story in this morning's issue of The Dartmouth:

Parsons also spoke on how the Internet has lowered the entry barrier for new ideas, leaving the marketplace “wide open for entrepreneurs.” While investment capital for new ideas has spread since the 1990s, he said, technology has simultaneously made that capital less necessary.

There I was, sitting at the kitchen table, sifting through the goodies left by the mailman earlier that day, when I happened upon the following solicitation from Chase:

Take a look at the box highlighting how much the monthly payment is on a $10,000 loan with a stated APR of 5.74%. If I could make loans like that, I'd bail out Bear Stearns myself. Is there no one working at that bank who could figure out that the $10k should have been $50k?

Or are they all doing market research leading them to the conclusion that co-branding with US Airways is the best way to improve their business model?

Quite literally. Here's Alpha Magazine's list of the ten hedge fund managers with the highest personal earnings in 2007:

*Earnings include managers' shares of fees as well as gains on their own capital.

So how did they do it? This article in The Washington Post explains: