This post is a summary of my comments at the London meeting of the International Association of Credit Portfolio Managers. Since it was a pre-dinner speech and the cocktail hour preceded it, we cut the quantitative stuff and stick to the fun stuff.
Let me start off by saying that this is a happy speech. I hope the only sad faces at the end of the speech are the losers in tonight’s election in the U.K. To those of you in the audience, thank you for not voting.
I may be a contrarian in arguing that some good things have come out of the credit crisis, but I want to convince you with a series of examples. In most cases, these are things we wouldn’t have otherwise known without the crisis. If education is a good thing, knowing these things is good even if we paid a lot of tuition.
Actually, Kamakura’s president Warren Sherman was so concerned about what I was going to say that he reviewed my script tonight with Som-lok Leung, executive director of the IACPM. Som-lok had some good advice—he said “We’ve all learned some lessons in the credit crisis. When you live in a glass house you shouldn’t throw Northern Rocks.” He added, “We want to take a happy tone—keep thinking ‘All is Good, All is Good.’ If that’s too hard to remember, you can abbreviate it as “AIG, AIG.”
With that advice, let me summarize some of the happy things to come out of the crisis. One of my favorite country songs says “Don’t let a cowboy make the coffee, and don’t tell a joke that’s not that funny more than once.” We’ll see how many of these credit crisis lessons get retold.
- In 2007 the copula method was conventional wisdom for CDO valuation. Within 2 years however, Wired Magazine was labeling that technique “The formula that killed Wall Street.” Think of all the time we’ve saved now that we don’t have to waste time reading academic articles on the copula method for simulating credit portfolios any more. Just speaking personally, I have made a lot of progress using that time for other things. I am well on my way to a second career as a rock and roll ukulele player. Not only that, my wife gave birth to twin girls 3 months ago. All due to the demise of the copula method.
- Because of the credit crisis, we learned that there is a lot more excitement than we thought to the phrase “these securities are rated triple A”
- We learned that the acronym SIV doesn’t mean what we thought—we now know it means “Security Isn’t Viable”
- Thanks to our fall speaker at the IACPM dinner, Ben Friedman at Harvard, we learned the real definition of “too big to fail”—it means a firm whose CEO personally knows at least 2 members of the Federal Reserve Open Market Committee. Too bad, Dick Fuld and Kerry Killinger.
- In fact, Dick Fuld put this insight another way when he was told Lehman would not be bailed out. His response was “So I’m the schmuck?” This may well be the best quote of the entire credit crisis. Congratulations, Dick.
- We learned, thanks to the New York Times and Charles Prince, that it can be useful for a CEO to know the difference between a CDO and a grocery list
- Everyone’s talking about how a CDS contract is like buying a fire insurance policy on someone else’s house. Well, we now know that the perfect hedge in the credit crisis was to buy directors’ and officers‘ liability insurance on Citigroup, Lehman Brothers and AIG.
- Eric Rosengren, President of the Federal Reserve Bank of Boston, explained in April 2008 that the Federal Reserve was quote “very pleased” with the yield it was getting on funds lent to JPMorgan for the Bear Stearns rescue. Ben Friedman at Harvard asked what the yield was on those advances was—when Ben heard the answer, which was 2% for 10 year money, Ben offered to borrow $1 billion at the same “very pleasing” yield. Ben is still waiting to hear back from Eric
- We understand there’s a new motto at the Fed for the strategic management of the US economy—the motto is “Anything Japan can do we can do better.”
- We’re also grateful to Toyota, at the height of the credit crisis, for bringing new excitement to the phrase “put the pedal to the metal.”
- Another thing that we’re really excited about is a new course being offered as a result of the credit crisis. It’s titled “Advanced Financial Accounting for Sovereigns,” and it’s being offered at the National Technical University of Athens.
- We now know that the biggest winners in the credit crisis were lawyers. Which lawyers? Here are the top 3:
In third place, lawyers to Angelo R. Mozilo, Countrywide Financial, 67 lawsuits In second place, lawyers to Richard S. Fuld, Lehman Brothers, 70 lawsuits In first place and undisputed champions, lawyers to Kenneth D. Lewis, Bank of America, 376 lawsuits
- Another big winner of the credit crisis is Paul Volcker, the only 83 year old with more google hits than Britney Spears.
- After Volcker, I’d have to say one of the biggest winners of the credit crisis is Michael Lewis, author of “Liar’s Poker” and now “The Big Short.” Every time you think he’s written the last book one can write about Wall Street, Wall Street hands him some new material.
- I’ve wondered throughout the credit crisis why my firm Kamakura Corporation has been called “New Kid on the Block” in credit modeling for 20 years now. I finally realized that you’re called “new kid on the block” as long as you’re younger than NYU’s Ed Altman. I just snuck under the wire on that one.
- Another really important insight from the credit crisis is that we now understand the plaque on the wall in the lobby of the Federal Deposit Insurance Corporation. It reads “Inspiring Confidence: 1933-1983.” Nothing after that.
- Another happy lesson from the credit crisis is a new flexibility in people’s thinking about risk management. For example, prior to 2007, nearly every bank in China asked us to teach them how to manage risk like Citigroup. In 2010, nearly every bank in China asks us to teach them how NOT to manage risk like Citigroup.
- Believe it or not, the credit crisis has promoted an increase in biodiversity. Probably the most amazing spectacle of the entire credit crisis happened on April 27, 2010, when a vampire squid spent an entire day in the US Senate. Normally that building is occupied only by 100 chimpanzees.
- One of the other happy lessons of the credit crisis is that we learned that the social value of a “synthetic CDO” ranks right below the value of a single “tweet” on twitter.com
- There is another big revelation from the early days of the credit crisis. Who could have imagined that “commercial paper” and “toilet paper” were so much alike?
- That brings up another security that has been much in the news…we now know that the phrase “bank trust preferred” is an oxymoron
- Maybe one of the best outcomes of the credit crisis is that there is an alternative to Divinity School or entering the priesthood, now that Lloyd Blankfein has explained that Goldman Sachs is doing “God’s work.” That’s a good thing as Goldman will soon have a lot more money and a lot fewer problems than the Pope.
- Speaking of risk, how many people remember that in 2006 RISK Magazine named as its “Risk Manager of the Year” the chief risk officer of Lehman Brothers? Timing is everything.
- I use google alerts to notify me every time there is a new web page posted that uses the acronym “CDO.” Another happy outcome of the credit crisis is that acronym no longer refers to a complex financial instrument. All the articles now are about “Chief Diversity Officers.” Good on ya.
- And since we’re here in London, isn’t it great what Her Majesty the Queen and her loyal subjects have done? As the new owners, they’ve put the “Royal” back in “Royal Bank of Scotland.”
We have indeed learned some happy things from this crisis.
Donald R. van Deventer
May 6, 2010