Several years ago, I read a book called “Liar’s Poker”. It was a very popular book that shed a ton of light on the madness that was Wall Street at the time- and which unfortunately has continued until now.

The author, Michael Lewis, also wrote the incredibly excellent book “Moneyball”, about the success of statistical analysis in building baseball teams.

Anyway, Lewis used to think that his book had helped shed some light on how Wall Street operated and he originally was under the impression that it might help rein in some of the excesses of the financial markets. Sadly, that has not proven to be the case.

Recently, through some links on the web site DailyKos, I wound up reading a few blog articles that I found to be totally fascinating and terrifying.

The first was an op-ed piece by Thomas Friedman. Friedman is kind of funny; sometimes I can’t stand what he writes, and sometimes he does a tremendous job of capturing how certain things are working that I think “how could someone this smart have ever screwed up?”

A perfect example is something that’s been nicknamed “the Friedman Unit”- which is a unit of time six months long. Why? Well, here’s how the Wikipedia entry puts it:

The Friedman, or Friedman Unit (F.U.), is a tongue-in-cheek neologism coined by blogger Atrios (Duncan Black) on May 21, 2006.

A Friedman is a unit of time equal to six months in the future. The Huffington Post cited it as the “Best New Phrase” of 2006.

The term is in reference to a May 16, 2006 article by Fairness and Accuracy in Reporting (FAIR) detailing journalist Thomas Friedman’s repeated use of “the next six months” as the period in which, according to Friedman, “we’re going to find out…whether a decent outcome is possible” in the Iraq War. As documented by FAIR, Friedman had been making such six-month predictions for a period of two and a half years, on at least fourteen different occasions, starting with a column in the November 30, 2003 edition of The New York Times, in which he stated: “The next six months in Iraq—which will determine the prospects for democracy-building there—are the most important six months in U.S. foreign policy in a long, long time.”

(emphasis added)

Yet I absolutely LOVE Friedman’s book “The World is Flat”. It describes how the nearly-free cost of sending data traffic over world-wide internet connections has almost completely leveled the playing field for many industries- we’re competing with folks in China and India and elsewhere who’re willing to work for far less, but since the only thing they need is brainpower and a computer, nothing is limiting their potential.

Anyway, getting back to this blog post… Friedman recently wrote a terrific op-ed about Wall Street. In it, he discusses the financial meltdown:

…how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

Friedman’s piece mostly just quotes another, longer, and better article by Michael Lewis, but Friedman’s summation is worth reading and thinking about:

That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.

To me, nothing illustrates more perfectly exactly why we need a strong, reasonable regulatory system set up by the federal government. In the really long run, we are actually going to make MORE money and have MORE stable financial systems if we don’t play along with the neocon “let the free market rule all” ideology.

It just kills me that we’re bailing out the financial markets to the tune of hundreds of billions of dollars, but when it comes to bailing out the auto manufacturers for a couple hundred billion, we’re balking at the cause.

I know that the financial markets have a deeper impact; when the money quits flowing, everyone hurts. But those guys are making money from nothing, really; their primary attribute is usually that they’re perfectly willing to absolutely screw over anyone and everyone just to make a few more bucks.

The car companies, on the other hand, at least actually BUILD things. Their workers are more classic in their American dream outlook, and given the choice between some Wall Street whizkid that “makes money” out of thin air and a guy who makes his money bolting seats to the cabin floor of pickup trucks, I’ll take the honest blue collar guy every time.

Lewis’s article is more scary, because it illustrates how everyone involved in the financial system on Wall Street knew perfectly well just how screwed up things were, but they didn’t give a damn about fixing it; fixing it would kill the golden goose, and everyone was making way too much money to be thinking about doing that.

As Lewis puts it:

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

…

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

Lewis then points out that there actually were some people in the system who were sounding the alarms- the only problem is that nobody listened to them.

Part of the problem here is that there was so much money flying around that it was relatively easy to keep the government out of things. This is a good example of how we can’t let political ideology- namely, the “deregulation is great!” chorus of guys like George Bush and Grover Norquist and Phil Gramm and yes, John McCain- overwhelm the common-sense rules that were put into place after the LAST huge financial meltdown, the Great Depression.

I’m a little bit surprised that the rest of the world hasn’t tried to put more pressure onto the United States to change our laws after this meltdown. After all, we’re even more interconnected than we have ever been before; our financial problems are taking the rest of the world into a recession. Yeah, we’re the great big gorilla who eats where/when/what he wants, but the reality is that if I were the EU or Japan/Korea/China, I’d be saying “hey, listen, you’ve got to get your financial house in order or we’re going to decouple our economy from yours as much as we can.”

As Lewis points out, the most immediate alarm recently was sounded…

Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.

…

Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.

(emphasis added)

And in the last week, of course, the United States government has had to dump $20 billion into Citigroup and guarantee another $360 billion of Citigroup’s assets. Whitney was both right and wrong; these people were not only stupid, but many of them were also morally corrupt. Morally bankrupt, actually.

Lewis goes on to detail some complexities that I’ve never read before about the entire mortgage bond market- both normal and subprime mortgages- and how they’re graded, split up, sold and resold, and so forth.

It gets a little complicated, and this is already a long blog post, but what you need to know is that basically nobody controlled this crap. These guys just kind of winged it, made up side bets that became major money that was being traded, and at one point were basically making the same bet several times over.

So if the real estate market stopped rising, let alone fell back some, the financial markets were going to be completely and totally fucked.

And that’s just what happened.

The entire process was screwed up to the point where things were completely out of hand. Smart dudes, like Steven Eisman (who Lewis writes about), knew for some time that many institutions were probably going to take a massive dive. This includes one from my hometown, Washington Mutual. As Lewis writes:

The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

Okay, I’m sorry, call me crazy, but when someone making 14 grand a year gets a 720 grand house, the system is completely broken.

Looking back on it, I probably actually benefitted from this insanity. When Paula died 10 years ago, I wound up missing quite a bit of work in that next year or so. I got a nasty case of grief-induced depression and burned through all of my sick leave, all of my annual leave, and wound up taking quite a bit of LWOP (leave without pay). (In hindsight, I or someone should have put in for the leave donation program.)

My financial situation went south big time; I was at the point of getting serious about investigating filing for bankruptcy, but wound up sticking it out and slowly but surely paying stuff off. The ironic thing is that it took about the same length of time to really get my credit score back up to where it should be as it would have if I’d simply filed for bankruptcy protection, wiped out my debts, and started over.

One thing that happened during that time, though, was as I’d gotten most stuff paid down and was back to having a strong cash flow again, I refinanced my mortgage. My credit score was still in the toilet, but I got approved at a decent interest rate. In the end, it was great; I got caught up with everything that much quicker.

Now, in some ways, I was a good bet; I had a steady job making plenty of money, no major bills, and mostly just had a pathetic credit score (I was in the lowest 20% of Americans for at least 3 or 4 years).

I keep wandering off track here. Anyway, the biggest thing that I took away from Lewis’ article (and if you can find some time, you really should go read it) was that we simply cannot trust the financial guys who are supposed to be even somewhat cautious and watching out in these kinds of situations. As Lewis writes about Eisman:

…Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

BBB is the lowest rating for big bonds and such; since it’s got such high risk, it pays very large interest rates. But the banks were basically taking BBB stuff and, by splitting it off into its own fund, somehow turning it into “AAA” stuff.

What’s more, the RATING AGENCIES were supposed to know better- but plainly they didn’t. Who builds an economic model based on always-rising prices in real estate? Anyone knows that yeah, in the long run it’ll usually go up… but there’s going to be lots of times when it falls a bit along the way, too.

A “tranche” is a slice of a big blob of mortgages. What happens is that someone takes a big group of mortgages, puts them all together, and splits them up by risk factor. They get scores ranging from AAA down to BBB. Each group- say, the AAB group- is called a “tranche”. The highest-risk tranches get the BBB scores and pay the highest rates, because the most money is at risk… but then the financial institutions started figuring out even more and more creative ways to split these off, repackage them, and sell them over and over again.

As Eisman explains in Lewis’s article:

…Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

A “CDO” is a collateralized debt obligation. It’s basically yet another way to package and sell financial products. As you can see, the CDOs that were being traded over the last couple of years were incredibly risky (based on the highest-risk mortgages and incredibly dependent on an ever-increasing real estate bubble) but were being sold as though they were AAA, low-risk bonds.

Even companies or groups that are regulated and controlled, limited to putting their money- OUR money, actually- into only low-risk investments are caught up in all of this.

This article really brought to light for me the answer to something that I’ve been wondering for some time- how on earth could it be that so many of these companies and groups are running around out there claiming that they don’t know the extent of the damage, that they don’t know if the stuff they’re invested in is safe, that they are suddenly at high risk of not having any money?

Well, now I know. It’s because in nearly every step of the process, the “free market” people who in theory were supposed to be playing honest were actually screwing us all over, big time.

And the government? Long gone, baby.

It’s pretty amazing to me that our national memory doesn’t stretch back to the Great Depression, and the banking scandals that preceeded that calamity. The lesson from that was that our financial markets MUST be controlled, and honesty MUST be forced onto the system.

Without it, human greed gets the upper hand.

It’s kind of ironic; the same thing that, in my mind, ensures that pure socialism/communism will always be a failure is also putting raw, unadulterated capitalism at grave risk. That thing is human nature.

It’s time we got serious and got back to a fair blend of government control and regulation without TOO much regulation. What’s amazing to me is that there are still some morons out there- usually Republicans- who are saying that we need to junk the government and do things like forever delete the capital gains tax, and deregulate even more.

Thankfully, we elected Barack Obama, and he’s hiring some really smart folks who will hopefully clean things up and get things going again. In the meanwhile, we’ve got to slag through some tough times.

Here’s a good example of why Ginger and I kept things as simple as possible at our wedding:

My best man was both sober and coordinated, so no problems there!

Surprise! Ginger and I got married yesterday. Twice, in fact!

We got engaged back in September, in Hong Kong. It was a gray, rainy day, so it was kind of like being at home- except it was about 82 degrees. Even before we’d gotten engaged, though, we’d talked about how much fun it would be to throw an engagement party… and then get married at that party.

Which is exactly what we did. I joked to people that I wasn’t really sure about the whole notion of an engagement party; in Enumclaw, the closest we come to an engagement party is when the little stick turns blue. Ginger grew up in Bellevue, though, and they’re a little more hoity-toity there!

Actually, engagement parties are becoming a bit more common, as people want any excuse to get together… and as they’re pulling back a bit on how much they’re spending on the wedding itself. We don’t really need “stuff” as gifts- we’ve already merged two households’ worth of stuff, and I’ve got more stuff in a storage unit out in Enumclaw- and we aren’t into spending great gobs of money on a big wedding production.

I ran into some legal bills recently that I had to pay for, plus I’d been saving for some time for a new car (which I got- that’s another post, though) so we tried to keep the party relatively simple.

The Marriott in Redmond, Washington did an outstanding job for our party. Of course, Ginger working there probably helped out a lot! They had the room set up absolutely beautifully, and the food was excellent. I mean, I was feeling at least a bit of nerves (despite my cool and steely, “nothing fazes me” air traffic controller exterior) and I noticed the food was good. I’m not a food guy, either, so if *I* noticed, it was pretty damn good!

We had invited our closer friends and family, and turnout was pretty good. A few people couldn’t make it but I bet if they’d known it was a wedding instead of “just an engagement party” they would have. (They’ll be kicking themselves now!) All in all, we were delighted for the people that were able to join us and thankful they came to share it with us.

Oh, and the looks on everyone’s face when I said “everyone’s been asking if we’ve set a date yet, and we just decided to do it here tonight” was absolutely and totally priceless. In hindsight, I do wish I’d told one guy- the photographer- so he could have been behind me while I announced it, and he could have gotten the reaction shot.

Anyway, I’m a very lucky guy. Ginger is a super gal, a real keeper, and while we know that marriage can be a struggle at times, we also know it’s worth it. I love her and just hope I can be a good guy for her in the life ahead!

…actually, that’s Sirius radio.

I got a new car recently. (I’ll write about it later.) One thing that it includes is a 6 month subscription to the Sirius satellite radio service. It’s pretty cool! They’ve got way more channels than you can get in the Seattle area on regular radio, plus they’ve got traffic updates that integrate into my rig’s GPS/navigation display.

So if I’m heading to work, and I put “work” in as a destination on the nav system, if there’s any accidents or roadwork or general delays along the route, the system will show it to me.

On the radio, there’s TONS of music and programming. Sports, talk radio, and great gobs of music broken down into every category you can think of. Heck, there’s one station that plays nothing but Bruce Springsteen, and another that’s playing nothing but AC/DC- it warms an Enumclaw boy’s heart!

Thing is… I don’t know if it’s worth paying for.

Sirius just merged with XM, the other satellite radio provider. If you want the “Sirius Everything plus The Best Of XM” pack, it’s 17 bucks a month. Just “Sirius Everything” is 13 bucks a month. On top of that, Sirius Traffic (which embeds the traffic data) is another 4 bucks a month.

It looks like I could get the “Mostly Music” pack, which is just that- music channels but cutting out the sports, talk, etc stuff- for 7 bucks a month.

Thing is that my vehicle has Ford’s Sync system built in, which means I have a hard drive that can store over 2,000 songs in mp3 format. I can plug in an iPod or other music player device, which means that many more songs. And of course there’s the old-school radio, which has the added benefit of being FREE (albeit you have to listen to advertisements).

And Sirius doesn’t sell the traffic data alone; you have to package it with at least some kind of regular subscription.

Is it worth the 17 bucks a month, or even the cheapest solution of 11 bucks a month? I don’t think so, and even though I’m enjoying it right now, when my first free 6 months is up, I think that’ll be the end of the satellite radio thing.