Toluu : Dear John Thain

Dear John Thain

Once upon a time I wrote John Thain a letter. I never heard back. Maybe my thoughts need a broader audience.

The Easiest Hardest Question EverJanuary 7

I was reading Felix’s post, recently (I know, I’m behind on everything… I’m posting on that soon too), where he cites a Tanta piece on negative amortizing loans. And it prompted me to have a very specific memory.

Here’s my email to Felix…

————-

Subject: Here’s something funny-scary …

… that your post on option ARMS got me thinking about. No one, and I literally mean NO ONE, who works in securitized products knows very basic things about the loans, as you touched on. But the people securitizing the loans and selling the bonds don’t know very basic things that fall under the “you should be shot for not knowing something this basic” category… Here’s what I asked a whole bunch of these master’s of the universe and none of them knew the answer, they all guessed.

“When I, as an individual who has a mortgage on my home, have a fixed rate amortizing loan on a thirty-year amortization schedule, and I send in a curtailment (excess principal payment that doesn’t pay off the loan but reduces the principal balance faster than scheduled) what happens to all the subsequent payments?”

Here’s why this is tricky…

1. If you curtail the loan then your interest payment reduces. However, this m

Another “Holy Shit!” Moment in Compensation: The P.A.F.December 19 2008

Wow. Seriously, wow…

This year, up to 80% of the stock portion will come via what Credit Suisse is formally calling a “Partner Asset Facility,” of the illiquid assets, largely corporate loans.

Bankers won’t receive a return on the PAF program for eight years, although they can start to collect some of the principal in 2013. If the firm finds outside buyers for the assets, it will pay the proceeds to itself first, then provide the rest to employees.

The PAF applies only to senior bankers within the firm’s investment bank, which includes merger advisory, capital markets and leveraged finance. Those in Credit Suisse’s private bank and asset-management division aren’t subject to the PAF.

I’m going to play both sides of this one… But, how do you know it’s a good move? Hiede Moore’s post, in the next line, offers the proof:

The announcement elicited livid reactions from senior bankers, many of whom questioned whether it was legal. Many said they believed they were being unfairly punished for risky assets bought by colleagues in distant parts of the firm.

I’m not crying for these bankers, exactly, but they missed the point. To be honest, it’s a tremendous incentive for everyone to work together for the good of the firm. These same “livid” invest

Prediction: Madoff isn’t the Cause of The FraudDecember 18 2008

Okay, this is a bit controversial, I’m sure, but let’s look at the facts:

There was a huge amount of paper generated in support of these schemes. This is an inordinate amount of work for a 70+ year old man to do. It requires technical know-how and all sorts of scale.
Mr. Madoff confessed to his two sons.
We all know about Madoff’s statements regarding regulators, and how fraud would be detected.
This odd addition of Mr. Madoff’s niece marrying an S.E.C. agent into the facts, included in the S.E.C.’s own mea culpa.

Now, stop thinking like a rational person watching an elderly man confess. Mr. Madoff, if he was so deceitful this entire time, shouldn’t be taken at face value when it comes to his confession. Think like this is a Law and Order episode. This is the first 5 minutes of the episode and the police have gotten a confession. Well, that means only one thing: the suspect will change to whomever the confession takes the heat off of. In this case, his sons. Is it more likely that his sons were running a scheme, with confidants, and tearfully confessed to their father? I don’t know. What I do know, however, is that a devoted f

Semblance of Rationality in Compensation Structure, FinallyDecember 9 2008

It’s finally occurred. As I just read on Clusterstock, there is officially some sort rationality creeping into Wall St. payment structures. Claw-backs are here, as I suggested previously (I was hardly alone). Now, I wonder what the real impetus behind this sort of decision really is. Is it public officials railing against bonuses? Traders who were paid millions to put on the positions that are now sinking their (former) employers? Or, perhaps it’s the fact the C.E.O.’s and executives who are used to taking no risk whatsoever, as Felix also intuits, and are used to being compensated in the ponzi scheme that has the slogan, “in line with our peers.” This sort of groupthink, parading as transparency (that only pertains to rising compensation, obviously) has been championed by familiar names. But, other familiar names have

The Real Problem with the Citi BailoutDecember 3 2008

We all know that Citi was “bailed out” last week. However, as far as I can see, Citi’s is a unique situation for several reasons:

The company was not taken over, and
Management was allowed to stay on, and
The government is shouldering losses coming from securities that are already identified.

Taken together, these leave a huge hole in this “living bailout” (I call it that because, obviously, Citi was in dire straights but was allowed to survive, essentially, as it existed before) that, obviously, Treasury never thought out (setting aside my prior concerns). I’ll put the problem into a single statement…

When taxpayers agree to pay for losses of a company that is continuing to operate, but the losses being referenced pertain only to specific assets, there are a huge amount of games that can played and the government has no way to stop or monitor what is truly going on.

As a matter of fact, as I write this the news of the G.A.O. report (PDF) on T.A.R.P. is making the rounds. One of the