Blaming it on the Brooklyn College Guy

Who was responsible for bringing the global financial system to its knees? According to Princeton alumnus Michael Lewis, and MIT alumnus Jake DeSantis (one of the only current or former traders at AIG's Financial Products division willing to speak to Lewis on the record), it was Brooklyn College alumnus Joe Cassano (pictured above), a cop's son whose status insecurities caused him to yell a lot at his underlings over issues as trivial as who left the weights on the Smith machine¹. So claims Lewis in his Vanity Fair article on the implosion of AIG's Financial Products division, "The Man Who Crashed the World" (Hat Tip: Real Clear Markets). Allowing a number of AIG F.P.'s traders to impugn Cassano anonymously was apparently the price Lewis had to pay for his access, but the article is worth reading anyway, as Lewis's Wall Street articles usually are.


¹Given Lewis's familiarity with sports as well as finance, while reading the anecdote about the Smith machine, I wondered if Lewis would bring the Smith machine up later in the article as a metaphor for hedging risk, but no dice.

USEG Expands Share Buyback; More of Mark Cuban on Buybacks

U.S. Energy Corp (Nasdaq: USEG) expands its share buyback. It had already bought back about $3.1 million worth of its shares under its previous $5 million authorization, and now USEG's board has expanded that authorization to $8 million.

Separately, on his blog last week, Mark Cuban reiterated his opposition to buybacks ("The AIG-Lehman-Merrill Link"),

3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months.

[...]

Can anyone say “financial engineering” ? think all 3 companies could have used that cash they spent trying to pump up their stock prices ? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.

In the cases of AIG, Merrill, and Lehman, I doubt the shareholders would have been much better off if they had received dividends in lieu of buybacks over the last 18 months, and I doubt the money used in the buybacks would have been enough to materially affect the outcomes there. It certainly didn't help though.

I wonder what Cuban would think of USEG's share buybacks. USEG has plenty of cash, so it's not facing a cash crunch; it doesn't have current earnings, so it's not engaging in 'financial engineering' to boost earnings per share; and it's buying back its shares at well below book value.

The Atlantic's Megan McCardle on the Politics of the Financial Crisis

Excerpted from Megan McCardle's Atlantic column, "The Blame Game":

Naturally, the two presidential candidates are moving quickly to deal with this crisis -- that is, to blame it on everyone except themselves. John McCain and his surrogates are pushing the dubious notion that the primary problem is a lack of transparency and accountability. He might send someone down to Lehman's trading floor to ask the people packing up their desks whether they feel they've gotten away with something.

Meanwhile, Barack Obama is pointing the finger at John McCain, or at least Senator McCain's ideas:

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to.

This may play well on television, but it is rather disappointing coming from the man who promised us a new kind of politics. There have been no significant changes to the financial regulations in the last eight years that might credibly have created this crisis (the one major alteration, Sarbanes-Oxley, moved things in the other direction). And it's hard to blame loosened oversight when the entire market systematically overvalued the now-toxic securities. Lehman Brothers was not, after all, trying to put itself into receivership for the sheer joy of molesting taxpayers.

Worth reading the rest of it.

It's a little disconcerting to have both major party candidates running as populists. Of the primary candidates in both parties this year, I think the one who might have been best-qualified to deal with the financial crisis was Mitt Romney. He didn't have the sorts of qualifications the American public seems to prefer this year though: he wasn't raised by a single mother, didn't spend any time in a POW camp, didn't live until age ten in Scranton, PA, didn't seem like he actually liked hunting, etc.

AIG, Merrill Lynch, and the DJIA: Questions

Someone on CNBC asked an interesting question of NY State Insurance Dept. Superintendent Eric Dinallo this morning: might AIG have avoided this crisis had Elliot Spitzer not forced out long-time AIG chief Hank Greenberg? Dinallo, who was nominated to his position by Spitzer during his scandal-truncated governorship, declined to speculate.

Two questions I haven't heard anyone speculate on yet (though I'm sure I'm not the first person to think of this): Is there any chance AIG will stay in the Dow Jones Industrial Average after this? If not, what companies will replace AIG and Merrill Lynch in the DJIA? It will be interesting to see if the editors of the Wall Street Journal use this opportunity to replace one or both of these companies with non-financial companies, to reflect the contraction of the financial sector as a percentage of the economy.

More Sunday Night Excitement

A lot of news for a Sunday Night:

- Lehman Brothers is filing Chapter 11.
- Bank of America is buying Merrill Lynch.
- The Fed is expanding the types of collateral it will lend against to include equities.
- AIG is planning asset sales to raise capital as part of a massive restructuring.

I wonder if at some point it might make sense for the Federal government to create its own vulture fund with one or two hundred billion dollars and start buying up distressed mortgages and mortgage-backed securities at steep discounts. Maybe that would put a floor under the prices of some of the complex assets derived from mortgage-backed securities, and if the Feds buy these securities at steep enough discounts, they might turn a profit on them when the credit markets revive. Just a layman's thought. Perhaps professional pundits will offer better suggestions.