"The Big Short", by Michael Lewis (2010)

Michael Lewis, author of the original Wall St expose "Liar's Poker", couldn't resist the temptation to jump on the bandwagon and write a book about the latest financial meltdown. Since "Liar's Poker", Lewis has carved out a successful writing career and has clearly evolved as a writer: his writing style is light and easy to read, and he spins an interesting yarn.

What sets "The Big Short" apart from the flood of other books on the same topic, is that Lewis focuses on a positive angle: the small group of money managers that were shrewd enough to see the crash coming -- and who made a lot of money "shorting" the subprime housing market (betting against it). For the most part, they did this by buying "credit default swaps", effectively insurance policies against the bonds based on sub-prime mortgages. On the other side of the trade in these "financial weapons of mass destruction" were many of the investment banks and, in particular the american insurance giant AIG, who duly got into deep doggy-doo when the music stopped.

BOTTOM LINE: An easy, enjoyable read that gives a good understanding of what went on in the sub-prime crisis from the point of view of those who saw it coming.

Cowboys on Wall Street

I've just been reading about the legislation to overhaul the US financial system that was passed by the Senate yesterday. Apparently, if passed it will represent the most sweeping reform to Wall Street since the aftermath of the Great Depression. Looking over its contents, it seems to propose some patently sensible things: for example, it would drastically enhance the regulation of the $615 trillion derivatives industry, bringing them onto regulated exchanges and improving transarency of the industry.

Predictably, the Wall St banks have been lobbying like crazy to try to prevent all of this and maintain the status quo as much as possible, but so far they don't seem to have succeeded. 

The situation reminds me of a classic moment from the 1993 film Tombstone. Curly Bill, the charismatic but evil leader of the Cowboys gang, has just been taken into custody by the Earp brothers after shooting the town sheriff dead (in his defence, he is sky-high after a trip to the opium den and probably doesn't realize what he's done). 

Now, to see where I'm going with this, try to picture Curly Bill as Dick Fuld -- or perhaps Lloyd Blankfein; take your pick -- and the shooting as the GFC. The role of Wyatt Earp is to be played by Barack Obama.

Initially, the Earps face off against a would-be lynch mob comprised of non-Cowboy townfolk who want his blood (think outraged Main Street voters). But slowly, one or two dissident voices pipe up: "Turn 'im loose!" barks Cowboy henchman Ike. Before you know it, an even more tense stand-off ensues, not against the lynch mob, but against a "lobby group" of Cowboys demanding their leader's release.

In the end Wyatt & Co hold fast and justice is (eventually) served. I just hope that, back in the real world, Obama can prevail against the Cowboys on Wall Street.

FIASCO: The Inside Story of a Wall Street Trader (1997)

This book is essentially Liar's Poker for the 1990s. It's a well-written and enjoyable read, and Partnoy does a great job of explaining the types of derivatives deals done by investment banks during the 90s. He avoids getting bogged down in detail, and manages to portray the realities of the investment banking culture without resorting to the cheap, titillating anecdotes used in many similar books. The book covers similar ground to "Traders, Guns & Money" by Satyajit Das --- but does a much better job.

The overall message of the book is clear: the financial derivatives dreamed up by the investment banks are little more than legalized fraud, allowing shady clients to make extremely risky bets without explicitly disclosing them. A simple example, explained in the book, is the derivative known as an "equity swap". The idea is that one party holds a stock that they would like to sell. However, if they sell the stock they realize a capital gain and will have to pay tax. This is where the investment bank comes in: instead of selling the stock, they continue to hold it, but enter an agreement with the bank to exchange the future gains/losses from the stock against a fixed interest payment. For all intents and purposes, it's exactly as if they had sold their stock -- except that they avoid paying any tax. The investment bank is happy, because in return for providing this service they earn a nice juicy fee. And they aren't sweating the future movements in the stock price, since they can hedge their exposure by simply selling short an equal amount of the stock in the market.

The equity swap is an extremely simple example -- derivatives can become an awful more sophisticated and convoluted. But the essential principle remains the same: investment bank facilitates a transaction which circumvents a regulatory hurdle and earns bumper fees. The net result is a transfer of wealth (via lost tax revenue) from Joe Public to the already wealthy (the client) and the soon-to-be-wealthy (the banker).

It gets worse: Partnoy describes a series of trades carried out by American investment banks in Japan in the mid-nineties. Here the objective was to realize a phoney short-term profit while simultaneously shoving the offsetting loss far into the future. The parties responsible get credit for the "profit" now, and by the time the sushi hits the fan further down the line they are long gone. There's really no grey area here: this is outright fraud, and it's telling that some of the most venerable Wall Street banks were in it up to their eyeballs.

Reading about this in a post-GFC world you can't help but feel a sense of outrage: the book was written in 1997 and yet the problems it highlights were to be played out in almost identical form a decade later. It makes you wonder what books the politicians and regulators are actually reading, and what real hope there is for grass-roots reform in this industry.

Last Ride (2009)

Watched this low-budget, low-key Aussie flick on the weekend. Hugo Weaving plays a dead-beat petty criminal who, having just stepped into the big time by committing a murder, takes his ten year-old son on a "road trip" across the outback while on the run from the police. It's a fairly sad, depressing tale, but Weaving is good value as always and the outback setting is beautiful.

"The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It", by Scott Patterson (2010)

"The Quants" describes the rise of the generation of quantitative traders that have come to dominate the hedge fund world over the past couple of decades, focussing in particular on a handful of the most successful managers.

It's a reasonably interesting read, but Patterson (a reporter for The Wall Street Journal) doesn't really have the technical chops to describe in any effective way what these so-called "quants" do. He's limited to superficial, fawning descriptions, describing their methods as "a dizzying, indecipherable-to-mere-mortals cocktail of differential calculus, quantum physics, and advanced geometry". This sort of writing conjures up grandiose images of superhuman geniuses which is at odds with reality: a more accurate description for most quantitative trading would be "a straightforward combination of statistics and high-power computing resources, together with preferential access to trading locations".

On the few occasions when he does venture into technical explanations, Patterson stumbles quite badly. For example, on page 53 he describes a 27-standard-deviation event as having "a probability of 10 to the 160th power". Any reasonably numerate person knows that is a very large number! He means 10 the negative 160th power -- a very small number -- corresponding to a very low probability.

Less trivially, on page 60 we read:

the volatility smile disobeyed the orderly world of "no arbitrage" laid out by Black-Scholes and modern portfolio theory, since it implied that trades could make a lot of money by selling these out-of-the-money puts.

Ahem, not exactly: the whole point of the volatility smile is that it doesn't violate the no-arbitrage condition and is hence free to be "chosen" by the market.

And again on page 81: "A stock with a beta of 1 has the same volatility as the rest of the market". This would only be true if the stock was perfectly correlated with the market (in other words, if it was the market): in general the stock's volatility would be larger than that of the market.

It's not a big deal, but someone in the editing process really should have picked up on errors like these.

The book does a better job of describing the main players and describing with fairly broad brush strokes how they fared in the lead-up to the GFC.

Overall, it's not a bad read, but doesn't answer any deep questions.

Personally, I'm hanging out for the day when some of the insiders open up and describe how their quantitative strategies really work (in particular, a monograph detailing the strategies used by Renaissance Technologies over the past couple of decades would be a fascinating read). But I won't be holding my breath...

Rotten Apples: iPod Shuffle g3 jumps the shark

I need to vent a little spleen about the latest iPod shuffle. First, some background:

I have been something of an Apple fanboy ever since I was more-or-less forced into using Macs in my undergrad physics computer lab in the late 90s. Looking back on it, this was kind of an ideal time to hitch one's wagon to the Apple juggernaut: the original iMac had just been released (I had shiny green one in my office during my honours year), and Mac OSX was just around the corner; the iPod was still several years off.

After honours, I moved into laptops, beginning with a second-hand PowerBook before progressing through several generations of the more economical iBooks. More recently, in late 2007 I returned to desktop-land and picked up a 20" iMac, which quickly became the all-purpose home entertainment centre in my cramped apartment in Camden Town.

In parallel, I also worked my way through a series of iPods. I began with a 20GB original model (which in hindsight seems incredibly bulky). I have since acquired two iPod shuffles and two Nanos (as far as I can remember -- I may be forgetting one or two). Some of these I was able to palm off to less tech-obsessed relatives; the others I was able to justify since I was travelling a lot and had a diverse range of audio entertainment requirements.

For the most part, I was (and remain) extremely happy with the overall quality of the main Apple product. But along the way I began to notice a series of irritating, though initially minor, issues with peripherals and connectivity:

First off, the iBook didn't feature an audio-in socket; this was supposedly due to a lack of room, but it smacked of a cynical attempt to differentiate the iBook from the more up-market PowerBook line.

Similarly, the lack of a standard monitor output was irritating --- and led me to buy one of their ridiculously overpriced adapters to fit with their own "mini-DVI" port. This was compounded by the fact that when I later bought my iMac, the shape of this "mini-DVI" port had changed -- for no apparent reason -- rendering my adapter useless. 

Yet another example is the change in the power supply socket between successive iBook models. Again, pointless and infuriating as it renders the older one useless when it may otherwise have served as a handy backup.

[As an aside, I now have a box filling up with obsolete adapters and cables resulting from this cynical and senseless practice. Multiply that by the millions of similar fanboys around the world and we're talking about a significant waste. Any government that would legislate to disincentivize this profligate behaviour would get my vote...]

And so to the point of this rant. Recently, my g2 iPod Shuffle has become a bit flaky, repeatedly cutting off and requiring me to press play. When this happens ten times in quick succession, while you're jogging along a busy street, it quickly becomes very irritating. I've soldiered on with it for a while, hoping the problem might go away, but lately it's become worse. Here's the downside of the sleek, compact design: it's literally impossible to open up with breaking it. And even if I could, what are the chances I'm going to find what's wrong with it?

So, resigned to the end of my shuffle and, acting by unconscious consumer impulse, I decided to check out the latest g3 iPod Shuffle. At 79 bucks for a 2GB model, it seems like pretty good value. It's even smaller than the previous one and looks pretty smart. However, looking more closely there is a big problem: they've made the "design" decision to take the buttons off the actual iPod (supposedly to facilitate the size-reduction), and onto the headphones. So now, in return for a size reduction that, quite frankly, wasn't at all necessary, we have to use Apple-branded custom headphones with controls built into the cable. So no chance of using your own Sennheiser earphones if you happen to be a prissy audiophile (I'm not -- but, hey, I would like the chance to become one...). And what if you lose/damage the flimsy Apple headphones? You have to buy a replacement from the Apple Store for 39 bucks. Or take your chances and hand over 20 bucks for a Belkin adapter which, according to the reviews, seems to work great -- for about a month. This may seem like small beer, but for goodness' sake, when the whole thing only costs 80 bucks it seems a bit ridiculous.

So, I'm taking a pass on this one. And I'm going to think twice about investing in any further iProducts unless I can be sure I won't be getting an iShafting by getting locked into over-priced peripherals.

Disgusted,

Tunbridge Wells (Now Cherrybrook).

"Porno", by Irvine Welsh (2002)

This is the sequel to "Trainspotting", and is a very welcome second outing for Renton, Sick Boy, Spud and, most infamously, Begbie. The novel is set a decade after the events in Trainspotting: having scarpered with his friends' cash, Mark Renton is now keeping a low profile but doing pretty well for himself managing a night club in Amsterdam. His erstwhile best mate, Simon "Sick Boy" Williamson, has been living in London where he has progressed in his career as pimp, con artist, and self-styled business man. North of the border, psychotic hardman Frank Begbie is fresh out of jail and keen to get back to his belligerent ways. Danny "Spud" Murphy, meanwhile, seems to be pretty much where we left him ten years ago: still struggling to stay off the hard drugs and basically being a total waster; however, he does have a young son to think about now.

The plot revolves around Sick Boy's harebrained scheme to make a low budget porno film (but with lofty production values), starring a rag-tag cast of local associates. As with Trainspotting, the story is told as a pastiche of first-person monologues, from each of Sick Boy, Spud, Renton, Begbie -- as well as Sick Boy's new muse and soon-to-be movie starlet Nikki Fuller-Smith. However, unlike Trainspotting, which read as a collection of short stories with recurring characters, there is a single main plot line running through the length of the novel.

I found it a very enjoyable and at times hilarious read, though the subject matter can be a little heavy going at times (the passage with Spud and Chizzie "The Beast" was particularly unpleasant reading). For the chapters told through the eyes Spud and Begbie, Welsh renders their thick Scottish slang phonetically; this adds an undoubted authenticity, but it does make those chapters a little slow going at times.

As with Trainspotting, I found Begbie to be the standout character. To describe him as belligerent, aggressive, self-righteous and ultra-paranoid just wouldn't do him justice. A great scene which had me laughing out loud was when he was walking down the high street with Spud (as told by Spud):

...Franco gits a text message oan his mobile. Eh stands lookin at it in disbelief. -- What's up Franco, man?

-- SOME CUNT'S TRYIN TAE GIT FUCKIN WIDE! eh shrieks, n two lassies wi pushchairs passin us jist aboot shit thir thirsels.

As we already from a previous chapter, the text message in question had been sent by Sick Boy (from Renton's mobile), and reads:

HI DOLLFACE. CAN'T WAIT 2 GET LOOSE ON YOUR PRETTY ASS AGAIN. HOPE PRISON HASN'T SLACKENED IT 2 MUCH. IT'LL BE MINE AGAIN SOON. YOUR OLD CHUM.

BOTTOM LINE: excellent follow-up and well worth a read for anyone who enjoyed Trainspotting. I hope they get around to making the movie.

I've also heard from a reliable weedgie that "Glue" is worth a read as well, so I'll be looking out for that.

Eis Eis Baby

Have recently got into German industrial metal band Eisbrecher (the name is Deutsch for "ice-breaker"). They follow proudly in the genre pioneered by Rammstein, but take it to a more gothic, Twilight kind of sound. I love the mix of heavy guitars with atmospheric synth. And, just like Rammstein, the fact that they sing in German (primarily) means that you don't have to confront the issue of whether the lyrics are any good (I've often thought how Iron Maiden would be even better, if only you didn't understand a word of English).

Suggested tracks: "Vergissmeinnicht" ("Forget-me-not"), "Zu Sterben" ("To Die"), "Heilig" ("Holy") and "This is Deutsch".

The Lovely Bones (2009)

Peter Jackson gets in touch with his softer side with this adaptation of the Alice Sebold novel. Having read the latter a couple of years back, I was curious to see how it would translate to the big (42") screen. Overall, I was quite impressed. Jackson showed admirable restraint in his use of special effects (if you suffered through Return Of The King, you know what an effort this must have been...), and managed to remain pretty faithful to the feel -- and plot -- of the book. Also noteworthy was the poignantly atmospheric soundtrack by Brian Eno.