Saturday, May 5, 2007

The Era of Trillions: Success Through Excess

Not a day goes by without the announcement of several multi-billion dollar takeover bids. The "feel" of the market is remarkably similar to the late 1980's - early 90's when swashbuckling takeover artists like Ivan Boesky, KKR, Carl Icahn, T. Boone Pickens and many others were empowered by seemingly unlimited junk bond funding from Mike Milken's Drexel Burnham Lambert. At first the bonds were sold to institutions, but eventually the deals got so large and fluffy they had to tap that perennial sucker, the retail investor. Stuff like 12% RJR junior notes to finance the takeover by KKR was aggressively promoted via the retail network of major brokerage firms, with 3 point commissions attached. That's a lot of scratch, for bond peddling...

That era of excess did not end well and several protagonists did time behind bars - even if only at Camp Fed and only for a short while. However, the final bill for the Predators' Ball had to be borne by the taxpayer through the Resolution Trust Corporation, the largest ever financial bailout arrangement (~$50 billion). Greed was not good, after all.

Which brings us to the present era of easy money, the Era of Trillions. Carl is still around and so is T. Boone, but they are hoi polloi compared to the younger hedge and private equity barons. This crop of financiers have learned a thing or two from the past and mostly keep a low public profile, though their annual compensation is upwards of a billion dollars. But the excess is there, just as it was 20 years ago and the retail investors are being tapped, yet again - this time through their pension funds.

Hedge fund assets are now $1.6 trillion and through leverage their open market positions are certainly twice or three times that. No one really knows how much total money is involved at private equity funds, but it is definitely more than hedge funds: in 2006 alone private equity firms raised $430 billion in new money. The "billion" is dead, long live the "trillion". Just for comparison, US GDP is $13.4 trillion and global GDP is ~$50 trillion.

Let's compare: in the late 80's corporate raiders at least used the fig leaf of consolidation, of getting rid of corporate "fat", to justify their actions. Today's private equity firms don't even bother with that: they buy entire companies with the expectation they will sell them to someone else at a higher price, just because the market will go up. The ultimate in no-value-added hubris: We shall make money because it's us. These guys have gone beyond greed, they believe themselves omnipotent - if money goes to your head, then extreme money surely goes to your psyche.

Euripides lived 2.500 years ago and had no clue of "modern" finance. But he certainly knew human folly was timeless, when he wrote: "Whom the gods wish to destroy, they first make mad."


  1. With respect to a shortage of sanity displayed by the financially, and otherwise powerful, I maintain that U.S. society is experiencing madness on an order of magnitude not witnessed in living memory.

    I agree with Jeremy Grantham that we are in a global asset mania, however, I strongly disagree with his assertion about sound fundamentals underlying the mania. If the last few decades has proven anything in the financial realm it is that fundamentals need not underly any asset explosion. And with few exceptions, in our present global round of asset manias, that is certainly the case.

    In any case, manias are nothing more than pathology writ large in the sphere of "money."
    Given the realities of Peak Oil, we are almost certainly experiencing "The Last Party." I like that. Should I tm it? Great! Consider it tm'd.

    My guess is the present chapter in the mania sweepstakes will end sometime later this year, maybe early next year, because, contrary to Grantham's view, the fundamentals can not and will not support it. The tenuousness of the convoluted and overly complex schemes that give life to the mania and allow it to operate, are apparent to astute observers such as you, and they will topple and implode, as they always do, of their own gargantuan weight. Hell, I am not sure why you believe the question, "How it will end" to be the most crucial. To me, it is the least relevant one to ask, except, perhaps,to financial historians.

    Furthermore, looking past the end of the global bubble, allow me to conjecture that Marx's standing in the world community is poised to make a fantastic comeback as the
    pain experienced by hoi polloi in the form of massive unemployment and purchasing power destruction intensifies to a level not seen in many many years. Class warfare, which has been waged both visciously and effectively against the middle and lower income echelons for decades by the upper tier will truly blossom going forward. What's past is prologue, except more so.

  2. Did Euripides write it? I cannot find the original and the following thinks it may be other wise.

  3. According to some, it could have even been Sophocles, before him. Human folly is as old as the hills and the ancient Athenian dramatists probably understood that better than anyone else. They should make financiers read some of the plays before letting them loose on the public.

    "The Last Party" (TM)...I like that. The elite are playing at the penthouse where the champaign and canapes are flying off the tables, but the hoi polloi are down at the basement with beer and pretzels on credit. If/when the credit runs out the unwashed masses will get in the elevators and go after the canapes...