Daniel Lubetzky

I have always admired Goldman Sachs as the smartest of the smart, as "the" Investment Banking firm.  When I haven’t gotten a chance to catch up with emails and reports, and I go back and notice "forecasts" and predictions from columnists or analysts, I love taking a look at how accurate they were.

From a report a friend of a friend shared from Goldman’s predictions late this spring/early summer, sent to prospective clients, a small sample:

We expect core inflation to be contained in a range of 2.5-3.0%.

[Instead we are witnessing deflation]

We expect that the Fed will continue easing in 2008 with the Fed Funds rate ultimately settling at 1.25% to 1.75%.

We anticipate 10-Year Treasury yields to range between 3.5-4.0% for 2008.

[We wish]

And the kicker:

Our central case scenarios for 2008 call for operating earnings of $75, respectively, and reported earnings $67. These estimates result in an S&P 500 price target of 1475-1540 for 2008 year end.

They also provided a "Bad case" scenario, where the S&P would end in 2008 at "1200." That was their bad case scenario.  Well, we are still a few weeks away from year-end, but so far it’s tanked far below, at 896 AFTER a nice rally (it hit a low of 752 on Nov 21).  Their "positive case" was S&P 500 hitting 1600.

So much for my thinking at least Goldman knows what’s going on.

Michael Lewis (from "Liar’s Poker") wrote a piece in Portfolio Magazine that is a must reading (this earlier piece is also very good).  It is at once nauseating, chilling, and fascinating to see how our financial system is a house of cards.

A couple years ago I got into a passionate debate with friends from the financial sector about the growing disintermediation between actual products we make in the "real" economy and the derivative products that get packaged and re-packaged and sold – always generating a fee for the financial firms that hawk them – without really creating value.

Michael Lewis explains better than anyone how this came about in the 80′s and how it came about with the current credit crisis.

The saddest thing is that, while there will be some short fixes and a lot of chest-thumping in Congress, by the media, and in the executive corridors, the system is so sick and so rigged by those that benefit from it, that it is unlikely to be structurally fixed.

As Lewis concludes in his piece, it would require that Wall Street firms go back to operating as private partnerships with skin on the game rather than become publicly traded firms where management can pass on long-term risks to shareholders, benefiting from short-term profits even if they are risking the fate of their institutions.  Or it would require enough regulation that really tracks and connects compensation to long-term value creation.

Yet greed and ingenuity are potent combinations.  And the "smart" guys will always find a way to game the system – with your money.

Even as we witness calamitous losses on the market, many insiders are doing quite well for themselves.  They find the way.  They are survivors.  Several of my friends are in this industry.  They are not bad people.  They are just playing by the rules of the system, which banks on our own greed as investors to sustain and legitimate itself.

It is hard not to be tempted to participate in the market once it has been so depressed that it should have nowhere to go but up.  And yet Lewis points out that someone who would have invested in the 80s in the predecessor to Citigroup would have lost more than half the value of the investment – rather accrue growth over a 22 year period!

Buyer beware.

And for the young people out there thinking what to do with their careers – many of whom Lewis laments having misread his book as an alluring tale for an exciting career – find something you can truly CREATE.  There are sooo many opportunities to make this a better world through concrete businesses that truly improve life and society.  There are so many opportunities to make money and do something truly good. To build something that adds value.  Find one that is real.

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It feels so frustrating to see so much abuse from insiders getting bailed out by taxpayers. It is true that the US government is providing terms to AIG that require high interest payments and a stake in the company.  But that is besides the point.  The main problem is that the damage has already been done by executives who took out billions of dollars over the last few years, even though the recent losses already accumulated far exceed the gains of AIG over many years.

The company has reported $38 billion in losses this year, wiping out the company’s total reported earnings for the preceding three years. -NYT

And that is not even taking into account what would be without the $150 bailout from US taxpayers, who are plugging in the hole, while executives got compensated ridiculous amounts for digging that hole!

Same story across Wall Street.

In Liar’s poker, Michael Lewis once wrote that if you don’t know who is the fool, it’s probably you. Here it is all of us as taxpayers.

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It’s ironic that these guys are more insightful than Paulson et al about exposing the idiocy of the market abuses and follies.

And these comedians highlighted this half a year before the Wall Street pundits…

See also this excellent one:

From an article in the New York Times quoting George Dyson:

Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth.

And:

“The unlimited replication of information is generally a public good,” George Dyson writes. “The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments.”

Also fascinating from the same article:

Here’s a frightening party trick that I learned from the futurist Ray Kurzweil. Read this excerpt and then I’ll tell you who wrote it:

But we are suggesting neither that the human race would voluntarily turn power over to the machines nor that the machines would willfully seize power. What we do suggest is that the human race might easily permit itself to drift into a position of such dependence on the machines that it would have no practical choice but to accept all of the machines’ decisions. … Eventually a stage may be reached at which the decisions necessary to keep the system running will be so complex that human beings will be incapable of making them intelligently. At that stage the machines will be in effective control. People won’t be able to just turn the machines off, because they will be so dependent on them that turning them off would amount to suicide.

Brace yourself. It comes from the Unabomber’s manifesto.

Yes, Theodore Kaczinski was a homicidal psychopath and a paranoid kook, but he was also a bloodhound when it came to scenting all of the horrors technology holds in store for us. Hence his mission to kill technologists before machines commenced what he believed would be their inevitable reign of terror.

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Here is an interesting article about the new frontier of automated trading. Algorithms tracking and reacting to market moves are no longer ‘fast enough.’ Increasingly, algorithms aggregate raw sentiments from newspapers and blogs and issues orders based on them, bypassing human interpretation.

The system may indeed be at the cutting edge, but it is dangerously susceptible to easy manipulation. You can imagine the next wave of robo-crawlers artificially pumping up a news story designed to highlight a false vulnerability that will depress shares of a sector or stock that the manipulator shorted. Very dangerous.

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Besides the fact that Jeff Sachs (the uber-economist) is a smart and good guy, I just realized he looks like Mark Wahlberg’s older brother (or young Dad).  If you don’t believe me, watch him on the Fareed Zakaria GPS interview of Oct 12.  But in the meantime this will have to do as proof:

You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial
institutions is an ugly sight."

- Warren Buffett

Sent from my iPhone – pardon typos

I just learned from Daniel Sachs about this think tank – the Glasshouse Forum – to encourage serious thinking towards a more enlightened version of capitalism, one that reflects on the dangers of rampant consumerism (same which we can now witness more clearly with the current financial crisis, not to mention related environmental consequences from consumerism) and related problems like short-term financial objectives and behavior, as well as the impact of globalization on the middle class.

A couple of provocative thoughts about the studies they are setting out on:

…the fact that capitalism is a necessary basis for a free society does not mean that it is a sufficient basis.

…There are tendencies within capitalism itself which cause it to saw off the branch on which it itself is sitting. (ie, the reduction of the Middle class and its buying power)

Capitalism has constantly to stimulate our desires and encourage us to want to satisfy them immediately. This stimulates an infantile character, whose attitude to life can be summed up in three words: I. Everything. Immediately.

[Under unfettered capitalism], Is it our duty to consume more and more in order to keep the economy going, even if we then as households live above our means? While we are focusing on the bubbles in the financial markets – sub-prime, asset-backed securities and others – the largest bubble in terms of long-term impact is the consumption bubble. At some point, the Western world will come into a period of considerably lower consumption levels. This is a structural change that will obviously have a dramatic impact on retail and consumer goods companies as well as on advertising, media and ultimately on our standard of living. Can we cope with such a development?

Has the time come for not-Only-for-Profit models like PeaceWorks to become the rule rather than the exception not just in business but in our economic structures and frameworks?

Robert Frank provides an elegantly simple explanation of the individual and collective behaviors & motivations that cause asset bubbles, and the means to prevent them.

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