Mar 17

In January, the Financial Crisis Inquiry Commission issued their final report, titled The Financial Crisis Inquiry Report.

While I’d not want to ruin a good cliffhanger of an ending, the web site itself puts it conclusion on the front page:

The Commission concluded that this crisis was avoidable—the result of human actions, inactions, and misjudgments. Warnings were ignored. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”

These words are encouraging, but I suspect the lessons learned here will soon be forgotten. Do you remember the Savings and Loan Crisis? I do. I was young, but bright enough to notice CDs from Lincoln Savings and Loan were not FDIC insured, not the ones they were pushing. Weren’t we supposed to learn our lesson then? The real question is whether our collective memory can last even a full generation. Will the next generation fall prey to the claim of this time being different?

This document is available as a (free) PDF download, and runs 662 pages. It’s organized in a way that makes it manageable and even interesting to read. I’m not betting, but let’s hope it’s really lesson learned this time.


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Apr 24

Although, maybe if they spent a bit less time surfing for porn, they might have had more time to do their jobs…..


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Oct 31


Sad to say, our collective memory appears to be getting shorter, back to the same bad habits.


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Apr 15

This is the title of an article in Wired Magazine. Not a typical place to look for financial articles, but it came to my attention and I found it an interesting read. Turns out this is the formula (actually the proper word is “equation”):


While the explanation of this equation is beyond the scope of this blog, a read of the full Wired article makes one thing clear, the failure of the market had to have an origin, and to me, it started with the rating agencies basing their ratings on historical data. They had no ability to understand that subprime loan were being given to anyone with a pulse and the ability to write their name. Securitization itself was not to blame, but it certainly got a black eye in the process. The public radio program Marketplace offers an interview discussing this same topic in an article titled “Did math formula cause financial crisis“?

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Sep 29

Warren Buffet last week announced that he bought (through his company Berkshire Hathaway) $5 Billion worth of Goldman Sachs preferred stock which will yield 10%. Goldman can buy it back at any time at a 10% premium to its current value. Along with this deal Goldman threw in $5B in warrants to buy more shares at $115 any time over the next 5 years.

Let’s look at the windfall this deal is to Mr. Buffett and his shareholders:
A warrant is similar to an option, but usually for a much longer term. An option gives one the right, but not the obligation to buy a stock at a predetermined price (the ‘strike price’). So an option has unlimitted upside but a fixed downside. In this case, those warrants are included for free. But let’s look at what the $115 is currently worth.

You can see that just going out two years and a few months, a $115 strike would be worth about $46. Going out the full five years, the option value would be closer to $65. To be clear, the value of the warrants alone is $2.8 Billion. If Mr. Buffett wished to sell just these warrants, this is the amount he’d recover. Next, the shares of preferred stock he purchased for the $5 Billion will return 10% or $500 million per year. The next 5 years of cash flow have a present value of $1.996 Billion using a cost of money of 8% (and in these times, money costs less that that.) As we look at the financial crisis we are in, it’s clear that those who have money are going to get richer while the rest of us watch. The deal I described here is not available to you or me, not in smaller units of $5000, or even $50,000. When you or I buy shares of Goldman Sachs, we get 1% dividends and no warrants at all.


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