Has anyone done a Value-at-Risk calculation or a stress analysis for Federal Reserve and the GSEs lately? If they have understood the severity of the problems, are their bosses doing anything about it? I am not talking about the management executives at these institutions. They are in fact the rogue traders themselves. I am talking about the stake holders who are the real bosses to prevent these rogue management executives from trying to blow up these institutions into pieces so that we all will have to pay for it in the end. The stakeholder bosses are indeed taxpayers ourselves, or maybe those naive foreign creditors who amazingly are still willing to continue to lend us the money at near zero interest rates to continue to watch our rogues traders punt. To be fair, the rogue traders today may indeed become the heros of tomorrow if they are lucky. Equally likely, we may all go down the tube with them if their luck runs out.
Despite on surface these rogue institutions are playing different gambling games but in essence what they are all relying on is the simple theory of having access to unlimited capital in their betting games. The way it works is very simple, a gambler loses $100 at the table, he doubles up to $200 the next bet, if he loses again, he doubles up to $400 and so forth, all he needs is one good luck to win back all the previous losses. If the money at risk is the use of OPM (other people’s money), he might as well triple or quadruple the bet each time so that he can not only recoup the loss but also win some profit and actually come out a hero if he gets lucky only once! To make this work, the access to these OPM capital for his next bet has to be unlimited.
What is different in the case of rogue traders at banks that rogue traders such as Nick Leeson, John Rusnak or Jerome Kerviel worked at is that the perpetual machine to access unlimited capital did not exist. But that certainly does not stop the next rogue trader from hoping it does. Hence Geithner and Bernanke may have to visit China, Japan, Saudi Arabia, Kuwait, Taiwan, Hong Kong and Singapore, etc. and round and round and round …
So even if they eventually get lucky to win it all back in just one lucky bet during this wild gambling game, it is hard to imagine why that may prove them to be good economists other than lucky punters. Or in the case of many idol worshippers, the successful management of an economic turn-around by a depression era specialist. When a father mortgages the family house to come up with the cash to temporarily bail out a shop-aholic, borrowing addicted, debt laden daughter while doing nothing to fix her borrowing addiction and compulsive shopping behavior, it is similarly hard to imagine how people could let him declare himself a hero when he has literally just put the entire family at risk and closer on the verge of a total ruin. Everybody in the household may all go down together with her. The transient calmness obtained from mortgaging the family house may have provided a false sense of security but the daughter is still on the loose. Nothing has changed. Instead of sending her to rehab for her consumption compulsiveness and train her to get a job to start producing instead, mortgaging the family house is indeed a crime to other responsible family members.
Spending money to solve problems could hardly be interpreted as heroic acts. Money could indeed make wonders. Anybody with no real talents or even no education at all know how to thrown money to solve problems. Shouldn’t the real heros be those who could come up a way to solve problems without spending any money at all? If that is not possible, at least those who could try to spend the least money to get the problems solved. Doesn’t that make simple common sense?
The celebration of the reappointment of Bernanke seems puzzling as well. I would imagine although Larry Summer may have asked Obama for the job but he would be really stupid to take on the job now after all that money having been spent already. The next few years to come will be the judgement day and time to face up the consequences of all the superficial Band-Aid fixes. Why would there be somebody else willing to be lynched for the misdeeds done by the original spinster who may have retired with accolades by then already? As in the analogy used in many previous blog posts before after a few more heavy Cocaine sniffs to calm down a Heroin addicts it would be quite stupid to volunteer to be the next caretaker, especially if the cure administered to the Heroin addict now is not just a few Cocaine sniffs but rather a few shots of Propofol.
In the case of Goldman Sachs, top management or trading talents seems to mean good political connections. If they ever lose in their gambling activities, their cronies in Washington will swiftly give them a banking license so the taxpayers would have to bail them out. If other people owe them money, taxpayers will also bail out those institutions first so that nobody will dare to owe Goldman money and not to pay them back. So heads Goldman wins and tails we taxpayers lose in all their business activities. On top of that, good connections may also certainly help trading information of upcoming government policies. In fact the policies may have been formulated by these traders. Hmmm, no wonder they get to make more money from trading than others. Gretchen Morgenson of New York Times may be right. The relationship between Goldman and the government administration is too close for comfort. Crony wunderkind institutions like that exist in many third world countries all over the world. The difference is that those in the third world countries usually stay in a low profile and do not call themselves a trading genius at the same time. Many questions we kept hearing in the press is that when will all these crony abuses ever be stopped. Do we have to wait for another socialist revolution, or something even worst to put an end to all this?
So the game is still on. Goldman will continue to make bigger wild bets to create more genius trading success stories or more taxpayer bailouts. They are a bank now and they are even more too big to fail. Fannie and Freddie will also continue to replay the movie “Weekend at Bernie’s” to keep up the appearances of a live US housing market. Let’s hope the Federal Reserve Board, the biggest rogue trader of all, will continue to be able to charm those faithful Chinese, Japanese and Saudis governments to keep bumping their hard earned money to us. Our future prosperity does indeed rely on their continuing blind faith in our US dollar.
If by any chance all this fails for some reason and the money flows stop all of a sudden, the rogue traders could always make it known to the world that their bosses in fact knew their activities all along, as they always do. In fact, they may be quite right. The bosses, the American taxpayers, do seem to be sleeping at their jobs right now.
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