No Time like the Present

   "October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February."

So Mark Twain, or so it is said.   Compare:

Black Monday
Black Tuesday
Black Wednesday
Black Thursday
Black Friday
Black Saturday
Black Sunday

One event makes the list twice. That would be Black Monday/Tuesday, the occasion of the world's largest stock market decline, which straddled the International Date Line. Thursday seems particularly bad for investors.  Blame it for the collapse of Jay Cooke & Co. Investment House on Sept. 18, 1873 (setting off the "great depression," i.e., the one that preceded the  "great depression"). Also October 29, 1929, the mother of all stock market crashes.  And the Moscow interbank crisis of August 24, 1995.  Oh, and the "flash crash" of May 6, 2010.  And if you like, also Sept. 30, 2010, when the Irish learned the truth about their banking crisis, causing their deficit to spike to 32 percent of GDP.    

But Sunday, unless I misread, is the one that has no connection with activity in the market.  On the other hand, there's this:

The Way Forward for a Clever Boy

Reading Edward J. Renehan, Jr.'s bio of Jay Gould, I struck upon a remarkable parallel.  No,  not "coincidence," because I think it is more than just happenstance. Here's the thing: Gould got his start as a surveyor.  Abraham Lincoln was a surveyor. George Washington was a surveyor.    Evidently this was a way up for a bright boy who could master the elements of trigonometry and who enjoyed the gift of stamina sufficient to make tracks in the trackless.  

The story of Lincoln's learning his trade is part of the folklore: Carl Sandburg tells it here (though I had forgotten how Lincoln seems to have gone broke at it).  The Washington story probably gets subsumed into the larger story of his career as a land speculator.

Gould's career is  necessarily less familiar. After a long hiatus in he shadows as the master malefactor, he seems to have found his defenders: Renehan is one; another is Maury Klein. Renehan calls Gould  a "Dark Genius," but presents him as a talented and largely constructive investor-builder who played a central role in the development of the railroads.

Surveyors on the make.  There must be other good examples, but who?

Update: Thoreau, right. A start for his legendary career in Wall Street speculation.  Thanks, Michael. 

What am I, Chopped Liver? (Fama-Markowitz Department)

I wanted to introduce my finance students to the efficient capital market hypothesis (don’t waste your time trying to pick stocks) and portfolio  diversification (reduce risk without sacrificing return). Because of time constraints, I had to do it by lecture, not problem sets.   So I jumped up and down, I waved my arms, I chewed the scenery, blah blah.  Then I put up a grid of 15 stocks. I explained that we were to pick five to make a diversified portfolio.  I picked one, then I asked a student to pick one; I said he could choose either one he wanted (because it would add diversification) or one he did not want (because it would not add diversification). 

Result: every single student I asked said “I pick x” (or y, or z)—and why?  “Because it is a good company and the price will go up.”

I might as well have entertained them by playing the saxophone.

It's Not You, Marcel, It's Me...

...but I think we need to see other people. No, no, dear, of course I'm not breaking up with you, it's just that I need...some...time.

So Buce to Marcel Proust, or perhaps to his shadow Marcel, hero of his 3,000-page doorstop, À la recherche du temps perdu.  Seems like only yesterday (actually, I guess it was last month) that I set out to  make the long journey through this which Edmund White calls the most respected of 20th Century novels.   I suspected what would happen, and it happened. As long as i had an hour or two or three a day, I was able to keep a rhythm, and even follow up with some of the original French.

But then school started and now here I am back in the classroom with the markedly un-Proustian agenda of bankruptcy and corporate finance.  And I can certify that Proust and the finance classroom just don't mix.  It's not the time: I'm not one to work 18 hours a day at anything, and I probably could find time for an hour, maybe even two, or three, a day to indulge my Belle Epoque enthusiasm.

I suppose you could say it's brain cells:  I've reached the age where 200,000 brain cells die every day and I just can't risk destroying too many of the survivors in a private enthusiasm. But it'd not just brain cells.  No; it is the utter discontinuity of tone, of manner, of sensibility that it takes to move from one to the other.  I woulds get the bends, and bends are not covered by my health plan.

I expect to be back in the spring, Lord willin.' And if the Lord is not willin'--if I die with a stack of Prousts on the night table--why then, you'll know that I was never bored, that I never ran out of stuff to read.

Now, exactly which things are there about financial  accounting that my students just must learn?

Justin Fox on the Truck that Just Hit Us

Justin Fox's Myth of the Rational Market was much praised; I found it kind of meh, repeating and not necessarily improving on a lot of work done earlier by Peter Bernstein.  But his new Harvard Business Review piece on "What We've Learned from the Financial Crisis" is excellent, particularly the first section on macro.  The latter portion on "shareholder value" and the concept of the corporation is somewhat more diffuse, but then the topic itself is somewhat more diffuse.  Fox has always been good at exposition; I think he is developing a better feel for the place of economic ideas in the structure of the economics profession.  A must-read; or at least, as Abraham Lincoln probably did not say, "if you like this kind of article, this is the kind of article you will like."

The Economist on Company Size: World's Bigggest Yawn

Honestly, I don't want to give up on The Economist,  but sometimes they seem to be asking for it. Case in point, this week's piece on "The World's Biggest Firms," which, so far as I can tell, is about as much use as the average Buzzfeed Listicle.    That is: they don't lift a finger to explain their methodology but so far as I can tell this is crude market cap: share price times number of shares outstanding.  Which is a  crude, lazy, and at best deeply misleading measure of value.

Yes, I know that everybody uses market cap (except they don't)--but this is the big E, frevvins sakes, the preening cock-o'-the-walk among finance news magazines (so they tell us), taking great pride in its (supposed ) capacity to explain complicated ideas simply.  So would it have  been all that hard to measure value of debt as well as equity--to recognize that everything on the right hand side of the balance sheet is a claim against everything on the lefthand side, and that payments to debt are returns to capital,  not just an expense?

I want to say, "sheesh, I thought everybody knew this by now."  Well, yes and no.  Granted that accountants still talk about "net income" after payments to debt (and, yes,  before returns to equity).  But this is just institutional drag; I really think they know better, and one of these days they' get around to clarifying.  Meanwhile, anyone who has ever sharpied the word "EBIT' on the back of a cocktail napkin know that book accounting is only the beginning, not the end in measurement of value.  And, oh yes, the bankersL: I admit they still talk about "capital" as = "equity," but we have abundant evidence that bankers don't understand debt anyway, now don't we?

And while they were at it, would it have killed them to make another point that they surely understand about market cap--i.e. that is the purest, the most glaring, the most unadulterated fiction?  In the sense that, no company ever (except for the sheerest coincidence) sold for share price times shares outstanding?

Here's a comment I posted over at The Economist website, making essentially the same point.

The Strouse Morgan

Note to self: quit reading all those hot-off-the-press must reads.  A few of them are good and original: a lot of them just recycle stuff you've been reading on the blogs, etc.  A lot re good 35-paage longreads tucked inside 180 pages of hard cover.Stick to stuff a few years, maybe a few centuries, old. 

Case in point: Jean Strouse's biography of JP Morgan.  I read Ron Chernow's doorstopper about the House of Morgan a few years ago and figured I could skip Strouse.  Not sure what changed my mind: perhaps Chernow had faded enough in my memory that I was ready for refresher.  Anyway, the takeaway: I'm not sorry to have read Chernow but I am delighted to have read Strouse.  For understanding how 19th Century finance worked, it's one of the best things I've run across so far.  Some critics complain that it is too thick with detail and that might be true.  But the details are still the natural venue of the devil and I don't know anybody (including Chernow) who walks you through so many individual deals in a way that makes you understand what the players were trying to accomplish and how they did it.   

That' last is particularly true of what I suppose you'd have to say is a hobbyhorse: railroad reorganization: the salvaging and refinancing of rail projects in boom years from the end of the Civil War to the end of the Century.   Among many other virtues, Strouse does an admirable job of putting the rail problem in context: vastly excessive overbuilding, "ruinous competition," (as they so loved to call it) and the exquisite challenge of nurturing investors, particularly foreign investors who still saw America as a cowboys-and-injuns show.  Strouse shows that not the least of Morgan's achievements is how he made the American market plausible: a place where you could put your money knowing that a deal was a deal.  And that may be the core point of the Morgan story: difficult, irascible, self-absorbed, unreflective though he have been, still Morgan was a man who wanted things to work.  He saw every project as an occasion, not just to make money (though he made plenty) but to put together a project with a result: a railroad, a power company, a sovereign government, whatever.

 Another reason Strouse is so good at her job is that she seems to understand the complexities and ambiguities of a competitive market place, together with the problem of (as the 19C liked to call it) "the trusts."  She makes it clear (how could she not?) that concentrated power may confer unimaginable wealth on the lucky holder of the winning ticket.  But she just as well shows how colossally wasteful the 19th-Century investment casino might be.

A bit of more general reflection: I suspect one reason why there isn't more good business-financial history is that most people who tackle these projects really don't have much of a feel for their task.  I liked Chernow because I felt he did seem to know what he was doing. I like Strouse better.  That might be partly a matter of coverage: Chernow was trying to cover the whole history of the firm, not just a single lifetime--and in fewer pages--so naturally he was a bit thinner on the ground.  But here;s the thing: much as I liked the Chernow Morgan book, I felt his later effort on Alexander Hamilton was far better (I haven't read his others).  Could it be that he learned from experience?

Business/Finance Books: Embarrassment of Riches

Wading into Jean Strouse's Morgan: American Financier, may I take a moment to marvel at how much more and better business/economic history of the United States we have today than we had back when I was a tad,  the best I can remember finding were Matthew Josephson The Robber Barons,  John Kenneth Galbraith, The Great Crash, and John Chamberlain, Enterprising America, A Business History of the United States, none entirely worthless but each unsatisfactory in its own way.  I suppose I could add Frederick Lewis Allen, Only Yesterday,  although I didn't recognize this as "financial history" until much later.

I won't begin to catalog what is available these days except to note that we've got at least two fullscale presentations of Morgan (I'm counting this) and, FWIW, two of Warren Buffet (link, link).  I keep trying to put together some sort of Amazon top-ten list but I can't narrow it down enough.

Afterthought:  Lacking good history, I suspect the best way to get a feel for American business/financial history was to read Dreiser or Dos Passos.  Might still be a pretty good way.

Say What? Assets v Equity Again

Can this be right?

[Morgan Stanley]  managed to produce a return on shareholder equity of only 5 percent for the year, compared to 10.7 percent at its rival Goldman Sachs. Simply to cover its debt expenses and other capital costs, Morgan Stanley needs to achieve a return on equity closer to 10 percent. 

Link  Seems to me she must mean return on assets, not so?  Debt expense determines return on equity, yes, not the other way around?   You might count as a slip of the pen, except she says "return on shareholder equity" in the previous sentence as well.  You might write it off as a rookie error but her personal blurb suggests she has been in and around finance for 15 years.   As it stands, it's the kind of mistake my students make all the time but they are, you know, beginners.

The Long View: Raising Money

One of the few consolations of getting older is that you can take the long view. Was listening to the excellent Bill Rochelle this week predicting that there won't be many corporate bankruptcies this year, and why?--hah, glad you asked. Easy money.  Interest rates are so low and capital so plentiful that almost anybody can (re)finance at a sustainable rate.

Makes sense to me but I find my mind rolling back to the 80s when my friends would tell me about how the CFO would ring up and say I can't make my interest payments, we'll just have to talk Chapter 11. But then a few days later: forget it, no need for 11, the investment bankers tell us we can raise the money we need by issuing equity. I.e., unsustainable with senior debt (too expensive) but doable with junior equity (comparatively cheap).

What goes around comes around. And goes around again.

A Pricing Puzzle

Why does Seth Klarman's  Margin of Safety list at $1,597.95?    Okay, maybe it's good, but is it that good?

Update:  Unconfirmed report that it is available free on line: 
http://www.my10000dollars.com/MS.pdf.

Update II: Oh, and you can sell yours to Amazon for a $3 gift card.

Mr. Smithers Goes to Washington

I read Jeff Connaughton's The Payoff on the strength of an enthusiastic recommendation from Simon Johnson. It was a worthwhile endeavor: an important story, well told. And as may or may not be relevant, it is also an odd story, or at least teller, and I'm not sure myself just how much the perspective of the teller affects the content of the tale. Bear with me, I'll try to explain.

The core story here is the narrative of Connaughton's life as the trusty right hand to Ted Kaufman in Kaufman's two-year career as senator from Delaware. You'll remember Kaufman: he was the trusty right hand to Delaware Senator Joe Biden through much of Biden's senate career, and the appointment to fill out Biden's term after Biden moved over to the White House was his reward. Kaufman, you'll recall, took the bit in his teeth and ran: he began his career by announcing he would not be a candidate for election and thereby freed himself of all the responsibilities of fund-raising that make up the daily life of any senator who wants to stick around for another term.

Arriving just in time to clean up after the 2008 meltdown, Kaufman decided to make a brief for financial reform. It was a topic Connaughton knew a bit about: he'd spent a bit of his youth in banking, as well as long years as a lobbyist. So the setup is clear. But from here, you could file the book on the heavy-laden shelf of memoirs entitled “how I confronted the great beast and got my head handed to me by the forces of greed, corruption and sloth.” Indeed from to time it is hard to tell whether we should envy them for the fun they are having as they slash at the Wall Street minotaur and how much indulge our sense of compassion from our foreknowledge that it will all come to nothing.

If you think you've heard all this before the chances are you have, and that's a problem: the kind of reader who will stick with this book (though it is fluent, and not very long)--the kind of reader is the one who already pretty much knows what story the author has to tell. This is a pity, not least because this would actually be a pretty good one to put into the hands of a reader who does not know the story and wants to know what the fuss is all about. Indeed Connaughton's general introduction to “algorithmic trading”--its revolutionary character and its potential for mischief—is a small masterpiece and I'm pretty sure I will steal it for use with students next spring.


But now, the odd part. Mainly, the alert reader is bound to be puzzled by the tone of Matt-Damon-like innocence that the author adopts when he undertakes to tell us what routine Washington evil is all about. This is a guy who, after all, had been in and around politics for a quarter century; who had managed campaign money; who had made himself a principal (if not quite first tier) of a formidable lobbying machine. Surprised? Is this a literary device thrust upon him by his editor?

Possibly, but here's a reason to think otherwise. Specifically as he describes it himself, Connaughton is one of those people born to believe himself not quite deserving of a place at the high table, the perpetual outsider with his nose perpetually pressed against the glass. He seems to have learned how to make a good thing of it: as he himself suggests, the job of second banana has its inherent virtues, and it is a job he seems to be good at. The irony is that in working for Kaufman he makes himself the second banana of a second banana and here, it would appear, he really excels.

Which sets me up for my final point—one not strictly germane to the essence of the book, but still a fascinating piece of dish. That is: Connaughton, who has built his entire career around Biden—around Biden's presidential aspirations but more generally around Biden's position as a top-tier macher in the Democratic party establishment. Truth be told, Connaughton really hates Biden. Well: he's awed by Biden's political chops and he genuinely admires a lot of what Biden stands for. But in his quarter century, Connaughton feels he's never had the appreciation he deserves.  And it rankles.  I mean really, really rankles. 

Which is to say: I can't count the number of times in the book where Connaughton says of Biden, “But did he ever thank me? Ha!”--or words to that effect.

And it may be more than just Connaughton. If you believe his account, it's a failing of Biden's: a great crowd pleaser, keen political instincts, and in many ways a highly constructive and admirable policy man. But on the testimony here, a man with an unpleasant habit of not saying thank you to all but the narrowest of old established inner circles.

In short, I can' think of anything to match Connaughton's rancor except Paul Theroux's confessional about his "relationship" with V.S. Naipaul.  And I grant this may be nothing more than mischievous gossip, although Connaughton does draw one provocative general comparison. He points out that Biden (at least in Connaughton's persepective) can be seen as the ant-Kennedy. Ted, that is: apparently Ted had exactly the opposite reputation from what Connaughton sees in Biden. Connaughton (quoting a friend) says that “Kennedy believe[d] in force projection”--of keeping touch, of following the careers of your former underlings, of making sure, in otheer words, that you have friends and allies in every cranny of the beast.

It's a fascinating insight, very likely true. Of course the irony is that with Connaughton, Biden got the same result by doing just the opposite.

In Which the London Bookies Prove ThemselvesSmarter than JP Morgan Chase

If you get to be too big of a player in the market, then one day you wake up and find you are the market, and you will get killed trading against yourself.  Jamie Dimon's crew may have missed this insight.  Evidently the London bookies are more sophisticated:

 A surge in bets has forced Britain's biggest bookmakers William Hill Plc and Ladbrokes Plc to suspend betting on the odds of Greece dropping out [of the Euro--ed.].
...
William Hill said the level of betting on Greece quitting first was such that it had become too risky to continue taking bets ...

"We've had Greece as hot favourites for some time but increasingly it was becoming the only one that people wanted to bet on," said a spokesman for William Hill, Britain's largest betting firm.
"It wasn't a healthy situation for bookmakers. We found it was virtually impossible to make a book."

H/t Athens News, via Calculated Risk. 

Why Dodd-Frank is Bound to be Trouble

Chris Dodd and Barney Frank both weigh in on the Economist letter page with predictably umbrageous responses to the trashing administered last month to their baby, the Dodd-Frank financial reform act.  Frank says:

SIR – Does The Economist seriously contend that the grave, systematic and repeated errors of the ratings agencies were irrelevant to the causes of the financial crisis? Simply repeating the claims of a few in the industry, who fear that we are moving away from the disastrous era of light-touch regulation, falls short of the independent analysis that your readers have a right to expect.

Link.  Hardley a surprise that Frank is combative--he's always combative--but push comes to shove, I'd say that's a fairly casual response, as if he has other things on his mind at the moment and doesn't think of the big E as worth worrying about,.  "Grave, systematic and repeated errors"--well yes, and whatever you may think of the E overall, I'd say they've done a fairly decent job of spotlighting "grave, systematic and repeated errors" that led up to the big pop. But wait--"of the ratings agencies"--huh?  Indeed the ratings agencies appear culpable for a lot but two things.One, I'm not at all sure they were just "errors"--I'd say a good case could be made for the proposition that we are observing something like outright fraud, deliberate corruption of the ratings agency process.  And two, the ratings agencies are part of the problem, but has Frank of all people already forgotten the "grave, systematic and repeated" (something) of so many other players in the late farrago?

But beyond that: "moving away from light-touch regulation"--c'mon, be fair..  There's a lot  more to the big E critique than that. The argument (correct or not) as that Dodd-Frank is unintelligible, indigestible, unmanageable and well-nigh unenforceable--and damned expensive to boot, a net loss to human welfare.

I tend to think there is more truth than poetry in the assessment though I, like the vast majority of humankind, have not actually read it.  And if there is a problem, I suspect I can identify one important root of the problem: Barney Frank.  No, no, not that he is venal or corrupt or even inattentive.  Not at all: I'd grant that he's one of the smartest (and funniest) people to sit in Congress in his generation.  But for  present purposes, I think he has two fatal flaws.

One: he believes in the therapy of the word.   He believes there is no problem too big or intractable that it cannot be brought to book by pouring on more language from the statutes or (even worse) the regs.  It's a déformation professionnelle: if there is a problem with legislation as a remedy, he's the last guy who is going to see it. He's spent his entire life in an insatiable quest for social improvement--24/7/365, with all his abilities and all his energies.  He just doesn't understand that the rest of the world can't be expected to go about the task with his intensity, focus and drive.  Worse, there's the problem of the surrounding apparatus: the legions of lawyers, lobbyists, accountants, economists you need to push the wagon out of the mud.  To the rest of us, they're a barrier.  To Frank after all these years, they're just invisible.

Two--okay, I guess this is just a subset of one.  But anyway: Barney Frank is just too smart for the job.  Note, I do not mean wily, slippery, crafty in the Odyssean sense (though I suspect he can be that when he needs to).  I mean only that he just doesn't understand that the rest of us just don't have the cranial capacity to comprehend his handiwork.  Really good statutory draftsmanship has to be simple, not because the world is simple (it's not) but because human beings are simple and if it's too complex, they are bound to get it wrong.  In his light, from the E's report, here is the most telling passage of all:

Even Dodd-Frank’s creators can bring no similar clarity to its intentions. In 2009 Mr Frank attempted to frame the new law’s goals under four heads: securitisation, compensation, liquidation and systemic risk. But in a single speech his ambitions overflowed to consumer protection and the reform of ratings agencies, too. Ambition is often welcome; but in this case it is leaving the roots of the financial crisis under-addressed—and more or less everything else in finance overwhelmed.

 Bingo.   

Or You Can Turn the Page...

Okay, you've got two choices.  You can (as I just did) fire up your noise machine and audioread the Economist special section on "Financial Innovation" (link here, et seq,).  Or you can skip it and go directly to Yves Smith's blog where Satyajit Das wades in with guns blazing.  Let's just say that when you begin a critique by calling the subject publication "Pravda," you're probably not in for a detached and muted evaluation.  Yet the odd thing about Das' fisking/deconstruction/rant is that it is surprisingly fair-minded given its tone.   Das doesn't exactly pause to articulate his adversary's best arguments but he does take time to specify exactly what he takes exception to and why: you can pretty much back-engineer the original from there. 

I don't have time or inclination to umpire this one in detail, but I must say this: one the one hand, I think the Economist's tone is perhaps a tad less celebratory than Das would make out.  On the other, there is something about the near-facetious jauntiness--very close to self-parody--of the Economist's standard style that does make the non-alert reader believe that all's right with the world.  Could it be that the Economist  has become like Time magazine as it passed its perihelion: no longer the Economist itself, but an increasingly weird and quirky imitation of the Economist.    I'm remembering how, it is said, Charlie Chaplin entered a Charlie Chaplin look-alike contest and placed second.

On Woolcott Gibbs' immortal parody of the Time style, go here.  That's the one that gave us the best single parody line ever: backward ran sentences until reeled the mind.  Or, maybe it's just time for an Economist bad writing contest, a la Bulwer Lytton, etc.  

Ignoto has been Hitting the Red Bull Again

My friend Ignoto the investor is cranky this morning:

For decades the flow of capital was treated like the flow of water, sewage, and electricity - a regulated utility with means to ensure that "excess risk" was not being taken with the public's "airwaves."  Bank regulators were like the Public Utilities Commission.  In the 1980s, someone decided that when it came to finance, mixing water, sewage, and electricity into the same conduit were perfectly appropriate.  Naturally, after 25 years of allowing this stuff to mingle a bunch of sparky shit-water came out...  Bankers called it "finance" while the rest of called it, well, sparky shit-water... (The first phase of structured credit, Fannie/Freddie/etc., were logical - like going from copper to fiber-optics.  The next stage was putting sewage down fiber-optics...)

 Maybe Ignoto is remembering Scopenhauer's law of sewage entropy.  

Timewaster of the Week: GSElevator

...and speaking of distractions, have you discovered @GSElevator, the Thinkingman's Overheard in New York?  They've got 78,000 followers as of this morning (including me), all enjoying the spectacle of crass vulgarity in the vertical corridors of power.  I've read a fair amount of commentary that speaks of the "arrogance" of these merry pranksters and arrogance is not entirely wrong, but I'd lean more to "bluff and bluster," coupled with lots of free-floating anger and whole boatloads of insecurity.  One thing that has long fascinated me about Wall Street bankers is how pissed-off they all seem to be: would you really want to join a profession that seems always to leave you just one automatic weapon away from a moment of suicide by cop?

And one point of perspective: these guys may earn zillions ("rich," says one, "but not give-up-my-US-passport rich"), but I get the strong sense that what we hear here are not the real movers and shakers; rather, these are the underlings, the foodsoldiers, the myrmidons,  the running dogs of capitalism who get to do the dirty work while their masters dine with popes and kings.   And they know it, these underlings: unloved as they are by so many, including themselves, they spend a good chunk of their day wondering where the real Goldman Sachs elevator might be.

Just Sayin': Defoe on Living in Hard Times

Tis  true observation that men grow shabbily gay as they grow poor, not as they grow rich; the reason is because pride is oftener the companion of poverty than of wealth; mark then in the chief trading streets of this great city, and see how trumpery and gaudy trifles fill up the vacancies, the gaps and the intervals from whence your departed substance of trade is fled...there's the fine and famous street of Cornhill, since I remember, filled with whole-sale men, and rich shopkeepers, if I mistake not, two or three most famous periwig-makers, five or six spacious coffee-shops, three or four illustrious cake-shops and pastry men, one or two brandy-shops and the like ... the alleys where the small places were full of Notary Publics, offices of Assurance ... now are crowded with stock-jobbing brokers, buying and selling of bearskins, and tricking and sharping to get estates...

--From Defoe's Review, his proto-newspaper (and proto-blog) for 12 January 1712,

quoted in Richard West, Daniel Defoe 178-9 (1997)

Spring Semester Appetizers

Gearing up to teach corporate finance and bankruptcy (two courses, not just one) in the spring, I'm spending my holiday looking for appetizers--hors d'oeuvres* to serve up on the first day of teaching before people's minds are fully in gear. I certainly ought to be able to get some mileage out of this brisk summary of 2011's major corporate bankruptcies, served up by Matt Yglesias (and when, exactly, did he become an economist?).  A few of them (e.g., American Airlines) look to be meaty stories with lots of good classroom apps.  Some (Dynergy?) perhaps just too difficult to untangle at this distance.  And the champ (MF Global) looks to me like just one more  narcissistic banker with a suicide streak and a bent for his own press releases.

For balance, I think I'll throw in the fascinating NYT story of five small businesses that failed did not survive last year..  Interesting that the B-word is not mentioned.  Note, nothing so far on the vast majority of bankruptcy cases: the ordinary working folks who get further and further behind under until they just get sucked into the maelstrom.  True, but plenty of stuff on them to come later.

For corp finance, I think I'll recycle a favorite: the NYT's glorious account of Simmons Mattress, transmogrified from a sleepy (heh!) but study old-fashioned manufacturer, then into a cash cow, then into bankruptcy (why do so  many of my stories wind up here?).  Sure, it's a chance to beat up on private equity but it's also a great vehicle to  kick off an inquiry into the question, what do we want out of a finance system, anyway?

Sounds like fun.   To me, anyway. 

--

*Does it really mean "out of work?"  

Corzine Comes Clean

My pal Michael serves up the shorter John Corzine:

Q. (By the chairman): Mr. Corzine, you understand that you have the right to remain silent and refuse to testify before this committee?

A. (Mr. Corzine): Mr. Chairman, I do not choose to hide behind the Fifth Amendment. I want to give this committee a complete account of the situation, and I am ready to answer any and all of your questions.

Q. We appreciate your forthrightness and candor. In that connection it appears that $1.2 billion of your clients' money has gone missing. Can you tell the committee what happened to it?

A. I am sorry, Mr. Chairman, but I don't have the faintest idea.

Reading William Cohan's Money and Power  last Spring--i.e., long before the current uproar went viral--I got the distinct sensation that Corzine was an accidental man, a loose cannon, an empty suit.  There has to be a reason why he was whisked ouf ot Goldman so briskly and efficiently.