Liar’s Poker: Rising Through the Wreckage on Wall Street has to be the first book about the mortgage crisis that the United States is going through. I say this with some confidence, because it was first published on October 1, 1990. Yes yes, 18 years ago, but I swear to you it is the most coherent explanation of mortgage securities, and what can go wrong with them, that I’ve seen. The author, Michael Lewis, was a trainee at Salomon Brothers in the mid-1980’s, just when these securities were invented, whole cloth, by a savvy trader on Salomon’s trading floor.
Oddly enough, I picked this book up almost two years ago on a lark; Lewis’ more recent books (Moneyball and The Blind Side, both economics/sports books) had been enjoyable reads, so I snagged his first book, used, on a lark. It turns out that his first career out of college was in finance, and so his first book was a memoir-ish look back at his time at Salomon Brothers, just in time to see it spiral into its death throes.
The middle of the book is an amazing primer on how and why mortgage-derived bonds were created, as well as a couple of ways that they could completely screw you. (While a collapse precisely like the current one doesn’t take place, the situation is clearly predicted by Lewis’ description.) Essentially, mortgages represented an unpleasant investment opportunity for the simple reason that you didn’t know when you’d get your money back; early repayments of mortgages are common, so your 30 year mortage-based security could actually get paid back before you want it to; this does not make financial planners happy.
Then Lewie Ranieri came along. Under his guidance, Salomon created securities that… well, that did a lot of different things: split interest payments from principal payments, guaranteed first (or middle, or last) repayment, and so on. The market boomed, Salomon Brother got filthy rich, and then the inevitable infighting and decline.
Michael Lewis is an excellent writer, with a good sense of what makes a good story. I highly recommend Liar’s Poker if you’d like to see point A of the trip we’re currently on.
This news feels too good to be true, and yet it is. McColo Corp., in San Jose, California, is a Web hosting service that had been identified by those savvy folks in the know as a bearer of bad things for some time now. These same sav-sters conducted their own studies and determined that up to 75% of all spam (der wha? 75% of all worldwide spam!) originated from McColo’s servers. Armed with this information, Security Fix over at the Washington Post contacted those companies that provide “pipe” from McColo to the internet at large. By Tuesday afternoon, both Global Crossing Hurricane Electric had cancelled McColo’s service, with Hurricane’s director of marketing flatly stating “[w]e shut them down.”
Since then, spam traffic has been cut by 65%. *pauses for reader to stop dancing around like Snoopy* I had, in fact, noticed a slight lessening, but my filters are already pretty good. I’m curious if any of you felt this before you knew it?
According to this article at the freakonomics blog, spam costs U.S. companies (alone!) $33 billion a year in lost productivity and, according to this study (it’s a pdf, beware!), likely generates far far less revenue than that for spammers. If ever there was a parasite, spam is it. Granted, given the relative inexpense of running botnets vs. the revenue achieved, it’s likely that someone will rise up and take McColo’s place. Still, it’s nice to know that the white hats out there are learning how to shoot back.
The Sordid, Sneaky Story of Dark Market
In October of 2004, a Secret Service sting centered around the website shadowcrew.com (no link because it’s now a generic parked domain) led to the arrest of 28 people involved in identity theft, credit card scamming and the like, and created a cascade effect that shuttered most of the other sites that facilitated trade in this kind of information. From the wreckage, DarkMarket.ws arose to fill the void. Known for its zeal in scrutinizing users to filter out narcs, the site had a solid reputation as a 1st rate den of thieves.
Inevitably, jealous competitors tried to knock them down a peg. In 2006, Max Ray Butler (a “security consultant” who turned to the darkside) claimed that he had infiltrated the darkmarket server and discovered that the site’s lead administrator, “Master Splyntr” was logging in from an FBI location in Pittsburgh. This was typical of the jousting between competing sites; Butler was later arrested for cyber crimes and darkmarket grew to be more popular than ever.
As it turns out, Butler was 100% right.
On September 16th, 2008, Master Splyntr announced that DarkMarket would be shutting down on October 4th. “[R]ecent events have proven that even in our best efforts to expel and deactivate the accounts of suspected LE [law enforcement], reporters, and security agents, it is obvious that we haven’t been entirely successful,” Splyntr wrote in a message on the site.”It is apparent that this forum … is attracting too much attention from a lot of the world services (agents of FBI, SS, and Interpol). I guess it was only time before this would happen. It is very unfortunate that we have come to this situation, because … we have established DM as the premier English speaking forum for conducting business. Such is life. When you are on top, people try to bring you down.” (Thanks, Wired!) A lot of reasons seemed to be the cause at the time, most notably the then- recent arrest of a Turkish hacker named Cha0 who was also a DarkMarket admin.
In fact, DarkMarket was taken down in preparation for a coordinated series of raids that resulted in the arrest of 56 people worldwide. Yep. “Master Splyntr” is actually J. Keith Mularski, a senior cybercrime agent based at the National Cyber Forensics Training Alliance in… wait for it… Pittsburgh. Shortly after the site went dark (hur hur hur…) the arrests began. You can read more about this story here and here. I’m just amazed, really. My quasi sister-in-law, a lawyer who knows more than a thing or two about the state of cyber affairs in the world, dismisses conspiracy theories with the compelling-sounding argument “when has the government ever pulled off anything secret?” But really, we wouldn’t know most of the time, would we? And after all, they pulled this off, brilliantly.
8 Trillion Dollars and Counting
I oppose bailouts as a solution to a deflationary crash, because my theory is that the government will not be able to inject enough money to matter, and will then suffocate itself with debt in the process.
I never thought they would be this aggressively stupid.
The government has now made promises to the tune of 8 Trillion dollars (that’s eight followed by twelve zeros, BTW). That’s roughly $25000 for every man, woman, and child in the USA, on top of any other government and personal debt.
That excludes the most recent bailout of Citigroup.
Don’t let anyone fool you. None of this is going to be making the taxpayer any money. If it does, it will be because the money is worthless.
And now it’s time for a rant:
This is all done in the name of “saving the system”. I was born in Zimbabwe and I’ve seen some interesting things; I still have family there who write me some very interesting emails. When “the system” fails, people usually scratch their heads and figure something out. The entire “ATMs will stop working and people will riot” line of argument gets right up my nose. ATMs will stop working and people will figure something out, mainly because rioting while someone else figures it out costs you money.
If rioting gets you a free TV, some people will riot, probably with friends because decent TVs are really big nowadays. So, I would suggest that TV’s not be made available to rioters, or that someone try real hard to get them back. Other than that, I don’t see a big riot problem down the line. If the government is afraid banks are going to fail, it should investigate what forms of credit would keep services and transport of food going, set up a facility to provide that credit, and cut the banks loose. The implosion would be huge, and short. The rush by small and sensible banks to take over their customers and business niche will be worse than opening time on Black Friday at Walmart.
“But letters of credit will fail!” I hear. Letters of credit are failing now. Some stuff will become unavailable. The rest will become available in other ways because people will figure it out. Why? Because they like making money, and you make money by selling stuff. The worse things get, the more enthusiastic they will get at figuring it out.
The one thing you can guarantee about a deflationary crash is that it has a bottom. A deflationary crash is what happens when a massive amount of debt is destroyed when people are forced to default. They don’t pay because, you know, they can’t. You can put lipstick on that, but you can’t get broke people to borrow more money. They might have taken a while to realize they are broke, but when they get there, they figure it out how not make it worse. Giving the banks money to lend, just after they’ve had their hand burnt by stupid lending, is asinine.
Attempting to stop a deflationary crash is stupid. It’s going to stop when bad debt is written off. You can try to obfuscate that, or you can try to help get it out of the way. Stagflation does not have a time limit. Long term zero-percent inflation with oodles of pretend-not-bad-debt hanging around has no time limit (ask Japan). Debt disappearing because it can’t be paid and has to be written off has a limit. Worst case, when there is no more debt, but probably significantly before that.
In the meantime the US government is spending like a drunk sailor in Vegas, as we go into a time when people won’t be able to pay their taxes, or won’t have any taxes, because you don’t pay taxes when you don’t have income.
In the meantime, President-Elect Obama is talking about deficit spending much more than usual for the first two years of his term to stimulate the economy. That level of imbecility is going to require an entire post of its own. I don’t know where to begin.