The Big Short.

My final draft reviews are up for the American League and the National League.

I’ll be on KNBR 1050 in San Francisco at 1 pm PDT today with my friend Damon Bruce. I’m sure we’ll talk about how bad AAA pitching is and why the Giants need more veteran presence.

I’m leaving for vacation on Saturday, so between now and then I’m going to try to do a few quick dish posts on books I’ve read since the draft rush began.

Michael Lewis’ The Big Short: Inside the Doomsday Machine follows three investors who foresaw the meltdown in the subprime mortgage market and each made a killing off of it, using their stories as a way to expose the lunacy of the collateralized debt obligations used to sell these destined-to-fail loans (much of which was new to me) and to do something Lewis does very well: Create villains and take them down.

Lewis has two great strengths as a writer: His prose is easy and natural, and he has a gift for finding interesting protagonists. Of the three profiled in The Big Short, none is more compelling than Michael Burry, the awkward, antisocial neurology student whose investment blog becomes so legendary that he quits medicine to raise his own value-investing fund, only to abandon that approach and bet everything on what he saw as the inevitable collapse of the subprime mortgage market. Second in interest level is Steve Eisman, the perpetually angry hedge-fund manager who spends the entire book in a state of mounting disbelief at the stupidity of nearly everyone involved in the giant Ponzi scheme of subprime mortgages. The third major winner on bets against the market, the three-man investment outfit Cornwall Capital, had an incredible run of success, turning a $100,000 initial investment into a nine-figure fund, but their stories just aren’t as compelling as Eisman’s or particularly Burry’s.

The real villains here are the ratings agencies who weren’t so much asleep at the wheel as passed-out drunk. Moody’s, S&P, and Fitch continued to give high ratings to investment vehicles they didn’t examine or even understand, and once Lewis’ protagonist investors realized what was going on, they ratcheted up their bets against the subprime market, with one going to so far as to short the stocks of the ratings agencies. Lewis does spread the blame around, vilifying the investment banks who sold CDOs while enabling bets against them, the mortgage originators who gave out loans to people who lacked the income to pay for them and which were structured to fail, and the host of people who made money from the industry and didn’t want to hear the doomsayers’ warnings about an impending collapse. But the biggest culprit of all is human nature: We respond to incentives, and the system provided incentives for almost every villain to do what he did. Originators were paid for originating but faced no consequences when their loans went bad. Ratings agencies had immunity from claims when their ratings turned out to be bogus. And nothing prevented investment banks from betting everything on black or from profiting by playing both sides of a gamble.

I listened to the audio version of The Big Short and thought the reader did an excellent job in both pacing and distinguishing between all of the while middle-aged men who populated the book.

White Man’s Burden.

William Easterly’s The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good is, really, kind of a downer. He points out that billions in foreign aid poured into developing countries across three continents have accomplished nothing, that global pledges to end poverty and hunger have epicfailed, and that most if not all foreign aid efforts are built on a foundation of racial and ethnic condescension: The West acts as if the world’s poor people, who are largely dark-skinned, need the help of the educated, advanced, civilized white man. And that is far from the truth.

Easterley’s arguments against foreign aid as we know it are straightforward. One, Big Plans don’t work. If the goal is absurdly large, the project will fail. If the goal is vague, the project will fail. If accountability isn’t possible, the project will fail.

Two, aid projects rarely consider what the recipients want, but instead consider what the donors want. He gives the example of highways in Tanzania built with aid from foreign donors who didn’t provide funding for road maintenance; the roads “deteriorated faster than donors built new ones, due to lack of maintenance.”

Three, aid projects nearly always impose massive costs on recipient governments, both in manpower shifted to dealing with aid projects and in paperwork. In fact, Easterly questions why aid must always go to recipient governments, which, in developing nations, are often corrupt, autocratic, and even cruel (reason four).

And five, the West nearly always attaches stipulations to aid, such as changes to government policies or structures, that inevitably fail and take the aid-related projects with them. Nation-building doesn’t work, whether via military intervention or wholesale importation of another nation’s laws and policies.

Easterly backs up his arguments with anecdotes and analyses of data from the World Bank and the IMF (two of the main targets of his criticisms – he really tears into the World Bank’s penchant for doublespeak). The data are more compelling than the anecdotes, but the anecdotes carry the book along; without them, it would be borderline unreadable. It’s an advocacy book that isn’t written as one; Easterly is telling the story of the data, and given the evident lack of progress in combating poverty, hunger, and AIDS in the developing world, it’s hard to argue. Easterly devotes an entire chapter to the story of AIDS in the developing world, particularly Africa, pointing out, for example, that

For the same money spent giving one more year of life to an AIDS patient, you could give 75 to 1500 years of additional life (say fifteen extra years for each of five to one hundred people) to the rest of the population through AIDS prevention.

Yet Western aid programs are all geared towards getting expensive medications towards the 5% of Africans already suffering from AIDS because that’s what donors want (think of the brain-dead protests against pharmaceutical companies a few years ago). Teaching prevention through condom usage doesn’t make for great headlines, but it’s much more cost-effective and more closely tracks what recipients want.

Easterly points out that countries have developed from the Third World to the First with limited Western aid. Botswana was one of the few African nations to end up with a mostly homogenous population after the Europeans fabricated all sorts of borders across the continent, and through a stable democracy, some smart management of natural resources (mostly diamonds), and lack of interference before and after independence from their colonizers to build one of the fastest-growing nations in Africa. Their economy has even been strong enough to cope with a severe AIDS crisis. Turkey, Japan, and Chile all developed from Third to First World inside of fifty years without much aid or interference from the West.

The most interesting part to me was Easterly’s mention of, a micro-charity site that aims to connect donors interested in supporting the type of projects Easterly encourages (because they work) with aid workers and local good Samaritans running just such projects. He gives an example of a project that was “so tiny, in fact, that it initially embarrassed” the site’s founder: a request for $5000 to build a separate toilet block for girls at a school in Coimbatore, India. They got the money and built the toilet block, and lo and behold, the dropout rate for girls who hit puberty dropped dramatically. It occurred to me that we might pick a project there as the target for Klawbaiting funds, which I’ll kick off with a $50 donation to cover past times when I’ve been successfully baited by readers. My suggestion would be this project to help disabled Kenyan children attend school. It’s exactly the sort of unsexy project that Easterly complains aid agencies overlook, but that has a higher rate of success and that meets a stated need of the recipients.

Next up: I’m halfway through Faulkner’s Light in August. I usually do a lot of reading in dribs and drabs – five pages here, ten there – but I find that Faulkner is best read in longer sittings.

Stock-market forecasting.

Interesting Wall St. Journal article today on why most stock-market forecasts are wrong. The whole article is a good read, but here’s the part that surprised me:

History shows that the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss — and promptly lapses back into its usual stupor. Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900. I asked him to extend his research through the end of 2008. Prof. Estrada found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market’s 10 worst days, you would have tripled the actual return of the Dow.

I wonder what bearing this has on the debate over whether or not share prices follow a random walk.

The true cost of panic.

A must-read op ed today from economist Arthur Laffer, probably best known for the Laffer curve. Laffer argues that the economy would bounce back nicely if the government would just stay the hell out of the way:

Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street.

He has harsh words for just about everyone involved, crossing party lines, and points out that the stock market doesn’t seem to believe either Obama or McCain is capable of providing a solution. It’s sobering, but unlike 99% of the gloom-and-doom you’ll read, it’s grounded in sound theory rather than a desire for attention. In fact, perhaps if Laffer got more attention, we’d have better solutions.

Some links on the economy.

Been collecting a few of these links over the last week with some intent to write a short column about the topic, but that’s not happening, at least not in a timely fashion, so here are the links for those of you looking for further reading.

A Thumbs Up From the Ivory Tower: In general, econ professors approve of the idea of injecting capital into the banks rather than a government purchase of bad assets, although the new plan is far from perfect.

Gordon Does Good: Grumpy Paul Krugman gives credit to UK Prime Minister (and former Chancellor of the Exchequer) Gordon Brown for pushing the recapitalization idea when the U.S. was pushing the bad-asset purchase plan. I generally don’t agree with Krugman, but he presents a very strong argument here until he goes off the rails by saying that “All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.”

How did it all happen?: A sort of pop-psychology take on the fallacies and (bad) thought processes that played into the real-estate bubble and subsequent credit-market meltdown. It’s thought-provoking, but it’s all argument and no evidence.

Denmark Offers a Model Mortgage Market: George Soros is certainly not among my favorites – his attempts to buy the 2004 election for Kerry and his gleeful puncturing of Asian market bubbles in the 1990s come to mind – but he’s positively tame here in describing a safe, strong way to continue the securitization of home loans.

Smithtown on NPR.

A classmate of mine from high school (and junior high, and elementary school, dating back to 2nd grade) appeared on NPR’s All Things Considered today, in a segment about Dolly Parton’s song “Jolene.” Mindy Smith – who also shares my birthday – recorded a version of the song for a Dolly Parton tribute album in 2004, and Parton herself said it was her favorite of the 30-odd covers of the song. (You can buy the mp3 on

And while I’m pimping NPR, the first segment of today’s Diane Rehm Show, “The International Response to the Financial Credit Freeze”, was an outstanding listen, with a ratio of reason to rhetoric that approached infinity. Nobody screaming about the Dow dropping to 5000 or an imminent depression – just serious analysis of what’s happened, what might happen, and what should happen.

Oh, and Casey Weathers left tonight’s game holding his elbow.

Reusable bags.

I’m in Milwaukee, eating and writing up a storm. To tide you over, here’s a great WSJ article on the rise of the reusable bag, replacing the so-called “T-shirt” disposable plastic bags that have become the environmentalist’s new bête noire. It’s a well-written, balanced piece and brought a few things to light for me (like how the “I used to be a plastic bag” slogan has two interpretations).

Chez Law, we have more of those reusable bags than we really need, but many are the products of trips to the store without our bags and our subsequent refusals to take disposable ones. I think we have five from Whole Foods and at least four from Trader Joes, although I will take any bag to any store. I always tell myself I’m going to leave one in my car, and sometimes I do, except that then I take it into the store, fill it, bring it inside to empty it, and never restore it to the back seat.

Haute cuisine.

Interesting read from the Wall Street Journal on cutting-edge cuisine in Spain, which has become the vanguard of the cooking-as-lab-experiment movement over the last five to ten years. The famous El Bulli restaurant is mentioned, but the focus is on some of the other culinary standouts in Catalonia.

And I suppose as long as you’re on their site, you might want to check out their banking bailout FAQ, aimed at active investors but useful for everyone.

On naming rights.

Richard Sandomir wrote a slightly polemical piece on Citi’s $20 million purchase of naming rights to the Mets’ new ballpark, arguing largely that it’s unfair to the Citi employees who’ve been laid off during the bank’s recent financial troubles. It’s the type of side-by-side comparison that offends our sensibilities: Big, bad, insensitive Corporation and its Greedy Executives light cigars with $100 bills, cackling as they sign pink slips for the proletariat.

The problem is that Sandomir doesn’t address the one question that underlies the comparison: Does Citi get a higher return from spending the $20 million on naming rights and cutting the employees, or would they get a higher return from foregoing the naming rights and keeping the employees?

I don’t know the answer. Neither does Sandomir, but he’s arguing that Citi’s executives have made a mistake without knowing whether or not they did. If the return on the naming rights option is higher than the return on the employee-retention option, then Citi’s executives made the right call for their stockholders, for the remaining employees, and for their own pockets as well. If the return on keeping the employees is higher, then the executives just screwed up. All Sandomir offers, however, is this:

Even in the flush times during which it was signed, the deal seemed questionable. With high name recognition and a place among the world’s banking leaders, Citigroup hardly needed the Citi name plastered on a ballpark to enhance itself. Will fans move their C.D.’s to a Citibank branch because of the Mets relationship, any more than air travelers will consider flying American Airlines because its name is on two professional arenas?

Will the corporate suite-holders at the Mets’ new home want to do more or new business with Citigroup because they share deluxe accommodations at Chez Wilpon?

I don’t know the answers to those questions, Richard. Do you? And if you don’t, why are you asking these questions as if the answers are all going to support your underlying argument that the naming-rights deal is a dud? The closest we get to this is a generic quote from an academic who raises the same questions I do without providing answers, although he misses one of the fundamental (presumed) benefits of stadium naming rights – the frequent repetition of the stadium name during game broadcasts, on news and highlight shows, and in print coverage of games.

Sandomir calls the deal “an investment that seems to thumb its nose at laid-off workers.” In reality, Citi is responsible to more than just the workers they laid off; they’re responsible to their stockholders, remaining employees, and maybe even their customers. If the naming-rights deal is a bad one, then the executives are putting more than their noses at risk.

Related: BBTF discussion of the article.

Some economics links.

JP Morgan buys Bear Stearns for $2/share. This is fantastic news. One, JP Morgan picked up Bear’s financial obligations, so they believe they can be met, and we don’t get a default that really could trigger a broader financial panic. Two, there’s no government bailout, at least not in this case. Bear fucked up, and they’re paying for it. This is is how financial markets are supposed to work: If you take on too much risk, or evaluate risk incorrectly, you may get burned, and Bear did.

The Buck Stops Where?: If you want to be a pessimist, the way that the Fed is cheapening the dollar is the best argument that our immediate economic future is dim. We’ve seen scattered reports in the last two weeks that the recession is already abating and that economic growth should resume in the next quarter, so why is the Fed still pushing interest rates down? This would be a good time for President Bush to step in and show the sort of economic leadership he showed earlier in his tenure when he pushed for lower marginal tax rates, elimination of the dividend tax (albeit temporarily), and freer trade. The editorial argues that the Bush administration has tacitly approved of Bernanke’s rate cuts, and if that’s true, it’s a huge mistake. A weak dollar will drive investment funds out of the country at a time when we need more coming in to help ease the credit crunch. This is one example where the equity markets have it wrong. The Fed needs to start bumping rates back up, and sooner rather than later.