The Laughing Policeman

A society that admires its shock troops had better be bloody careful about where it’s going.

— John le Carré, A Perfect Spy

This picture is beautiful. Just beautiful.

It was posted earlier today by Twitter account @reclaimuc. I have no idea whether it was posed, photoshopped, or merely a serendipitous tableau. I have no idea why the policemen and woman in the picture are laughing. But the framing—capturing the police, the telephone booth ad, the TD Bank branch entrance, and the building address of Two Wall Street—is simply spectacular. As an extra bonus, and for extra frisson, the tonality of the photo perfectly evokes that in The Matrix movies. Urban photojournalism doesn’t get any better than this.

Kevin Roose of New York Magazine later tweeted to explain that the ad in the picture is a fake, designed to promote an upcoming series on Cinemax. This makes sense, as it seems unlikely any real organization would be so tone deaf as to publicly advertise its services in earnest in such a way.¹ I don’t care.

Sometimes fate and fiction collide in such a way that the veil of dissembling and polite convention covering our everyday life is torn aside, revealing the slightly sordid truth beneath. It would be hard for anyone to pen a better exposé of the naked power structures undergirding the surface of my fair city in the Year of Our Lord Two Thousand and Twelve than this serendipitous little photograph.

Mayor Bloomberg must be exceedingly annoyed.


¹ Although behavior by certain Presidential candidates recently exposed in the news does plant a seed of doubt in my mind as to just how clueless members of the plutocracy can actually be.

© 2012 The Epicurean Dealmaker. All rights reserved.

Kingdom of the Animals

Wine comes in at the mouth
And love comes in at the eye;
That’s all we shall know for truth
Before we grow old and die.
I lift the glass to my mouth,
I look at you, and I sigh.

— William Butler Yeats, “A Drinking Song”

Human beings are animals.

Most of the time, most of us take this self-evident fact so much for granted that we entirely forget it. We forget that we are flesh and blood, sweat and skin, muscle and bone. We forget that we get tired, that we sicken, that we get hurt. That we die. Until one of those things happens to us, or to someone we are close to. Then the unavoidable reality of our animalness slaps us in the face with its wet, heavy truth. And the accompanying metallic tang of fear.

There is another time which reminds us, more gently and more pleasantly, that we live our lives chained to the world of flesh. This is the time we take time to spend with each other, to touch and feel the muscle and sinew beneath our loved ones’ skin. I am always surprised when I take a woman or a child into my arms; surprised once again—so many times, over so many years, yet always as if for the first time—at how soft and silky is the skin, how taut and supple and strong are the muscles quivering beneath. Surprised at the strength and durability of the fragile package containing the soul and personality of someone so precious to me I cannot imagine their absence. The absence I know, sooner or later, will come, no matter what I want or pray or can do.

Take time to embrace your loved ones, my friends. Feel their strength; feel their fragility. Smell their hair and their skin.

And rejoice in your beautiful despair.


© 2012 The Epicurean Dealmaker. All rights reserved.

Fluctuat nec Mergitur

A girl came in the café and sat by herself at a table near the window. She was very pretty with a face fresh as a newly minted coin if they minted coins in smooth flesh with rainfreshened skin, and her hair black as a crow’s wing and cut sharply and diagonally across her cheek.

I looked at her and she disturbed me and made me very excited. I wished I could put her in the story, or anywhere, but she had placed herself so she could watch the street and the entry and I knew she was waiting for someone. So I went on writing.

The story was writing itself and I was having a hard time keeping up with it. I ordered another rum St. James and I watched the girl whenever I looked up, or when I sharpened the pencil with a pencil sharpener with the shavings curling into the saucer under my drink.

I’ve seen you, beauty, and you belong to me now, whoever you are waiting for and if I never see you again, I thought. You belong to me and all Paris belongs to me and I belong to this notebook and this pencil.

Then I went back to writing and I entered far into the story and was lost in it. I was writing it now and it was not writing itself and I did not look up nor know anything about the time nor think where I was nor order any more rum St. James. I was tired of rum St. James without thinking about it. Then the story was finished and I was very tired. I read the last paragraph and then I looked up and looked for the girl and she had gone. I hope she’s gone with a good man, I thought. But I felt sad.

I closed up the story in the notebook and put it in my inside pocket and I asked the waiter for a dozen portugaises and a half-carafe of the dry white wine they had there. After writing a story I was always empty and both sad and happy, as though I had made love, and I was sure this was a very good story although I would not know truly how good until I read it over the next day.

As I ate the oysters with their strong taste of the sea and their faint metallic taste that the cold white wine washed away, leaving only the sea taste and the succulent texture, and as I drank their cold liquid from each shell and washed it down with the crisp taste of wine, I lost the empty feeling and began to be happy and to make plans.

— Ernest Hemingway, A Moveable Feast

I am overdue for a visit to Paris. I suspect some of you are, too.


© 2012 The Epicurean Dealmaker. All rights reserved.

Picking a Lock with a Wet Herring

Will Shakespeare: “Words, words, words... Once, I had the gift. I could make love out of words as a potter makes cups out of clay; love that overthrows empires, love that binds two hearts together come hellfire and brimstone. For sixpence a line, I could cause a riot in a nunnery. But now...”
Dr. Moth: “And yet you tell me you lie with women? ... [consults notes] Black Sue, Fat Phoebe, Rosaline, Burbage’s seamstress; Aphrodite, who does it behind the Dog and—”
Will: “Aye, now and again, but what of it? I have lost my gift.”
Dr. Moth: “I am here to help you. Tell me in your own words.”
Will: “I have lost my gift. ... It’s as if my quill is broken. As if the organ of my imagination has dried up. As if the proud tower of my genius has collapsed.”
Dr. Moth: “Interesting.”
Will: “Nothing comes.”
Dr. Moth: “Most interesting.”
Will: “It is like trying to pick a lock with a wet herring.”
Dr. Moth: “... Tell me, are you lately humbled in the act of love? ... How long has it been?”
Will: “A goodly length in times past, but lately...”

— Shakespeare in Love

Apologies for the relatively lengthy hiatus, Dear Friends and Readers, but lately I have been sadly humbled in the act of writing. Specifically, I have been unable to post at this location for any number of reasons. Without boring you with particulars, these reasons include:

• Not having anything to say;
• Not being interested enough in anything happening in the world at large to write about it;
• Being exhausted with the neverending wrangling and partisan hackery which has taken over commentary on the financial system and its regulation;¹ and
• Finding no inspiration anywhere else.

The realization dawned on me this afternoon that I was in a pickle when I discovered I was about to post a poem on this site which I had already posted a year and a half ago. And it wasn’t even that great a poem. I was just desperate to post something.

My dilemma is exacerbated because I have barred myself from many reliable sources of stories, parables, and lessons learned, including those in my personal and professional life.² Unlike, say, Outer Life, who has penned some remarkably candid and wonderful pieces on his unfolding life story, I have chosen to mask my own identity beyond a limited number of superficial details and anecdotes. Notwithstanding the impression of most outsiders, Manhattan and Wall Street are each remarkably small places, and one too many details might allow a diligent person to triangulate my identity. This itself might not be so bad, but I would much prefer not to go to prison for the murder and dismemberment of any such misguided soul.

Likewise, my professional activities are off limits here. Not only because I do not want to tip my hand to eager enemies and competitors over clients and transactions I may be working on or have completed, but also because the SEC and even that toothless self-regulatory fossil FINRA would likely take an exceedingly dim view of such unapproved and noncompliant communications. This is not even to mention my duty of confidentiality, secrecy, and discretion to my clients and my colleagues which I—less unusual in this way among my industry peers than our haters and detractors (would prefer to) believe—defend and prosecute diligently.

* * *

So with this entry I have resorted to the last desperate act of a blocked writer: writing about writer’s block. A cheap and shameful maneuver. Fortunately for you, I have enough pride left that I will forgo any more posts on this selfsame topic for quite some time.

Now I truly have nothing left to write about. Enjoy the respite. You are welcome.

¹ Most tiresome and enervating of all is the sheer bloody-mindedness of most commentators and pundits in this regard. It’s as if nobody is actually interested in participating in a debate designed to reveal the truth about the problems and challenges facing us, but rather they are just interested in advancing their own one-note crackpot theories and agendas at as loud a volume as possible. That, and/or flog their books.
² This includes, for obvious reasons, the personal and professional stories of most people known to me.

© 2012 The Epicurean Dealmaker. All rights reserved.

Ready, Fire, Aim

So what I told you was true… from a certain point of view.

— Obi-Wan Kenobi, Star Wars Episode VI: Return of the Jedi

The news out of Old Blighty this morning that Bob Diamond, CEO of Barclays, has resigned under pressure seems to indicate the ongoing LIBOR fixing scandal is finally gaining enough momentum to fly off the rails. The current rumblings are that Mervyn King, Governor of the Bank of England, wiggled his stately eyebrows disapprovingly and conveyed, with the minimum regulatory fuss, that, yes, indeed, he would be exceedingly obliged if the presumptuous Mr. Diamond were encouraged to remove himself forthwith to a less embarrassing locale. Like, say, Inner Mongolia. Perhaps unfortunately for Mr. King, Lord Turner of the FSA, and their minions, however, Mr. Diamond is scheduled to testify in front of a Treasury Select Committee tomorrow. Current odds in the interbank lending market are 5 to 3 that Mr. Diamond will celebrate Independence Day by setting off a few hundred fireworks under his former overlords’ derrieres. Honi soit qui mal y pense.

Increasingly lost in the hubbub surrounding this folderol is the nature of the offense. Diamond himself admitted that Barclays did two things wrong. First, certain traders within the bank apparently cajoled, wheedled, and perhaps even bribed the employees charged with submitting Barclay’s LIBOR fixing over a period of several years in order to book profits or reduce losses on their own proprietary positions. While this manipulation may have benefited these individual traders, it is not at all clear that it benefited the bank as a whole. As a huge global commercial and investment bank, Barclays stands on the paying and receiving end of tens if not hundreds of thousands of financial contracts indexed to LIBOR, which is the base rate underlying hundreds of trillions of dollars of loans, mortgages, derivatives, and other financial contracts around the world. On many of these contracts, Barclays pays interest calculated as a spread to LIBOR, and on many others it receives the same. As a whole, one would only be able to determine Barclays’ exposure to LIBOR if one summed up all these obligations to determine its net exposure. It is an empirical question. If one takes the theoretical position that a huge bank like Barclays as a whole should normally be structurally short floating rates—that is, is a net short-term borrower which pays floating rate interest—then one can say an artificial reduction in LIBOR should in fact benefit it by reducing its borrowing costs.¹

But that was not the intent of the individual traders and submitters manipulating Barclay’s fixings. They were just trying to pad their own P&Ls and apparently didn’t give a fig for their employer’s overall profitability. This was sheer individual profiteering, and the fact that it occurred repeatedly demonstrates that Barclays was riddled with lousy controls, inadequate supervision, and a culture of individual profiteering run amok. It is not an indictment of banking in general, it is an indictment of what a crappy bank Barclays was.²

On the other hand, Bob Diamond also admitted that, beginning around the time of the financial crisis, Barclays began to systematically underreport its LIBOR fixings to the BBA. It did this, he claims, because executives began to notice its self-reported rates were higher than those of its global peers, which seemed unrealistically low. Because Barclays began to fear that reporting higher LIBOR rates than its peers would undermine the perception of its creditworthiness in the marketplace, it guided its submitters down to the new, improved “market” levels. For what it is worth, Gillian Tett of the Financial Times and others at The Wall Street Journal had begun to report as early as the Fall of 2007 that something was rotten in the state of LIBOR. It seems that every major bank in 2007 and 2008 was submitting bogus LIBOR fixings with the intent to persuade the market all was well (when it most distinctly was not). The kicker is that Barclays now claims its ermine-cloaked stewards at the Bank of England strongly encouraged it to get in line.

Oops.

* * *

Of course the real question in this kerfuffle is whether this gross, sustained, systematic and perhaps regulator-sanctioned manipulation of base rates used to calculate payments due under hundreds of trillions of dollars of financial contracts worldwide—which I think we can safely say did in fact occur—actually claimed any victims. Certainly not among the banks, who neither could nor would lend or borrow at LIBOR rates from their peers during the financial crisis. Certainly not obviously among the myriad of borrowers who had borrowed at or swapped back into fixed rates, and who happily motored along paying their nice level payments without regard for the shenanigans in the floating rate market. Not obviously among the investment banks, hedge funds, and other active market participants and intermediaries who regularly transacted on both sides of the floating rate ledger either. Perhaps those parties who borrowed on a floating rate basis during the period of artificially low benchmark rates benefited, and the counterparties who loaned to them suffered?

But here’s the rub: virtually nobody borrows at LIBOR. Entities borrow from and lend to each other at LIBOR plus a spread, which is negotiated between the parties at the commencement of the contract. It is the spread which reflects the negotiated price for credit risk undertaken by the lender. Spreads are the true market price of credit. LIBOR is just a number pulled from a page on a Reuters or Telerate terminal.

And consider this: Since no bank believed either their own or any other bank’s LIBOR number back in 2007 or 2008—to the extent that many (most? all?) even refused to lend to each other at those rates—do you think it likely they did not incorporate that knowledge into the market price of credit they offered each other and every other potential counterparty? Do you really think commercial and investment banks did not at least implicitly add 25, 50, or even 100 basis points to their normalized credit spread in each and every deal to compensate for the bullshit discount priced into the reference rate? Do you really think every sophisticated investor and participant in the fixed income and derivatives markets—who could and did compare posted LIBOR rates with the banks’ real market borrowing costs displayed real time in credit default swap and other credit markets—was unaware of this dislocation, and did not price it into their own transactions? Let me suggest an answer to you: of course they did.

In fact, I suspect the only participants who obviously benefited from the systematic manipulation of LIBOR were those who had entered into contracts priced before that manipulation began. In other words, a counterparty who borrowed at LIBOR + 600 bps in 2005 definitely benefited from the fact that they only had to pay 600 basis points in 2007 and 2008, when the correct price may have been closer to 700 bps or more.³ Even banks and other entities which were structurally net short floating rates during this period were unlikely to have benefited fully from the implicit LIBOR discount, because their obligations rolled over on a short-term, almost continuous basis, as is the wont for active financial intermediaries. Each time a bank borrowed money or reset a credit spread during that period, you can be certain its lenders priced the loan at true credit market rates, unconstrained by whatever straw man the banks and their regulators had agreed to put on the Reuters and Telerate pages.

* * *

So, despite the huge numbers involved and its pervasiveness throughout the global financial infrastructure, it is far from clear to me that banks’s systematic manipulation of LIBOR led to vast wealth transfers from one set of market participants to another. No, the real damage this practice caused is what we are witnessing now. The current scandal is the last nail in the coffin of whatever trustworthiness banks may have had left after five years of crapping the bed.

Sure, nobody (or very few people) may actually have been ripped off by this behavior. Sure, systematic lying by banks about their creditworthiness during the financial crisis may have lulled the public into not panicking and triggering a wholesale global financial collapse. (Which most assuredly would have been A Bad Thing.) It may have even helped in more systemic ways.

But I think bankers must now get used to staying in the doghouse for a very long time. It might even be time to pick out curtains.

Related reading:
Donald MacKenzie, What’s in a Number? (London Review of Books, September 25, 2008)
Ryan Chittum, The Libor lie unravels (Columbia Journalism Review, June 28, 2012)
Matt Levine, Libor Can Be Whatever You Want It to Be (Dealbreaker, June 26, 2012)


¹ Think of a simple example: Bank A borrows a million dollars in the interbank market on a floating rate basis at 3-month US dollar LIBOR. It then turns around and lends you a million dollar adjustable rate mortgage indexed to 3-month LIBOR plus a spread. Assuming no timing differences in the reset calculation of LIBOR on either “leg” of this transaction, Bank A’s net exposure to LIBOR in this example is exactly zero. LIBOR could be 10% or it could be 2%; it wouldn’t affect Bank A in the slightest. Now sum this up over hundreds of thousands of mortgages, tens of thousands of corporate loans, and tens if not hundreds of thousands of interest rate swaps and other derivative transactions. Good luck figuring that out.
² And perhaps an indictment of how ineffective or inattentive its regulators were, too?
³ Note, if you retain a shred of charity toward the banks at this point, that many if not most of the people who bought houses with adjustable rate mortgages in the run up to the crisis fall into this category of clear beneficiaries. I can assure you the banks did not intend it to happen this way.

© 2012 The Epicurean Dealmaker. All rights reserved.