Saturday, December 29, 2007

Tales of Capitalism #1

Listen to this and this then let me tell you a quick little story.

Many years ago when I was young I was one of the first in Minnesota to pick up swing dancing during that renaissance swing dancing had during the late 90's.

That's when I met Tony DeMarco. I was at a place called The Front, a schwanky kind of 1940's Tiki lounge kind of deal and there Tony was singing Sinatra and other lounge songs.

The odd thing was that Tony had his masters in English and I had my degree in finance. Neither of us knew a damn thing about dancing, let alone singing, yet the demands of the market at the time called for lounge singers and swing dancers.

That was over 5 girlfriends and 10 years ago and during that time Tony and myself have lived kind of Batman lifestyles.

Mild mannered economist and broker during the day.

Performer of Sinatra and dancing instructor extraordinaire at night.

But in an odd sense, especially since the housing crash occured we were discussing how what we were TRAINED to do was always second to what the market DEMANDED us to do, testifying to the power of the market and providing an important lesson in economics. Alas you can't fight the market, and so while I've pursued teaching dance classes in my spare time, Tony has decided to pursue his career in singing (while being the mild mannered broker at a brokerage that shall go unnamed)

Thus, since Tony is a friend (though an ass) he is a capitalist ass and I find it my duty to reward and endorse true capitalists across the fruited plain in the hopes they live their dreams.

So if you happen to be in the Midwest area and are looking for an EXCELLENT singer, I suggest you contact Tony DeMarco. If not and you just want to listen to his music, you can online.

Visit Tony Here if for any other reason than to listen to the music.

(If you are a capitalist and have a story, please send it to me at

Friday, December 28, 2007

The Merits of Education

What I find amazing, is that we always go back to how much people make as the primary measure of success. I don't disagree with it, but if it were up to leftists we'd use things like the "Human Development Index." Regardless, another chart that correlates education with that worthless metric of income per capita;

Thursday, December 27, 2007

It's OK to Cheer for Obama

I have a dirty secret to admit.

I want Barack Obama to win the democratic nomination.

Look, I think Barack would be a lousy president. And I think his nomination would result in a Republican defeat. And any sane, normal thinking person who knows what socialism holds for its people would be against his being president.

But it's OK to be cheering on what is ultimately the quintessential underdog. Because Hilary, quite frankly and quite truthfully, is evil. Quite literally the epitome of evil.

No, seriously she is.

NASA scientists and Harvard professors proved it in that big study she tried to bury;

"Hilary Clinton; Proof She is Evil. The Epitome Thereof"

And not only that, she is establishment evil. The spoiled brat daddy's girl who had her way paid through college, paid to study in Venice, and paid to just float on upper income coattails throughout life. Oh, and that whole thing of being married to a philandering president (while claiming she's a feminist too kind of thing), kind of puts the hip into hypocrisy.

So seriously, even though it is to the disadvantage of my desires, I cannot deny the truth that it would bring me some joy to see Hilary lose to Barack Obama. If for any other reason it would confirm to me that it is the people that have the power and not the established elite.

Furthermore, think of the quandry that would put the Democrats in. Their princess-entitled would lose to the first genuine black candidate. How could they possibly condemn his nomination? Additionally, think of the political clout and power Seniors Jackson and Sharpton would lose accusing Barack of not being black enough.

In any case, I do hope the Republicans can field a candidate that would bring the party back to its independent, low tax, freedom and choice roots, and one that could handily defeat Obama. But I would be lying if an Obama democratic presidential nominee wouldn't put a smile on my face.

Wednesday, December 26, 2007

A Banking Christmas Carol Part 2

A continuation from Part 1.

“You are not paid to think,” is what my father said. “You are paid to sit there and do what you’re told.”

He was imparting his wisdom when I told him about the troubles I was having working in banking.

“Even if they tell you, you are paid to think, you are not paid to think. You are just paid to sit there and to do what you’re told. Don’t offer any insights. Don’t offer any opinions. And whatever you do, don’t come up with any ideas. Just shut up and do what you’re told.”

And he was right.

As far as my experience in banking told me management, supervisors and employers have two goals; self-preservation and maintaining the status quo. Thinking, inevitably leads to ideas. And ideas lead to better ways of doing things. And better ways of doing things usually results in streamlining operations. And streamlining operations leads to eliminating redundant positions, most likely theirs. Basically, thinking leads to change and change is bad because it disturbs the status quo. But most disconcerting, especially for the person doing the thinking, is that it is dangerous for it usually ends up in the thinker ramming heads with management and ultimately losing his job.

Thus with that short fount of knowledge my dad explained to me single-handedly more about the working world and how it operates than any human resource class or seminar ever did. And with this newfound knowledge I started to find a bit of solace in my job. I stopped bothering asking why. I stopped thinking or worrying about the ramifications of the decisions passed down to us by management. I stopped caring about the viability of loans. I altogether stopped caring. If management in its subtler ways was telling me to approve a loan, I approved it. If I was getting questioned on the wording I chose or a sentence I had written, I’d revise it verbatim to their liking. And if the numbers didn’t come out the way management wanted, I’d massage them into what they wanted. In essence I forfeited sentient and independent thought and just became another cog in the machine. I plugged myself into the Matrix, surrendered to blissful ignorance and did whatever management told me.

But the same could not be said for Jimmy.

Jimmy was a banker and in spite of that he was a buddy of mine. One of the few that didn’t have his head in the sand and instead of just trying to push loans through to get the commission, he actually cared about the likelihood of repayment. He was a brand new banker, and in being such was crippled by his idealism and integrity. One day, obviously frustrated he pulled me into his office, closed the doors and asked me, “Look, I need your help. What the heck is going on here?”

I said, “What do you mean?”

“Well, this business, these loans. They’re all garbage. The other bankers are bringing deals to the table that are worthless. Condo deals, town homes, and I’m not the economist you are, but I read your reports and I at least understand the market’s oversupplied. There’s no way those developments are going to sell. But their loans get approved anyway, meanwhile I’m getting yelled at because I’m not meeting my quota. It’s almost like they want us to bring in bad loans. It just doesn’t make sense.”

And then I realized what was happening. Jimmy was new. And in being new he foolishly held onto some romantic notions of running a good business, making good loans and doing what was in the best, long term interests of the bank. He, like I did before, somehow thought that efficiency and profitability were the primary goals of the bank. That the bank existed to make a profit. And that because of this, management would presumably prefer to avoid bad loans. In other words he didn’t understand the true business the bank was in. That it was not there to make a profit, serve the shareholders or conduct good business, but that it was there first and foremost as an employment vehicle for castes of senior managers and bankers. That profit and efficiency were truly secondary, if not a complete ruse. Nothing more than sweet nothings to be whispered into the shareholder’s ear. And so to help him out I decided to share my father’s wisdom with him, but in my own special way;

“You see, Jimmy, here’s how it works. Everything’s a 4.”

“A wha?” he asked.

“A 4.” I said.

Confused he asked, “What do you mean a 4?”

And so I explained.

4 was the magic number. Every bank in the banking world has a rating system by which they rate loans, somewhat similar to the bond ratings put out by Moody’s or Standard and Poor’s. There’s no standard rating system, each bank internally develops their own, but all of them have a numerical rating assigned to each loan to score it in terms of its quality and risk. An ideal loan would have a risk rating of 1, a bad loan might have a risk rating of 8. The particular rating system being used by this bank was a scale of 1-8, 1 being ideal and 8 being bankrupt with no hope of recovering any of our money.

But what made this bank’s particular risk rating system unique is that the method by which the loans were rated was completely mathematical. Meaning all the sub-scores that culminated into the final risk rating were based on numerical measures. Things like debt ratios, cash flow ratios, numbers that were exact and precise and could be mathematically measured, leaving no room for misinterpretation. Therefore if the loan’s “debt service coverage ratio” fell between 1.2 and 1.5, then you would apply a sub score of 5. And if the “loan to value ratio” was between 50%-70% then you would apply a sub score of 3. The point being that there was no room for error as there were no “gray” areas, and therefore no subjective judgments.

I personally liked this particular risk rating system because the ultimate risk rating was not debatable. Once you plugged in the numbers, the loan would have a mathematically calculated risk rating, and that was that. Also because of its mathematical nature its calculation could be automated. So gleefully I programmed a model that would automatically calculate the risk rating of every loan and imbed this information into the report. Thinking management would be impressed with this minor little streamlining, I proudly presented the first loan rated by this new model, which happened to have a score of 2.

“No, no. This isn’t a 2, it’s more of a 4” my boss said.

Which seemed odd to me because the formula, the finite, non-subjective, literal and mathematical formula had it at a 2. It was no different than me presenting him with the formula “1+1=2” and him saying, “Nope, that’s really more of a 4.”

I submitted a new report for a new loan. The risk rating literally was a 7.

“No, no. This isn’t a 7. This is more of a 4.”

Formula said 6.

“No, no. This is a 4.”


“No, 4.”



And soon I realized that it didn’t matter what the actual risk rating of the loan was, everything was a 4. If it was a great loan, with a great borrower, lots of collateral and excess cash flow;


If it was a former drug dealer, convicted of bribery, extortion and fraud currently under investigation and in the middle of filing for bankruptcy who wanted a loan to help transport some “flour” from Colombia;


And not only would the actual risk rating of the loan largely be ignored, but if any of the risk ratings deviated too far from 4 then the higher ups would lecture us about not paying close enough attention to the loan and the risk rating.

Thus, to play ball and keep our jobs, not to mention just get the loan through, we would manipulate the figures to make them all 4’s. If the loan was particularly good, we’d maybe rate it a 3. Or if it was particularly bad, we’d maybe rate it a 5. But we’d never deviate too far from 4 even if the loan was indeed an 8.

Once we started manipulating the figures the results were amazing. We spent less time explaining our risk ratings to the higher ups. We spent little time substantiating and defending our risk ratings. We spent significantly less time “revising” the figures to get the loan to be a 4. And just like a husband realizes that “yes dear” is the single most powerful phrase in all of marriage, we too learned that “4” is the most powerful number in all of banking.

So I explained to Jimmy, “You see Jimmy, everything is a 4. Every loan we do is risk rated a 4. Doesn’t matter if the guy is blatantly trying to steal money from the bank. Doesn’t matter that the guy asking to borrow money is Alan Greenspan himself. Doesn’t matter if the mathematical formula says it’s an 8, because everything is a 4. The key to succeeding at this bank is to worship, bow down to and name your children after the number 4.

For you see Jimmy, you’re not here to make good loans. You’re here to make loans period. I too was foolish enough to think that somehow logic or wisdom or some kind of credit control would be desired on the part of the bank. That somehow the bank would like to be profitable. But that was my first mistake; I thought. But like me, you have got to quit thinking. You don’t think. You just do what you’re told. If they want condo deals, you bring them condo deals. If they want twin home developments, you bring them twin home developments. If they want theme parks in the middle of nowhere, you bring them theme parks in the middle of nowhere. You just worship the number 4. And even though every ounce of your body is telling you it’s wrong. Even though every ounce of your body is telling you we’ll never see the money again. And even though your intellectual soul is screaming “9!” that’s not your concern. Your concern is the number 4.”

And then Jimmy, like me, had the epiphany.

“So in essence I’m not paid to think. I’m just paid to do bring in deals?”


Regardless, while we all did worship the number 4, 4 wasn’t the only number that was important in the banking world. 16 was another important one. Specifically 16%. For 16% was the rate of return the bank demanded on its loans.

Some banks do it, some don’t, but banks only have a certain amount of money to loan out. Ideally they want to get as high of a return as possible on that money so instead of loaning money out to anybody, they loan money out only to those people who are going to be most profitable. And to ensure this they write it into their policy that a loan must provide an “X” percent rate of return. In this bank’s case the hurdle was set at 16%.

However, banks don’t just look at the interest rate when calculating their rate of return. They look at the “total or “overall” rate of return on the loan which includes closing costs, various fees, and commissions. And just like they had a formula to calculate the risk ratings of loans, they also had a formula that would calculate the “overall” expected rate of return. So if a proposed loan didn’t provide a 16% rate of return it was declined.

This provided bankers and analysts a great incentive to make sure every loan had a rate of return in excess of 16% and resulted in the same sort of “number fudging” done with the risk ratings of the loans. If the formula showed “14%” then the closing cost or management fee was bumped up. If the formula showed “13%” then the interest rate might have been increased. Regardless the loan was structured in a way to provide at least a 16% rate of return.

This in itself wasn’t misleading or necessarily bad. If the closing costs or interest rates were increased, then naturally the expected rate of return would go up. All it did was increase the costs to the borrower, not misrepresent the expected rate of return. However, fees and interest rates were not the variables in the formula that were most susceptible to being abused. “Administrative costs” was where the manipulation occurred.

“Administrative costs” are the costs to the bank for managing the loan. In other words all the labor, time and resources the bank would have to expend processing, maintaining and administering the loan until it matured. And as administrative costs went up, then naturally the expected rate of return of a loan went down. However, whereas interest rates, closing costs and various fees were regulated by market forces and competition (meaning we couldn’t just charge 25% interest and a $400,000 closing fee because then the customer would just go to another bank), administrative costs could largely be whatever we wanted them to be.

The assumed amount of labor, resources and other expenses required to administer a loan was roughly $500. And in the ideal world, this may have been true. Bob the Carpenter would come in, completed application in hand, sign the documents, dutifully and religiously make his payments, pay off his loan and then we’d never see him again. Total costs to the bank; $500. But the housing market at the time was anything but “ideal.”

Because of all the troubles in housing market the majority of the bank’s loans required much more baby sitting than $500 in administrative costs. A typical and recurring story would be where a real estate development had not sold as many properties as was expected and was therefore unable to pay off its loan. This would require that the entire deal be refinanced essentially doubling the amount of work the bank had to do for this one loan, and therefore doubling the administrative costs. And, as was frequently the case, the development was in such dire straits that the developer was completely tapped of cash and was not even able to make interest payments. This required that the bank extend a less profitable loan called a “bridge loan” where we’d not only refinance the original loan, but lend the developer the money he would use to pay the interest expense and any new fees on the loan. In other words, while the interest rate may have been stated at 10%, in reality the bank was making 0%.

But the ever increasing administrative costs did not stop there. During the earlier months of the housing crash management believed there would be a “quick turn around” in the housing market. That this was merely a temporary slump that would only last a few months. Thus when they’d make bridge loans, they only made them for three or six months expecting the housing market to recover and all the developments to sell by that time. Sadly when the three or six months came and went with no more properties sold, the entire deal would have to be refinanced again, sometimes three times in one year, further multiplying the administrative costs of the loan.

However, even if it wasn’t a troubled real estate development loan, but a regular loan rarely would administrative costs be as low as $500. Again, in the ideal world Bob the Carpenter would come in, completed application in hand, he would have gotten approved and then dutifully paid off his loan on time. However, only in my wildest dreams where a young Sophia Loren was giving me a massage while I worked, feeding me martinis along the way, would such efficiency occur.

Typically what would happen would be a long and drawn out process that would consume vast amounts of the bank’s resources. First was the tooth-pulling process of getting all the necessary documentation and paper work from the borrower who was usually insulted that we’d have the audacity to request proof that he could back the loan. This alone took at least five hours of cajoling customers that they did indeed have to furnish us with tax returns, personal financial statements and other documentation in order to get approved for a loan. Second, upon receipt of all the necessary information, would come the underwriting process where analysts would easily spend up to 20 hours researching, analyzing and writing up the loan. This process was hampered along the way as management would constantly question every figure the analysts would come up with, request reports and data be revised to their liking and beleaguer them with other petty changes and revisions. Should the loan make it through that stage, then came the long and arduous process of approving the loan. Most banks approve loans by committee, causing administrative costs to skyrocket for it is no longer underlings or lowly ranked, lowly paid employees expending their labor, but managers and executives…in a meeting…all trying to agree on one loan…which on a good day would take 20 hours.

While there were certainly other costs associated with processing a loan, when it was all said and done the true costs of administering the loan were most definitely in excess of $500. A rough, back-of-napkin calculation puts the true cost between $1,500 and $2,000 and in the frequent case of problem loans, these costs could easily exceed $10,000. The end result was that the majority of loans would never produce the rate of return they were suppose to, and in many cases provided a negative return.

One would think the issue of administrative costs exceeding expectations or a risk rating inaccurately reflecting the true risk of a loan would largely be the problem of the bank. If a bank wants to lie to itself, who cares? It will find out soon enough the loan is much more risky and not as profitable. In the end the bank is only hurting itself. But by misrepresenting the true risk and return of these loans the banks claimed yet another innocent victim in the housing market scandal; secondary market investors.

As a means to lower their risk banks may not necessarily hold onto the loans they issue, hoping the borrower pays it off and on time. They might sell the loans on the “secondary market” as a means by getting their cash now and letting somebody else worry about the likelihood of repayment. They do this by either selling the loans directly to another bank or can do it indirectly via converting a group of their loans into a portfolio of “asset backed securities” which are then put up for sale much like stocks or bonds. Though the concept may be foreign to the everyday person, chances are the majority of us have experienced this when our mortgage has been transferred from one bank to another. But two major problems arise from this practice.

One, if a bank tweaks the risk rating and the expected return and plans on holding the loan, it’s only lying to itself. But if they plan on selling their loans on the secondary market, then they are lying to other people. And not only are they lying to other people, they’re lying about the two most important variables when it comes to deciding whether or not you should invest in a particular investment; risk and return. If a loan has a true expected rate of return of -5% and a true risk rating of 7, then no investor in their right mind would want to purchase it. But if the banks through desperation massaged or manipulated the figures to make that loan look like it was risk rated a 3 and had an expected rate of return of 20%, then not only could they lead unsuspecting investors to buy a bad loan off their books, but probably get a higher price for it as well.

Two, another problem is that by selling their loans on the secondary market it eliminated any risk to the originators of the loans. If a bank or mortgage company was not going to hold onto the loan then what did they care about the probability it would be paid back? They would get their commission and closing costs, turn around and sell it on the secondary market, approve a new loan and do it all over again. Unfortunately this effectively made the banks and mortgage companies brokers and provided them with a great incentive to focus on volume and not quality or risk. It was no longer about making good solid loans that were very likely to be repaid, but to go for volume, rake in the commission and fees, and then jettison the risk to an unsuspecting investor. It boiled down to a game of hot potato.

The consequences for this misrepresentation were severe. Though good and thorough investors should have conducted their own analysis and research, and drawn their own conclusions, apparently not enough did. Between 2004 and 2006 over $1.7 trillion in sub prime mortgages were sold as asset back securities on the secondary market, the majority of which held misleadingly high credit ratings. When the housing market started to tank and short term interest rates on various ARM mortgages reset higher, the true risk and return of these loans became apparent. Defaults in sub prime mortgages started to sky rocket, delinquencies increased as well, housing prices dropped impairing the value of collateral, and those left holding these soon-to-be-worthless mortgages suffered severe losses. Scores of mortgage lenders filed for bankruptcy or otherwise went out of business. Reputable firms such as Lehman Brothers and Citigroup either posted losses, laid off employees or otherwise scaled back operations in their sub prime divisions. And hedge funds such as those managed by Bear Sterns and UBS ended up going bankrupt and having to shut down due to overexposure in the sub prime market.

But because of the largesse of sub prime loans that had been purchased on the secondary market, sub prime problems were no longer quarantined to the banking and mortgage industries. Employee pensions were now under threat as hedge funds had become a popular investment destination for pensions, bankrupt hedge funds such as those managed by Bear Stearns, UBS and others. The stock market tanked in fear credit problems would spill over into the larger economy affecting people’s 401k’s and IRA’s. And though still unfolding, estimates range that sub prime investors themselves stand to lose between $200-$500 billion. But the largest cost was the dramatically increased chance of a recession. So severe were the sub prime woes that it forced the Federal Reserve to take action on a scale that it had not taken since 9-11. In just one month the Federal Reserve pumped over $200 billion into the mortgage industry in the hopes of staving off a recession. Again, no longer was it the soon-to-be-unemployed bankers, or the greedy mortgage companies that would pay, but your innocent, everyday average American.

What is truly sad though is not so much the current situation of the US housing market or economy, but rather the cause of all this. For it wasn’t a devious underground conspiracy that brought down over 100 mortgage companies and bankrupted a dozen hedge funds. It wasn’t a James-Bond-level criminal mastermind that forced the potential loss of half a trillion dollars. It wasn’t a terrorist attack that forced the Federal Reserve to take action on par with September 11th. Nor was it the most unexpected and powerful macro-economic shock that brought the world’s largest and most powerful economy to the brink of recession. All it was, was just one simple thing;

The number 4.

Monday, December 24, 2007

The Best is Yet to Come

When we digest this big lump of E. coli then you can start thinking about the housing market stabalizing;

Thursday, December 20, 2007

Putting Success in Iraq in Perspective

I know this will upset those who constantly cheer against America, freedom, democracy and anything in general deemed "good" but things really are going well in Iraq.

Tuesday, December 18, 2007

A Banking Christmas Carol Part 1

As all you aspiring, junior, deputy, official or otherwise economists out there know, I the Captain, write a fair amount. However, what you did not know is that during this past summer I decided to start writing a book on the housing scandal based on what I had seen behind the scenes in the banking industry. I thought it was a great idea, timed rather well, and I could churn out a good book in a short time, and make millions and then retire with Selma Hayek in the Caymans. However, after tendering the book to many, MANY publishers, I had no takers. Thus I've decided to post the three chapters I did write here on Cappy Cap so that at least you my favorite readers could read a good old fashioned Christmas story about bankers, corruption, a heroic economist protagonist and scantily clad, cheerleading banking assistants serving martini's...well maybe not the scantily clad banking assistants, but that might be added in the movie version;

Glut is a Four Letter Word

I was always under the impression that the term “president” was reserved for people that were pretty high up the chain of command. Akin to “general” or “admiral” you wouldn’t have that title unless you were more or less in command of an entire division of the company, if not the entire company itself. But the bank I was working for sure seemed to have a lot of “presidents.” Last I counted there were 11 “community bank” presidents, 3 “regional bank” presidents, 40 some “vice” presidents and one guy who I surmised was the actual “president” president.

Such a level of senior management I could understand if the bank was called “Citigroup” but the bank I was working for was no Citigroup. Matter of fact it was all of 2% the size of Citigroup. Regardless, its small size did not prevent this bank from having so many presidents.

Ultimately I concluded that the bank was very much like the militaries of dictatorships or one of those African rebel groups where seemingly everybody is a “general.” Where all the enlisted men curiously start off as “captains,” giving themselves inflated ranks and titles to boost their egos. Therefore if you filed, faxed and made the coffee at my bank you were considered a “reserve vice president.”

However, euphemistic titles were not just the symptom of a bunch of middle aged men trying to pad their resumes with impressive titles. They were also evidence of something else; top heavy management.

As far as I could tell in our division the ratio of “officers” or “bosses” to the regular ground troops was about 2 to 1. There were literally two managers for every one employee. Other banks I worked at weren’t so high, but still above 1 to 1. This runs contrary to common sense and defies the concepts of “management” and “organization.” In the military you have many soldiers under the command of one officer in order to achieve various military objectives. In schools you have many students instructed by one teacher because that way you can educate the masses efficiently and affordably. And in most businesses a manager or executive has multiple people under them for the purpose of achieving economies to scale and increasing profits. The military, the education system and the business world could not function otherwise, but this bank did. Or at least it tried to.

Looking at their income statement and comparing it to banking industry averages I found that the bank was spending nearly 40% more on salaries than was the industry. And aside from the losses they were taking from the now ever-increasing loan defaults, the primary reason for their losses was the excessive amount of labor. So naturally when they decided to hire some additional staff to help boost sales they decided to hire…

another community bank president.

I didn’t know why they hired this guy, nor did any of the other ground troops, but we were told he had a hybrid role as both senior banker and boss. So now when loans and research were submitted for review it would go to him first and then slowly up three more levels of management.

At first we were hopeful that this new guy would bring some desperately needed common sense to management. That process and procedure would be employed. That when we’d submit our findings and research he would look at them, believe them and not ask us to revise our figures. Our hopes were quickly dashed when I submitted my first report.

“Can I talk to you in my office for a second?” he asked.

Thinking it was impossible for me to get into trouble this quickly I said, “Sure.”

“What’s this?” as he threw my report on the desk. It was marked in red all over. Things he was questioning me on. Wanting more data to substantiate my findings and results. And crossing out entire paragraphs that seemingly and ironically had “too much” data.

“That’s the report for the XYZ real estate development project.”

“Yes I know that, but this right here,” he pointed at a word he circled in red.

I looked and the word “glut” was circled. Not sure what he was trying to get at, I responded, “Uh, that’s the word “glut.”

“Yes, why is it in the report?”

Completely confused by now and having no idea what this guy was talking about, I answered questioningly, “Because there is one?”

And that’s when I learned that “glut” is a four letter word.

For you see “glut,” as this newest community bank president explained to me, has a negative connotation. It meant “excessive” or “too much.” It also happened to be the Latin base for “gluttony” one of the seven deadly sins. Using the word “glut” in a report was unprofessional I was told. And that more adroit and diplomatic phrases could be used instead. Phrases such as “slight oversupply.” Or “higher than average levels of inventory.” But “glut,” now that was inciting and abrasive and over stated the severity of true housing market.

Little did I know “glut” was such an offensive word. Odd they didn’t mention it at Sunday school. And here I was thinking all those other four letter words I used profusely were the really bad ones.

But there was just one small problem. Above the word “glut” was a chart. And in this chart I showed the supply of housing for the area that the proposed development was in. And not only was the supply of unsold housing increasing, it was at an all time record high. 17 months it would take to sell out of the current inventory of housing and adding these new homes would only make it worse. This was more than 3 times the level of housing that was deemed a “balanced” market. It was the most literal, quintessential definition and example of the word glut. A more accurate and descriptive word in the entire English language and history of the world did not exist. It was indeed a glut.

Ignoring our differences over the use of the word glut, I pointed to the chart, trying to convey my point that the housing situation was something a little bit worse than “slightly oversupplied.”

“Doesn’t it concern you though that there’s 17 months supply of housing out there?”

And that’s when I discovered the true motives of our new community bank president.

“Well I’ve known these guys for a long time, they know what they’re doing.”

How stupid of me. Why didn’t I see this earlier? This was his loan. These were his clients. No wonder he was fighting me every inch of the way. No wonder he painted my report red. The report I wrote was condemning of the loan. And not only did I recommend it be declined, I documented and presented compelling supporting data. This would cost him a hefty commission and arguably lose him his long time client that generated who knows how much in commission for him over the years. So no matter what I said, this loan was going to be approved, regardless of the risks. I could travel into the future, film these guys defaulting on the loan, return back to the present and show him the footage and he’d still want it approved. There was nothing I could do.

“Well, what would you recommend we do then?”

“We’ll you’re going to have to redo this report. You highlight some of the risks here, but you don’t list any of the mitigating factors.” He continued on with a litany of things that were “wrong” with the report, but I wasn’t buying it. His dishonesty was sickening and I saw through it. All of the sudden it wasn’t that the market was bad or that the loan was bad, or that he brought a rotten deal to the table. It was the analyst’s fault for not doing a good enough job analyzing the loan. It was the economist’s fault for painting a bad housing market picture. That somehow the realities of the economy and housing market were not to blame, but that the analyst didn’t concoct enough reasons to approve the loan. Not to mention the unforgivable sin of the use of the word glut. And thinking I was too stupid to realize this was his game enraged me further.

But by this time I was too experienced to get any idealistic notions of going over his head and voicing my concerns to management. I already knew what would happen. I would approach management. Management, in a desperate bid to increase sales (and get their bonuses), would ignore my concerns and back him up like they did all the previous bankers. I’d have to revise my research and report. And then somewhere in there I’d get a lecture about not being a team player. And so, despite the near impossibility of the loan ever being paid back I decided to play ball once again, keep my job and redo the report.

However, this time something was different. Fed up with the constant fighting, the constant resistance and questioning I’d get about my research and analysis, I took a more sadistic approach. If these idiots were in such a rush to lose their money, so be it. Why stop them? If these morons wanted to get fired so quickly, so be it. Why get in their way? Any time I or any of the other economists, analysts and employees would try to stop a bad loan from going through, we were summarily silenced, if not disciplined and the end result was just a huge headache, a waste of time, lower performance evaluations, all for a loan that was going to be approved anyway. Nobody seemed to care about quality, so why fight it? It only served against our best interests. So I capitulated. If they wanted a glowing evaluation of the loan, then they sure as hell were going to get one.

The revised report may have taken over 12 hours to write but it was a brilliant work of art. The problem wasn’t so much writing what he wanted to hear, but the grueling, if not impossible task of reconciling what he wanted to hear with reality. Not to mention all those pesky facts and statistics I had dug up previously kept getting in the way. How, exactly do you look at a chart showing three times the normal supply of housing and say, “It’s all good. There’s nothing to worry about here!” It was literally like taking a plate of garbage and convincing people it was filet mignon. Regardless the end result was a beautifully crafted lie that danced around hard facts, exaggerated and focused on the positive, completely ignored the negatives (otherwise known as reality) and provided management the rationalization they needed to throw even more of the shareholders’ money away.

I was a bit proud of myself and started thinking I might actually be able to enjoy some job satisfaction if I were to approach each loan more like a game, not a serious transaction involving other people’s money. That somehow if I threw away all morals and integrity and found a way to spin every loan in the best light, I could hasten the inevitable collapse of the bank and do my part to send these inept managers to the unemployment line. Of course I wouldn’t have a job, but I figured I was on track to get fired sooner if I didn’t play ball, so why not make a game out of it? So I capitulated. And for the next several months was a good little boy and played ball. Unfortunately, there was an even larger problem; I wasn’t the only one thinking this way.

If it was just me and this one bank the consequences would largely be kept within the bank. If one bank wants to make outlandish investments and literally throw away their money, fine, so be it, that’s just one less bank. But it wasn’t just this one bank. It was industry wide.

Every bank I worked for before and after, the political pressure to approve bad loans was immense. Even as the housing market deteriorated, the pressure increased as management tried to save their bonuses and avoid a year where sales had declined. Loans significantly worse than this one were being proposed and if anyone dared point out their weaknesses and drawbacks they were fought, complained about, lectured and maybe disciplined.

Additionally, the phenomenon of having the realities of the housing market and the economy blamed on staff were not relegated to my lowly bank. In speaking with some banking industry colleagues, I found this problem was also industry wide. Bankers, economists, sales people and analysts were getting disciplined, if not, fired for failing to produce enough loans. The drop in sales was not blamed on increasing interest rates, an already oversupplied housing market, crashing prices or the fact that anybody who wanted a house already had one and therefore the market was satiated. No, it was because banking staff was not working hard enough and slacking off. It was like Hitler blaming his losses on his commanders in the later years of the World War II, when it reality his commanders were geniuses, they were just hopelessly out-supplied and out-gunned by the Allies.

Nor was the problem confined to just the smaller community banks. Larger, well known national banks were blaming their staff for the housing market. A friend of mine who also was accused of being pessimistic and not a team player, forwarded me a company-wide memo from one of the nation’s largest and most well-known banks notifying all staff that his company realized there “may” have been a “slight adjustment” in the housing market and that they were changing management styles, tacitly admitting their staff was not to blame. Of course this was in late 2007, nearly a full year into the crash.

Regardless, tempting as it was to “play ball” and just hold onto our jobs, there were severe ramifications for innocent parties outside the banking industry if everybody did. Namely American home owners. Never before had homeownership been so high. More people than ever before owned houses in America. And not only did they own houses, but for the vast majority of these people, their house was the single largest asset they owned and therefore their single largest source of wealth. But in pushing for all these real estate developments to go through these banks and bankers effectively flooded the market with such excess housing that it lowered the value of the average American’s home.

The reason is very simple. Management and bankers put their bonuses and commissions ahead of the American public. Anybody, even those without formal training in finance and economics could have looked at the market data and seen that the housing market was flooded with housing. And anybody, even those with no banking experience, could have told you the likelihood of getting paid back on these real estate development deals was near zero. But that was not the bankers’ primary concern. Their primary concern was getting that commission check. Even when faced with a 17 month supply of housing, the research to prove it, and absolutely no hope whatsoever of getting paid back, bankers still held no reservations of putting their own commissions ahead of the net worth and well being of practically all 300 million Americans, and approved such wretched deals anyway.

The effect was that they exacerbated an already bad situation. A market already flooded with housing was flooded even further. This resulted in even longer sales times for people trying to sell their houses and even lower property values further decreasing the wealth of Americans. But most damaging were the overall effects on the economy.

Because of the size and severity of the housing bubble, as well as the fact that these questionable lending practices were widespread throughout the banking industry this increased the chance the overall economy would be adversely affected and increased the country’s chances of heading into a recession. It was no longer foolish banks and sub prime borrowers that would feel the effects of the housing crash, but your everyday average working Joe that now faced an increasing chance of unemployment. And as the value of people’s homes decreased, so too did consumer confidence, and with it the economy. Furthermore, as more and more mortgage lenders filed for bankruptcy the stock markets suffered as well, tanking in fear their housing troubles would spill over into the larger economy. All of this because a bunch of greedy bankers wanted their commissions and put themselves ahead of literally everybody else. All of this because Banker Bob’s commission was more important than Everyday Joe’s solvency. And all of this because the desire of legions of senior managers in the banking industry to purchase luxury cars was more important than the overall health and well being of the American economy. It made me sick.

Sadly, there was nothing I could do. If I continued to played ball then I would be complicit in advancing the problems of the housing market and would be no better than the bankers. And if I didn’t play ball, then I’d probably get canned within a couple months. And I was in this position because bankers and management cared more about themselves than running a good business and thought nothing of putting themselves above the rest of society. So the only thing I could do was hate. I hated them. I loathed them with every cell in my body. Never before had I had such hatred for a profession or a group of people...

that is until I met some real estate developers.

Saturday, December 15, 2007

Good Intentions Kill People

I always like debating communists. It's become a rarer event as when you leave college, people are inevitably forced to get real jobs and start supporting themselves, so the kid living on daddy's dime whilst studying philosophy at the university now has to support himself with the $7.25/hr he makes at the coffee shop. But one of the best arguments against communism that immediately puts people on the defensive is just how many people communism killed.

I mean, even Hitler, who purposely tried to kill as many people as possible with guns and gas, still couldn't outdo just a good ol' fashioned mass starvation. Alas, why I like charts like this;

Friday, December 14, 2007

I Delcare the Baby Boomer Rule Over

Their time has come and passed. Time to move on. I predict Hillary will not win the nomination and that America will move on past the Baby Boomer generation and start moving their gears towards the future and not the 60's.

Thank God.

Thursday, December 13, 2007

So What Else is New?


Really? No kidding? The democrats want to raise taxes on the rich? Wow, how novel!

Seriously, it's the same damn thing, over and over and over and over again.

Does anybody else out there see through this thinly veiled attempt to tax a minority so that they can bribe the masses into voting for them?

Wednesday, December 12, 2007

What Do Your Economist Eagle Eyes See?

I saw this picture of Bill and Melinda Gates doing charity work in Africa. But something stood out that my economist eagle eyes caught.

Do you see it?

Tuesday, December 11, 2007

Not to Add Extra Pressure to the Economy or Anything

In addition to a credit crunch, a housing crisis, high oil prices, a weakening dollar and imported inflation, there's that whole minor have-to-jack-up-the-taxes-to-pay-for-the-Baby-Boomers-retirement-thingy;

Actually, if you really wanted to boost the economy, stock market, America etc., increasing the retirement age to 70 or the Baby Boomers enmasse patriotically opting to work until they're 70 would be just the shot in the arm America needs.

Sunday, December 09, 2007

Parent's Economic Responsibility During Christmas

It was about 28 years ago now around this time that I learned to hate the accursed box.

Oh yes, the box.

The box that measured about 12"x5"x3".

For I had many boxes like that before and knew what was in that accursed box.

For 28 years ago I was 4 years old and right about this time in December the gifts started showing up under the Christmas tree and naturally you could pick them up and shake them to see what contents may be therein. But I had learned when I was 3, maybe even 2 to hate that 12x5x3 box, even if it was wrapped with surgical precision.

For I knew what was in the box.

For in the box was a sweater.

Or a shirt.

Or socks.

The standard 12x5x3 inch box that you got at JCPenny's for a single article of clothing.

The standard 12x5x3 inch box that you got at Sears for a pair of pajamas.

And there I sat in 1979, looking at another box with the exact same dimensions under the tree. Hoping it would be something different.

And so I pressed on the box.

Damnit! Smooshy!

A smooshy 12x5x3 inch box, wrapped with surgical precision confirmed my worst fears;

I was getting another sweater for Christmas.

Now I've carried this memory throughout my childhood and into my adult years. For I think childhood is special. It cannot be repeated. It is innocent. And though the forces of life have turned me into a cynical, cryptic man, I have not forgotten the sanctity of childhood and therefore try never, NEVER EVER to forget what it was like being a child.

This is why, in an ironic sense, I do great with little children. Because I remember what it was like being a kid and not getting what you want. I remember looking at my parents and relatives with a look of disbelief as to the sheer number of sweaters I would get and no toys. I remember the basic, simple common rule of childhood, CHILDREN WANT TO HAVE FUN, THEY DON'T WANT TO BE RESPONSIBLE, GROWN UP ADULTS AND (are you ready for the kicker?)


So I am going to provide a little bit of advice to all of you parents out there who are so foolishly daring to think of buying your children something that comes in a 12x5x3 inch box.

Don't do it.

Things that come in 12x5x3 inch boxes are your responsibility of being a parent for the other 364 days in a year. If you had the child, you are to clothe and feed and shelter it. That is a STANDARD responsibility. You literally might as well buy your kid an apple or some cereal and wrap it up and present it to them for Christmas. For 364 days a year, food, clothing and shelter are a given and just come with the territory of having a kid.


that 1 day, known as Christmas, dare you be so stupid and cheap to buy your kid clothes I swear by all that is Halo and Call of Duty 4 when I am king I will make it a crime punishable by death to buy a child clothing for a Christmas gift.







10 out of 10 children according to the American Dental Association prefer toys over clothes.

Another study put out by Super NASA Harvard scientists concluded 100% of children would prefer to have toys than a sweater for Christmas (with a +/- 0% margin of error).

Or cash. Cash is good too.

So, mothers, fathers and all gift purchasing relatives, lend me your ears. Make it a merry Christmas. Take all your 12x5x3 inch boxes and hide them away for a day that is not a holiday. And instead go out and buy your children toys. They'll thank me for it, they'll love you for it, and they are 68% more likely to visit you in a nursing home when you are old and decrepit.

Saturday, December 08, 2007

Men Should Never "Detonate" Sperm Either

I think I just had my biggest typo in this blog;
Thanks to Anon for pointing it out.

And let that be a lesson to you kids, never detonate sperm. Leave that to the professionals.

Friday, December 07, 2007

Thursday, December 06, 2007

Time is On My Side

All that economics and business and commerce and life is all about is time.

When you exchange $10,000 for a car, that's not $10,000, that's $10,000 of your time.

And I often have half heartedly toyed around with the idea of how one would set up a complete economy based on a currency that was only time. No currency, no credits, just time. "You have deposited 3 hours of time at the time bank." Of course a currency of some sort would have to exist as it's the only way to tell whose time is more valuable than others. Without currency and just my half-baked time idea, doctors would be on par with window washers (which I have done in my past), plus a barter system is basically the most simple form of a currencyless economy. I've been half tempted to offer dance classes in exchange for home cooked meals (another cunning plan).

In any case, I like this chart as it shows you how much time you need to buy a Big Mac in different towns. Bogata it takes 91 minutes, LA it only takes 11 minutes. Playing off the Big Mac Index, this not only show you how much a Big Mac costs, but rather how many minutes one must work to afford a Big Mac.

The true measure of purchasing power parity;

Wednesday, December 05, 2007

Big Wheat

There are many "deal breakers" for the Captain when it comes to dating.

Like being married and not telling me. That's kind of a deal breaker.

Or playing all those "Middle School Girl Reindeer Games." That's kind of a deal breaker.

Or having children and then expecting me to bring up some other guy's kid or kids. That's definitely a deal breaker.

But probably the quickest way to get dumped by the Captain is to utter the words "big oil" and in the context that you somehow think they are to blame for high oil prices.

Thus why I like the charts below. For while oil has gone up in price, other commodities have gone up MORE in price. If one is to be intellectually honest and they hate "big oil" then they too must hate "big tungsten" or "big timber" or "big aluminum." Of course, they don't hate those commodities because those commodities are presumably "good" commodities whereas oil is obviously an "evil" commodity.

Well look out oil. There's a new BAD commodity on the block;


Tuesday, December 04, 2007

Help Me Help You

Sadeep came from Bombay, India all of a month ago. I first met him three weeks ago in one of my dance classes that I teach as I moonlight on the side. Mathematically that would have put his total time in the US at about one week, giving him little time to prepare what awaited for him.

For what awaited for him were women.

Lot's of women.

And single women too.

For December is my busiest month for dance classes and (as it has always been) I have more women than men in my classes.

Sadeep only signed up for one class, but since I had 5 extra women in another class that night as well as 9 women AND NO MEN in my dance class the next day, I recruited Sadeep to help me with all the extra women.

All of three weeks later he's now reasonably accomplished in salsa, quite accomplished in swing dancing, and the entire time he's dancing with no less than a dozen single women with a big grin on his face.

Welcome to America.

However, it got me thinking.

Normally it's a herculean task to get men to show up for dance class. I have 9 women and NO men in a singles dance class, and I still could only muster up Sadeep, myself and two other friends to attend. Another class I had 12 women and 2 men sign up. The men never showed. And in pretty much every other class I have there are at least, LEAST 5 women without partners.

Now I remember the training we got at Guy School. And at Guy School they said our primary mission was "You will go where there are women."

Pretty simple mission.

"Go where the women are. Right, got it, got it. Don't know what I'll do when I get there, but I'll go where the women are."

And the men are botching up the mission!

Men, how freaking difficult is it for you to take a dance class? Thousands of single women, all in pretty good shape since they are taking dance, of varying ages and professions, just sitting there without partners waiting for you to sign up and have your choosing? It is an opportunity of a life time, yet no men avail themselves of it. Alas, leaving me, Sadeep and my buddies Chico and Kale to take it upon ourselves and suffer this task. The horror.

Thus, let me give you men a bit of advice. This is the best kept secret in the world;



You can hardly fail.

But nooo, you won't listen to me. No, you don't "like" dancing. And you don't have rhythm. And dancing "isn't fun." Yes, like going to the bars, dropping a ton of coinage on drinks for local bar flies that have no intention of going out with you anyway, is fun. Besides which, since when did dating ever become fun? You'll tolerate a Julia Robert's movie where some girl dies of cancer and there is seemingly no plot (nor end). You'll go to a fancy schmancy restaurant and fork over $100 for dinner when you really could just kill for a Chipolte burrito. You'll even have discussions about People Magazine and Lindsay Lohan. But oh no, not dancing. That's crosses the line.

Regardless, the idea I had was that if we can't get you American men to dance, then maybe we could outsource men to India and China. Lot's of men there, and in China because of the one child policy and the abortion of female babies, there is a surplus of men. Last year I had Raj, Chico, Vladimir and a handful of other guys form a sort of International, Multicultural Bachelor Dance Force to save the local lovelies from dancing by themselves. And even that wasn't enough.

So men, Americans, gentlemen and heroes, do yourself a favor and take a dance class. Many women (not to mention many dance instructors) will thank you.

The Math is Astounding


Monday, December 03, 2007

Another Reason the US Will Fall Behind

Because science just isn't as cool or as fun as studying social stratification and merits of wealth transfers.

Sunday, December 02, 2007


Hugo you suck!!!!!

Deal with it bitch.

Or as the King of Spain said, "SHUT UP!"

I shall have a fine scotch to celebrate this blowhard's defeat.

My apologies to all the socialists in the US that were hoping for this dictator's further oppression of the Venezuelan people.

Men Should Never Donate Sperm

Destroying trust in America, one institution at a time.

Having a Hard Time Seeing the Use in Consumer Confidence

Haven't studied consumer confidence much, so with this new fangled multi-series charting option of the Fed I contrasted GDP growth versus consumer confidence. Didn't really find much interesting except that when we go into recession people's confidence goes down. Which is like saying when cute, redheads that are (ahem) "blessed by the Lord" walk into the room men can't chew gum and talk at the same time;
Wish there were more redheads in economics.