Wednesday, August 5, 2009

Cousin Charlie and Uncle Bob

In finance, as in politics, love and most other aspects of human life, there are things we talk about, but don't do and there are things we do, but don't talk about. It is in finance, however, that we do things which we talk about in such an obfuscatory and banal way that - by design - no one from the public at large can possibly understand what is going on. (If you have any doubts, attempt- for example - to understand an IPO prospectus.

Usually there is little, if any, harm done. A bunch of professionals charge an arm and a leg to other professionals to come up with documents in a language only professionals can understand, all to assuage and comply with government regulations. Net-net it's a bit like my pet hamster running around in his little carousel - though it does keep pricey restaurants and luxury resorts in business.

But, there are times when such obfuscatory banality is absolutely, positively designed to confuse and deceive, despite its compliance to the letter of the law. How about this, for example: The Federal Reserve has decided to not apply Section 23 for XYZ big bank's transactions with its subsidiaries. "Blah, blah, blah" think Joe and Jane Average Citizen, presuming that if this was really important their government would speak in plain language - right?

Well, it so happens that the entire financial industry bailout process engineered by the Fed and Treasury is couched in exactly such anodyne terms. They completely obscure the unprecedented and breathtaking scope of liabilities, present and potential, all undertaken in the name of Mr. and Mrs. Average. Trillions, anyone?

Here is the truth, as an example that can be easily understood:

My rich cousin Charlie got the idea that he could get filthy rich by betting on the ponies. He set up a bunch of accounts with a whole lot of bookies and started placing his bets. At first he hit a winning streak - he styles himself a horseflesh expert - and let his winnings ride. After a while, he ramped up to such an extent that the bookies simply accepted his markers instead of cash. He was a winner, a champ, a fella - and, of course, an excellent customer who paid a whole lot of vig.

Hey, very nice! thought Charlie and started spending his filthy lucre; Lamborghinis, beach house in Southampton, mega yacht, chalet in Aspen. He even tried to get legit by making a sizeable donation to The Met, but the hoity-toity crowd took his money and still snubbed him, of course.

Needless to say, the roof caved in on cousin Charlie when the ponies started to fail to win, place or show as he predicted. Losses mounted and the bookies got nervous. Soon thereafter they stopped accepting his markers and demanded cash, instead. With liquidity flowing out much faster than it was coming in, Charlie was in deep trouble. Faced with the very real prospect of broken bones or worse, he turned to his Uncle Bob.

Now, Uncle Bob is not rich, as such. But he does have the ability to raise a ton of cash in short order because he works for the Treasury. He can also change crucial regulations as he sees fit, without having to consult with his ultimate boss, i.e. the people. Uncle Bob is not always easy to deal with and he does from time to time make an example of his wayward nephews and nieces by hanging them out to dry.

Charlie, however, was quite smart. He realized that if he failed to pay his losses he would set in motion a domino effect that would touch lots and lots of bookies. After all, he was dealing with most of them and they in turn had laid off their positions with yet more bookies. So Charlie got on the phone and quickly convinced them to appeal to Uncle Bob together; if you don't bail us out, they said, the whole bet-bookie-pony system will collapse.

The rest of the story, everyone knows...


  1. Hey, Hell, thanks a lot for teaching me that wonderful word : VIG.
    I think that VIG is what I have been paying MY ACCOUNTANT to do my tax return for quite some time, although neither one of us really managed to see it this way, and SHE probably still doesn't.
    Perhaps you would care to explain to me THE DIFFERENCE ?
    Except that VIG is actually... VIGOROUS, and thus keeps LIFE and LIVING in the whole process (like some other illegal activities which are much frowned upon by the establishment which regularly clamors for heads to roll).
    Some observations : I take exception, as usual, with your tendancy to think that this process is a conscious one, with actors DELIBERATELY setting out to milk the system for all it's worth.
    Doubtless there are actors doing this.
    But the number one culprit is the FACT that we have been allowing, even ENCOURAGING our language to INFLATE so that NOBODY, outside of the armadas of specialists, can UNDERSTAND or control what's going on.
    And the inflation of language has been at work for quite some time now.
    We won't solve this problem until we... deflate the language involved. (Unfortunately this is probably going to put some people out of work...but at least probably NOT the people who are now scrimping to pay their credit card debt...)

  2. How does the story end? or should we wait for a couple of years to find out?

  3. Where would the legal profession be one of their product QA requirements was Elements of Style?

    Whose is kidding whom? Congress' multiple-hundred page bills are written by and for lawyers, all of which would all get an F- in freshmen English Composition. Is the government that profession's biggest employers? If so, another example of a government-subsidized industry.

  4. Debra:

    "Vig", as Hell uses it is vigorish, i.e. the juice or the take a bookmaker retains as his/her fee income. I agree with Hell; that most all of what is being done in the executive branch and the Federal Reserve is conscious. And they are not telling the people the truth as to what they are doing and why. It all will have long-term intended and unintended consequences, most that cannot yet be defined or timed. Most legal language is used simply because it has stood the test of the court and there is no interest in creating new tests for the court to interpret. I certainly share your frustration with all that is happening. As a now deceased horseplayer once shared with me; you must protect your unit. No one else will.

  5. Your narrative today is exactly why the USD is dead. Jim Sinclair posted this last Sunday.

    "There are 97 days to go before confidence waning enters into the collapse phase."

    "When the dollar senses this its fall will be violent and quick."

    Around November 10 we get the beginning of the end of the USD.

    Joe M.

  6. Another wonderful post Hell, though I might take at least a little exception with the slightly narcissistic view that written obfuscations are the unique preview of the professionals of finance. Though I truly hope it is never necessary, next time you are in your local ED, just take a look at all the paper work you must sign ;-)

    As for Uncle Bob rescuing cousin Charlie and the rest of his bookies: it seems that rotting fish keeps smelling worse and worse from places beyond its head (indeed the head is the only thing everyone seems to like the smell of right now). Indeed, it is always the few screwing it up for the rest of us.

    ... Kind of reminds me of Gore Vidal's quote of Ben Franklin:

    "I am in favor of this Constitution, as flawed as it is, because we need good government and we need it fast. And this, properly enacted, will give us, for a space of years, such government.

    But then, Franklin said, it will fail, as all such constitutions have in the past, because of the essential corruption of the people. He pointed his finger at all the American people. And when the people become so corrupt, he said, we will find it is not a republic that they want but rather despotism " the only form of government suitable for such a people.

  7. Thai, was that you on the 'Have Your Say'programme on Monday?


  8. When I first saw the title, I thought the article was going to be about this Charlie here.

    Apparently, Matt Taibbi is getting ready to expose how CNBC regularly sucks up to favored Wall Street executives. Like this one that was mentioned in the article:

    In the meantime, here’s a little taste of the tactics CNBC uses to suck up to its potential interview subjects. The network, for instance, likes to brag to its pals on Wall Street about what a good job it does beating up on the poor. Here’s an email Dennis Kneale sent to a buddies list that includes some Wall Street executives:

    From: Kneale, Dennis (NBC Universal) []
    Sent: Wednesday, July 22, 2009 6:12 PM
    To: Kneale, Dennis (NBC Universal)
    Subject: fight night at 8pm on cnbc

    hey guys, thought i’d show you a politically correct moment on my show last night: the poor are better off than you think. take a look! best, dk

    Beneath which Kneale included a link to a clip in which he argues, basically, that the poor are not suffering because 65% of poor families own their own washing machine, according to some idiotic study or other. Hell, with stats like that, who needs to actually interview people?

  9. I like to think of the Chair of the Fed as Robert McNamara in the Fog of War. You just keep making decisions even if you have no idea what the outcome is going to be, because you will lose the war if you stop making decisions.

    Though I have little sympathy for our gov't officials I do wonder if I could any better. Doing nothing or doing what's terribly unpopular is just not acceptable in politics.

  10. Thanks for that Ben Franklin quote, Thai.
    He probably hung out with Toqueville, didn't he ?
    The founding fathers were 1) less cynical than we are and THUS, 2) less naive, because cynicism always comports a hidden naivete that the holder unconsciously ignores.
    But... talking about the corruption of the people, I still maintain, is one of the most secret ways that WE manage to hide our own responsibility in all of this from ourselves. It makes an us/them system, and this is the easy way out.
    It would take me a book to explain this to those who haven't already figured it out, so I ain't gonna try.
    I think what it boils down to is that we ALL become complacent, and used to things after a while. We stop thinking.

  11. Betty re:'Have Your Say'????

    What is that?

  12. Sue, amen

    "Primum non nocere"- translated "first do no harm".

    It is the absolute first rule of medicine.

    Sue, if you ever run for office, you have my vote.

  13. Okie, you know how much I like to plug the underdog...
    I checked out the link to the CNBC show...
    It was rather amusing.
    Dennis Kneale lived in poverty, like REAL poverty when he was growing up in another day and age that looked a lot MORE like Dickens than what the American worker, or a lot of American workers can even imagine.
    (Yeah, like Joe says, you think this looks like a Depression, just wait and see what a depression REALLY looks like, and what "poor" means).
    Well, he sounds like a rather obnoxious, loud, self serving individual, but he does know what poverty is first hand, and... having a flat screen TV, a car, a washing machine, a roof over one's head is not exactly poor in MY book, at least.
    When you start talking to people you realize that NO-ONE in the (upper) middle class is ever going to own up to being rich. Even if they have flat screen TV's, three mobile phones, two cars, and a roof over their head.
    Wonder why ?
    Most people sure have a hard time IMAGINING those Dickens days...

  14. Ben Franklin wouldn't have spent much time with Toqueville since Franklin died 15 years before Toqueville was born.

  15. Sounds like Uncle Bob is missing an opportunity to corner the market on making book. Just let the bookie's default, and then hire them back, at a reduced rate of course and cut their health care benefits to save costs, but keep bonus programs, such as flat-screen TVs and washing machines, to keep them motivated.

    Make deals with the creditors from the assets left in the bookies pockets, plus a certain percentage added by the Treasury at favorable rates, to keep the peace and lubricate the operations.

    Keep control of the market until bookmaking settled down to a new, safer regime. Bob could one-by-one let the successful bookies write their own book again after buying a territory from
    Uncle Bob. Bob makes money from the deal, the bookies are more careful with book in the future and Uncle Bob and the Treasury profit from the debacle.

    Just a cruel joke about cutting their health care. Nobody should have to put up with dying from a curable disease because they can't afford health care.

  16. Marcus, this is where it falls apart : "the bookies are more careful with book in the future".
    edward, thanks for reminding me that some of those numbers are actually important, mea culpa.
    Ben Franklin did spend some time over here in my very local area, in the birthplace of the French revolution, which is NOT Paris, by the way, but the Dauphiné. His portrait is hanging in that encyclopedic museum, The Museum of the French Revolution, in Vizille, where the events that lead to the republic got going.

  17. I totally agree with Marcus!

    Nobody should ever have to face such an issue. Which is why it is so important that those citizens who are able to work but simply refuse because they are too lazy or suffer from "white man entitlement syndrome" get off their duffs, stop complaining and start helping out! Those of us who are helping the rest really really do need all the help we can get. Even if it means they get a job that only pays a few bucks an hour! For it would mean those free loader would be contributing that much more/taking that much less from the pool of money used to pay the sick and thereby freeing up resources which allow the rest of us to help the (wo)man/child with a curable illnesses.

    ... Of course under such an approach we would spend more than 16% of our GDP on health care, which I guess would be personally a good thing good for Edwardo, Hell and Econoliscious, as they live where we are already spending most of our collective health care resources.

    Or we could ration and spend the same money (or even just spend less) by shift the money from one member of the collective to another, or we could even do both (e.g. ration AND spend more).

    I couldn't agree more with you Marcus!!

    But you haven't really specified which approach we should take as a collective to achieve your goal now have you?


  18. Thai, Public health care. State monopoly. That way we could use the corporate propaganda lessons of advertising to get people in better shape.

    You ever see some of the anti-smoking ads? Pretty good some, now imagine anti high-fructose-drink ads. Get up off yer ass is good for your health ads. Heavy drinking causes colon cancer ads.

  19. Debra:

    "Marcus, this is where it falls apart : "the bookies are more careful with book in the future"."

    Well it goes something like this Debra, the bookies had a lot of money invested in their little (overextended) operation, they lost it all when the system collapsed. They are impoverished, they work their way out of poverty, being the industrious filthy lucre lovers they are,they are averse to the same traumatic experience in the future.

    Oh and you can rest easy knowing it isn't punishment because these little souls know nothing much but carrying little pieces of lucre back to the nest anyway.


  20. Sorry Marcus, this does not answer how to solve the problem at all.

    It is kind of like saying "I prefer a colonial decor to a modern one", and what I really read in your comments is "I like covert rationing" and this is where you and I might strongly disagree.

    Whether the system is public or private, it still has only so many options on how to build the mousetrap.

    I realize you are in one of these "a rose by any other name does not sound as sweet" traps, but I am taking about roses and you are talking about their scent.

    Please read up a little on health care before you keep making one line comments that suggest a stunning lack of understanding of the relevant issues.

  21. And regarding your (and many other people's) love of a single (e.g. monarchical or despotic) health care system, if ever Franklin was making a premonition about about someone....

  22. Marcus, you sound like the Dick Cheney/George Bush crowd who, true to their paternalist ideology, obviously knew what was good for everyone and did everything in their power to bring it about...
    Not with evil intentions, mind you.
    Because they truly believed that what they were doing was right. (Many of them...)
    And they also believed that they had the answers that everybody else was missing. Answers of course, that were good for the others, but didn't apply to them. Privileges obligent, as we say...
    And really, Marcus, you don't need to talk down to me because I don't know diddly shit about the vocabulary you're using. I DO know simple maths, still...
    It's... comprenez, and not comprende...

  23. Thai:

    "It is kind of like saying "I prefer a colonial decor to a modern one", and what I really read in your comments is "I like covert rationing" and this is where you and I might strongly disagree."

    Covert rationing we already have: we ration to people that have the ability too pay.

    Let's make it real simple: Design the system after Germany's system. They spend less than 1/2 per capita than we do for health care and everyone is covered.

  24. Debra:

    Did not mean to talk down to you. How could that be? I'm so flawed compared to you.

    I don't think I have all the answers, I'm suggesting there may be alternatives. I'm not for going to war about this, I'm hoping to help prevent war.

    I like telling other people what to do? Well yea, if I'm paying for it I think I have a say. How Arrogant of me to want to boss around "The best and the brightest".

    Just amazes me that you, who don't want to see "government wipe people's butts", would have a problem putting incentives in front of the princes of capitalism.

    What in your thinking is to prevent people from doing the same theft (misfeasance) again if we have no negative incentives in place?

  25. Marcus, that is not covert rationing, that is quite overt.

    OK, so you want to spend even less on GDP for health care? Well how very liberal and generous of you.

    And by choosing Germany, you want to focus on that simplicity vs. complexity issues? At least what you see as simple?

    I do like your choice of Germany as a comparison with our own, as it seems quite appropriate that a pro single system advocate propose the solution chosen by the master race.

    Further, Germany is so interesting because they do spend less than us and their median age is something like 42, while ours is a little more than 37. And they have higher rates of alcoholism and tobacco use than we do.

    So mister simplicity vs. complexity, if you understand these things as so simple, would you please now share with the rest of us who would be the losers in America that we all gang up and go to war with in order to make our system look like theirs?

    Do we make the social demographics of America look like Germany in order to accomplish this? (Some others on this blog might enjoy the concentration camps you set up in order to achieve this- will you be only rounding up our fatties? Or do you intend to also make us really look like Germany and go after those of low IQ or ethnic differences beyond what Germany has? If so, which immigrant groups are you going after?)

    Or will you keep our demographics as they are bu instead simply spend 14% of our GDP but administer it through 1000s of sickness funds that you will set up to mimic Germany's system which will cover 90% of the population and then let the other 10% have better private health insurance? Our countries would still look different but we would spend our money administratively the same way Germany does. Is this your simple plan?

    And if we spend our money with this administratively equivalent method, but our countries don't look the same, will Marcus get to decide who get the money? e.g. who lives and who dies?

    For I have a pretty good idea which (lets just call them) special interest groups you will be going after, and some are as emotionally American as hot dogs and apple pie. Good luck in that knife fight... Full disclosure I have a few friends with breast cancer so I may have a dog in that fight as well.

    Have fun with the AARP and the NAACP.

    So share away with your simple solution, we are all breathlessly waiting. Just do us the courtesy of also reminding us who the losers and winners will be when you do.

    Your selfless generosity is touching...

  26. Thai: Nothing substantive to say today?

    Master race? And then a series of incomprehensible scenarios or questions. Can you site a clear objection to the idea of a German type of health care plan without all of the hyperbole bullshit?

  27. Incomprehensible? You really don't get the issues do you. Has all these discussions between real and imaginary economies gone over your head?

    re: the German system I should give a "thumbs up" or "thumbs down on"

    Yes or No to each issue:

    A. 14% GDP?
    B. Germany's method of administering the money?
    C. 90% of people are part of one system with 10% getting a special private health insurance?
    D. A national rationing board?

    Thai's answers:

    A. Personally seems low so "No"
    B. I am rather agnostic on this issue as I do not think it substantive but if you force me to chose something then "no", I would prefer go with the Danish system. But again it makes little difference to me
    C. Again "no" for the same reasons as in B
    D. A very strong "yes"

    Now you explain who you intend to deny care to with your change?

  28. I am going to comment on the health insurance issue from a slightly different angle.

    I believe universal,publicly funded health care is primarily an ethical, or moral issue. Once we agree, as a society, that everyone should be covered regardless of ability to pay, then the rest of the discussion becomes mostly technical.

    But, we must first agree on the major moral issue.

    Example: we agree that public transportation is a necessary service, worthy of massive subsidies. I guess businesses like it because their employees can go to work at a low cost.

    So.. isn't a healthy workforce also desirable, without directing trillions of dollars almost exclusively to the private sector, which functions as a wealth-concentration funnel?

  29. re: "Once we agree, as a society, that everyone should be covered regardless of ability to pay, then the rest of the discussion becomes mostly technical."

    Hell absolutely!

    But once you take politics out of this statement, your rabbit hole entrance is the word covered.-“covered for what?"

    And what level of guarantee does one get on that coverage.

    The basic issue of health care is/has and will always be a tragedy of the commons issue. The issue of the uninsured is not “them” (e.g. congress) solving it for us, it is you and me agreeing on a compromise with each other.

    You of all people know there is only a finite amount of resources on this planet, a finite set of skills in society, a finite productivity people can achieve.
    Further we cannot all have everything with 100% certainty.

    Is Hell willing to give up a month of life UNDER CERTAIN CIRCUMSTANCES at the ripe old age of 85 so that Marcus will not have to deal with bankruptcy issues when his appendix bursts and further he can even afford to see a physician twice a year and get blood pressure medicines for a low enough cost that he can live an extra 10 years?

    Is Thai willing to tolerate a reduced guarantee of 97% that his child will not have cerebral palsy, but instead accept a 97.3% guarantee, so we reduce the incidence of caesarian sections down by 30%? And by the way, it means we need 15% less OB/GYNs than would otherwise be needed. And is Thai willing to forgo a med mal action against an OB/GYN if the worst happens. Will we all be willing to move to some kind of cheaper "no fault" mediation where Thai is paid from a universal slush fund and will probably never get compensated as much as he thinks he deserves?

    Are some trial lawyers willing to find another career in order to let this happen?

    And if a policy wonk looking at all these issues says that increasing the incidence of cerebral palsy by only 0.3% is still not worth it because the child lives so long, and therefore decides that Hell should give up another week of life at the end, will you/I/we all accept this judgment?

    And remember all decisions in health care are still based on models: remember how models got the financial quants in trouble?

    If we use models that are only so sensitive or so specific for a particular price point, are you willing to accept this for Marcus to avoid bankruptcy after appendicitis?

    And if you want greater sensitivity and specificity for (say) a heart attack, then what else in the system are you willing to do without?... Perhaps you might be willing to forgo having a physician see you for minor issues, but instead let a nurse practitioner treat you?

    I think I have made it abundantly clear I thought long ago we should move to such a system (this all happens anyway so just make it overt).

  30. Thai,

    'Have Your Say' is the daily programme of the BBC World Service where listeners debate the issues they find important.
    On the subject of wether graduates are entitled to jobs a Thai from Pennsyvania expressed your views. So apparently there's more of you.


    The town of Hasselt (Belgium) has free city transport since 1997. (
    They found this was cheaper than adapting the mediaeval city center for modern traffic.

    This is the problem with health care too: at some point it is easier to import a healthy workforce (or export the jobs) than to provide affordable health care to the sick and the aged.


  31. Thai,

    Me thinks you be complaining too much.

    That is the most convoluted way toward agreement I've ever seen. Are you "Too-much-coffee-man" today?

    Where is this ideal gold-plated system you have in your head anyway?

    That Hell seems like a magnanimous fellow and would no doubt see the benefit of keeping me out of bankruptcy by expiring a few days early.

  32. Betty, I looked for my apparent twin on your link but couldn't find him in the comments.

    Out of curiosity, what is my view?

    Interestingly, a variant of this issue (society protecting itself from risk) is happening here in Washington D.C. right now. The head of the school district, Michelle Rhee, is offering teachers salaries of up to $135,000/year if they will first give up tenure. Probably no surprise that when more salary comes with more risk, the teachers want nothing to do with it.

    Marcus- re: complaining. What on earth are you talking about? Go read up a little on how the world of health care works, will you? Then talk with someone else.

    @Hell- I rest my case.

  33. And Betty, while I hear you point, remember the prisoner's dilemma as illustrated in the BBC documentary The Trap by Adam Curtis.

    For the Rand corporation did not look at its own data- e.g. the secretaries always cooperated (13:29 to 17:22).

    The truth is it is always both.

    Deb, I think you might like Curtis' particular anti numbers message if haven't already see this BBC documentary before. ;-)

  34. Thai,
    Master Race? Concentration camps? Humph, last time you get to lecture me about my 'puzzling obsession' with the chosen ones. Just for that, I'll have some links ready for you on the next post.

  35. I am sorry Yo, I just couldn't resist. The opening was just too tempting... :-)

    But in truth I was thinking more about that annoying anon commenter who is obsessed with Latin immigration, and whom we seem to have luckily dropped for at least the time being.

  36. Too late; I'm in the process of formulating your remedy potion.

  37. Aw, shucks, Thai, that anti-immigration fellow gave me an (un)willing outlet for all of my proselytizing/propagandizing impulses, which are considerable...
    I'll check out the broadcast, if it is not too long...
    On the subject of healthcare...
    Back in the good old days, when France had one of the best health care systems in the world, and was recognized for it, prenatal care was a big, big thing (which I and my children benefited from, by the way...).
    And fifteen years ago, I unsuccessfully attempted to explain to an American money fund manager just why it could be considered a positive investment for a society to ensure good prenatal care to all of its mothers.
    He really couldn't understand it... Kept harping on "but why should I pay for somebody else's health ?", in the most stubborn manner.
    If you are incapable of seeing yourself as part of a group, a collectivity, then you cannot fathom paying anything for anybody else. It's... so UNFAIR, to use that infantile word that crops up in conversation so often.
    The idea that with more... money, talent, opportunities, luck, come more responsibilites is ultimately an extremely... ARISTOCRATIC one.
    You draw your own conclusions.
    And Marcus, maybe you could use the smileys if you are indeed NOT talking down to me, just so that I will not take your irony and sarcasm personally...