Corzine Forgot Lessons of Long-Term Capital - By Roger Lowenstein

Thirteen years ago, when the hedge fund Long-Term Capital Management was desperately negotiating with Wall Street banks for a bailout, Jon Corzine, the chief executive officer of Goldman Sachs Group Inc. (GS), called John Meriwether, LTCM’s founder, and read him the riot act. Wall Street would invest, Corzine said, but “JM” would have to accept more controls, including strict supervision over his firm’s trading limits.

Corzine, I wrote soon after, “understood the flaws” at LTCM better than anyone. The firm had no controls over risk limits, no accountability to anyone who wasn’t a trader.

Corzine was also tempted by the upside of high-risk trading -- and by Meriwether in particular. Perhaps his admiration for Meriwether didn’t begin when they were classmates at the University of Chicago Booth School of Business, in the early 1970s, but it blossomed soon after, when Corzine became a bond trader at Goldman and Meriwether one at Salomon Brothers.

Goldman, in that era, was still a firm guided by investment bankers, sometimes in tandem with traders but always with the motto “long-term greedy” rather than short-term. Its primary mission was doing deals for clients. Since Goldman was private, its partners avoided taking too much risk with the firm’s capital -- which, of course, was their own capital.

Salomon was brassier -- perhaps because it didn’t have a gold-plated roster of clients to fall back on. At Salomon, Meriwether built a trading powerhouse, one that Corzine envied. In the early 1980s, Salomon became a public company, and Meriwether’s famous bond arbitrageurs had more capital to trade with.

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MF Global was leveraged 30 to 1, shades of LTCM. And of MF Global’s roughly $40 billion in assets, more than $6 billion were in volatile European sovereign debts. Corzine was the author of the firm’s strategy of risking its own capital. He wanted a firm like Meriwether’s, and he got one. Corzine also approved the strategy of loading up on European debt. According to the Wall Street Journal, he told a company executive that “Europe wouldn’t let these countries go down.” Just as, 13 years ago, traders believed that Russia wouldn’t default.

Corzine’s bet may still prove correct; “these countries” -- Italy and Spain, for instance -- may emerge from the current crisis solvent. But if they do, MF Global will not be around to reap the gains. Because the firm was so highly leveraged, and because it was dependent on short-term financing, its liquidity dried up and it failed. This seems to be the lesson that Wall Street never learns.

Nassim Taleb - AntiFragility: Chapter 2. Fat Tony and the Fragilistas

Source.

Link to: AntiFragility: Chapter 2

Greenlight Capital Re's Earnings Call Transcript

Found via Santangel’s Review. The comments below are from David Einhorn.

As the market retreated over the past few months, we added to a few of our existing long positions, found a few new investment opportunities primarily in the technology and auto sectors, and covered several shorts. We also exited a long-standing position in Pfizer profitability as better opportunities presented themselves.

During the third quarter, we shifted a portion of our gold investment from physical gold into GDX and ETF gold mining companies. Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better.

Late in the quarter, we increased our net long exposure to 35%. Although, we didn’t expect it, the strong market advance in October immediately rewarded us for a more positive view and the Greenlight reinvestment account reversed all year-to-date losses and generated a positive return of 6.9% in the month of October, with gains coming primarily from our long portfolio.

Despite the strong October, we believe that the environment remains challenging. Many equities, especially in large capitalization companies appear quite attractive. This is balanced by the continuing impact of dangerous macro policies. Most of our portfolio is assembled from the bottom up and we continue to see reasonable opportunities on both sides of the portfolio. As markets have quickly priced in a few positive recent data points in October, we have slightly reduced our net long portfolio exposure and ended October 33% net long.

Europe’s Plan To End the Debt Crisis - By Satyajit Das

Part 1

Part 2

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Related previous post: The Financial Zoo: An Interview with Satyajit Das – Part I

Related book: Extreme Money

FPA Crescent Fund Q3 Letter and Conference Call

Link to:

Q3 Commentary

Q3 Conference Call

Q3 Conference Call Slides

Could America turn out worse than Japan? - By Mohamed El-Erian

It is time to say goodbye to the confident reassurances from American policymakers that Japan could not “happen here.” It is also time to regret the smug assertions that Japan’s “lost decade” of growth was due to a combination of uniquely Japanese failings – from insufficient policy activism to weak corporate governance and poor political leadership.

American policymakers, together with their European counterparts, are realizing something that Japan has been experiencing for a while: It is very difficult to manage well an economy hobbled by structural impediments and balance sheet excesses. Absent a major change in the effectiveness of the policy approach, this realization will likely lead to broadening societal concerns about the possible “Japanization” of America and, with that, worries that under such circumstances the country would not be able to navigate such a phenomenon as well as Japan has.

The US continues to find it difficult to generate meaningful economic growth and to create enough jobs. Despite multiple fiscal and monetary stimulus programs – indeed, record breaking ones – the economy has failed to recover decisively from the sharp contraction that followed the global financial crisis.

With insufficient growth, un- and under-employment remain distressingly high while the average duration of joblessness hits one unfortunate record after another. To make a bad situation even worse, it is the most vulnerable segments of the labor force – the young and the less educated – who are being hit the hardest. In the process, society experiences a further deterioration in already excessive inequalities in income and wealth.

Low growth means that America is unable to “safely de-lever” from the financial excesses of the last decade. As a result, the economy faces a risk of tipping into another recession.

The Obesity Epidemic: is the Metabolic Syndrome a Nutritional Deficiency Disease? - by Stephanie Seneff

Found via Art De Vany.

The United States is currently facing an obesity epidemic across its population, affecting children and adults alike. It is now estimated that 30% of Americans are overweight, and the problem has been worsening over time.

Why does the US have this problem? Why are we the "leaders" in obesity and related health issues such as heart disease and diabetes, despite our incredibly high dollar investment in health care? What are we doing wrong?

My research, detailed in this essay, shows that in many cases the underlying cause of obesity lies with basic nutritional deficiencies, which can be corrected through simple dietary changes. These deficiencies are likely caused, in large part, by two ill-conceived, yet supposedly "healthy", modern day lifestyle choices: an excessively low-fat diet, and sun phobia. The modern preference of sugar-laden over calcium-rich foods also plays a role.

The solution to our problems, fortunately, is surprisingly simple.

Fault Lines: The Top 1%

Found via Simoleon Sense.

Link

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Related previous posts:

TED Talk - Richard Wilkinson: How economic inequality harms societies

Capital versus Talent: Discussion between Malcolm Gladwell and Roger Martin

How Inequality Fueled the Crisis - By Raghuram Rajan

Amy Chua: World on Fire

Bill Gates on ABC News

Found via The Big Picture.

Link to video: Bill Gates: Aid ‘Makes a Huge Difference’

Amy Chua: World on Fire

In the Malcolm Gladwell/Roger Martin discussion that I posted yesterday, Gladwell recommended Amy Chua’s book (released in December 2002) World on Fire. Below are links to a couple of video interviews she did based on the ideas in that book.

Link to: December 2002 Interview with Brian Lamb

Link to: 2004 Interview with Harry Kreisler