Michael Lewis on Wall Street.
@paddyb just tweeted an absolutely superb piece written by Michael Lewis about The End (of Wall Street’s Boom) that anyone with even the mildest curiosity about why the investment banking sector is imploding will enjoy, though maybe ‘enjoy’ isn’t the right word to use in this context given the consequences for us all.
Of course the investment bankers are primarily to blame but the rating agencies didn’t exactly cover themselves in glory in recent years. One particular paragraph from the article really sticks in my head:
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,†he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,†says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.†He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,†Eisman says.
(That Steve Eisman guy seems like a legend, his career history in the article is class)
Michael Lewis is the author of Liars Poker, a book I first read many moons ago when I was working for Iona Technologies. The book is superb if even for only for bringing terms like Big Swinging Dick into the common vernacular. Funnily enough, I bought the book in Dublin airport back in ‘97 while on my way to Wall Street to train up a bunch of IT guys in a large investment bank (right across the road from the US Stock Exchange) on using Orbix and OrbixWeb as the middleware for some of some new internal systems. I had the book finished long before the week was out and it turned into a pretty lively topic of conversation when the guys on the course saw it on my desk one morning.
Ah, they were the good days, unfortunately the investment bank bull appears to be about to be slaughtered.
Anyway, what was the point of this post? Oh yeah, Irish default rates – does anyone truly believe that they will stay as low as the 1-1.5 point levels that the Irish bank management teams are publicly quoting?
I wish there was a ‘zero probability’ smiley I could tack onto the end of this post.
Err, John -
Plenty of commentary on Banking disasters..
But, in fairness… as a longtime geek blogger.
What about your good self? have you found a job yet?
Or still not working?
I agree with you on Michael Lewis.
On the default rates, 1.5% certainly looks puny in the light of the U.S. experience. But is that a valid comparison ? For all their faults, did Irish mortgage lenders really emulate the insanity that we’ve been hearing about from Lewis and others ?
Are there any facts in the public domain that would allow us to pronounce on these matters ?
@interested sorry, economics is a secondary passion of mine. Yep, I do have a new job, funnily enough in the financial sector, with Delta Index. (Delta make money regardless of which way the market goes, just as long as it keeps on going!)
@fergus,
Its a global money market and all investment vehicles are chasing the same margins so I would assume most are exposed to these exotic markets if they had attracted/payed ‘the skilled ones’ to trade there for them. Perhaps the Irish banks couldn’t compete to get into these markets to the same extent as their (admittedly much larger) US counterparts or perhaps they anticipated the crash and sold off those positions last year. The fact that they didn’t see the Irish properly crash coming leads me to suspect the latter is not true.
Regarding Irish loan default rates, the current stock prices of the Irish banks is as close to a ‘fact’ that you’ll find I suspect. Part of the problem is the banks don’t have to disclose how they arrive at these expected loan default percentages. However they cannot fool the international equity market investors who know better (from experience in other countries/busts) and dump their stocks.
We look on with interest and wonder how long the bank management will hold out. We rely on the markets to naturally price financial equity at the value they believe it is worth (not based on what the management tell them). And in the meantime our gombeen goberment have gone and decided to drag down the credit rating of the irish state by wading into a mess they don’t understand.
>Yep, I do have a new job, funnily enough in the financial >sector, with Delta Index.
John — Well done on that..
But hopefully you haven;t given up on your ‘primary’
passion… You were very interesting as a techie
blogger back in the day’ Folllow your passion aehso….
You say
> The fact that they didn’t see the Irish properly crash
> coming leads me to suspect the latter is not true.
Didn’t they ? How come AIB Bankcentre, just to mention one, was sold, then ?
> Regarding Irish loan default rates, the current stock > prices of the Irish banks is as close to a ‘fact’ that
> you’ll find I suspect. Part of the problem is the banks > don’t have to disclose how they arrive at these expected > loan default percentages. However they cannot fool the
> international equity market investors who know better
> (from experience in other countries/busts) and dump
> their stocks.
Maybe, but maybe not. Current bank stock prices worldwide reflect the fear and read generated by the cataclysmic events of the last few weeks more than anything more rational, I suspect. It is not sensible to regard them as a reliable indicator of anything much at present. Irish values would be discounted simply because of the size of the market anyway.
How many holders of Irish bank shares are selling I wonder ?
Fergus,
Sorry for the delayed comment approval, it slipped into my spam filter for some reason. You make some interesting points but I’m sticking to my guns – the Irish banks are tanking because of the lack of transparency into their current real financial position. Since your comment Anglo have proven this, one can only hope the other banks don’t have similar skeletons in their closets….