Manure and the Common Man

He gets up at 4am. Puts his feet on the floor and the floor is cold.  It’s April and he is in Iowa.  You know what it can be like in Iowa at 4am in April?  Dark and cold as… damn cold and let’s leave it at that.  For the last month though the weather has been good enough to get the soil ready. It’s not frozen and it’s dry enough, ready to be worked. Nobody made him get up; he doesn’t have a job created by somebody else.  He doesn’t have a boss – except for his family and except for – well let’s leave that for later.  He goes down the narrow staircase to the first floor of his house and into the kitchen.  It’s colder down there, kept just warm enough so the water doesn’t freeze in the pipes. Still has the long johns he slept in on and leaves them on as he pulls on his overalls and his Hawkeyes sweatshirt with the hood.  Pulls the hood up on his head, flips it down again, then puts his DeKalb cap on and adjusts the hood over it. Maybe someday he will get the order of that right. Socks, he looks down at them in the dark room, same socks he had on when he went to sleep last night.  Too cold to take them off.  Boots come next, good ones but old, not too old but getting some age on them.  Gloves next, two pair, one for warmth and one to keep the others from getting torn up.  Goes out on the porch, stops, no wind today.  On mornings like this with a lot of wind, it doesn’t take long for his face to feel as if it is going to fall off.  He takes a deep breath – that’s the only break he is going to take today.  Ok that’s over- let’s get after it.  At a proper pace it will take 10 hours to get it done with a half hour break for some lunch.  The cab is heated though so it won’t be bad, just boring. But he knows what all of this will look like in July, beautiful.  He fires his baby up, the John Deere barks to life, lights come on and he begins.  How many acres today?  Too many - but not enough.  Corn, sure it’s a risk, it’s a commodity and so he hedges his hope. But for this morning no hedge will do or for that matter get the work done, nope there is no hedge for not working.  So he drives off into the dark, no breakfast – that will come on a break, three hours later. He has a radio in the cab.  After his breakfast, about 8:30 Iowa time, he is listening to the radio and hears about Goldman Sachs getting sued by the government.  So they supposedly helped sell something to somebody that was synthetic and backed by/derived from/or somehow related to some mortgages. Mortgages taken out by people who couldn’t pay the mortgages. Mortgages supposedly picked by an outfit that believed the mortgages were probably bad and would likely end up in default.  Then that outfit supposedly bet that they would default.  Supposedly they did default and that outfit made a billion dollars while the folks that got helped out lost a billion dollars.  His initial instinct was to think of a four letter word, but no, he just visualizes some manure and continues driving his tractor. He thinks people have to eat. That outfit isn’t going to feed them, Goldman isn’t and the government isn’t.

I am.

Make that a large pile of fresh manure¹, yep, well at least the Hawkeyes won in Omaha this year, best college wrestling team on the face of our planet.  He wonders how his son is doing taking care of the hogs - there is no hedge for not doing that either.

1.     1. Manure: an end product which eventually may have indirect benefits not intended by its originator.

Oh! So Now You are Sorry?

Last week Messrs Prince and Rubin, formerly of Citigroup, testified before a government commission looking into the financial meltdown.  Having lived through the “experience” I thought I might share some of my earlier Observations.

·        Separating the Truth from Fiction

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”

            Charles Mackay – Scottish Philosopher

If you don’t understand something ask for an explanation. If the explanation doesn’t make sense, then ask for clarification.  If it still doesn’t make sense the problem is not you or your capacity to understand. It’s that “it” doesn’t make sense. 

Implying that people who “don’t understand” are dense is a common persuasive tactic of people who themselves don’t actually understand (or worse).

The problems we often encounter are not caused by our lack of mental capacity, but by our willingness to go along with such an implication.

            -03/24/2008

·        Demigod (Demon)

Corporate culture has a negative aspect I would like to address.  I call it the deification (often later demonization) of senior executives.  These folks are not demigods (or demons).  They are not smarter (or vice versa) than before they got promoted (appointed, whatever) and their intelligence and acumen does not vary with the fortunes of the firm.  They are humans just like the rest of us.  Nonetheless this process goes on constantly, often the result of actions by their subordinates.

We are neither unintelligent nor uneducated and don't help ourselves or the firm by buying into the process I have described.

We should overcome the temptation to do so.

          - 07/07/2008

·        Standards do serve a purpose

When the justification is that we have to because “well everybody else is doing it and we have to stay competitive” then it’s time to take a deep breath and remember what happened to …..

          -09/08/2008

·        What happened (11/05/2007)

Here is my take:

People (yes that means everybody) tend to overestimate the accuracy and precision of their knowledge and that often leads to overconfidence and a lack of perception of the amount of risk they are undertaking in making financial decisions. This in turn tends to burn them from time to time and it kick starts the law of unintended consequences hurting others.

10/01/2008 Supplement: Senior executives in financial firms, quasi governmental entities (Fannie, Freddie), and regulatory authorities listened to and accepted the explanation (by senior but subordinate experts) of the “risks incurred” for various proposed offerings and undertakings.  The senior executives and those making a proposal were far too confident that the analysis of the risk/reward balance on the proposal was based on accurate and complete underlying data. That is a classic and oft repeated mistake.  This led to tragic overconfidence and the assumption of a level of risk that was unknown and unprecedented sending the law of unintended consequences off on a gallop.

But make no mistake we all had a hand in this. Whining that it was someone else’s fault isn’t going to help.

          -09/29/2008

·        Prognostication is a four letter word (and so is overconfidence)

I was all set with a different Observation for today but then a financial guru testified before Congress on Thursday.  I read a transcript of part of his testimony and I just could not resist.

What he said was:

It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.

What he meant (in plain English) was:

They thought they had it figured out but they didn’t and it turned out to bite everyone on the....*

Overconfident Prognosticators, all of them, including the “guru” (and you know what I think of those guys).

You may wish to reread my 03/31/2008 (“worse than a lollygagger”) and 05/19/2008 (“…use your head Fred…”) Observations. If you don’t have them I will send them to you. I already sent them to the “guru.”

*reminds me of when I was young and used to set off firecrackers with my buddies.  Once we set off several hundred in a row without a failure.  Then one of didn’t go off after being lit.  Georgie Wade stuck his head over the darn thing; it flared up and burnt his eyebrows off.

            -10/27/2008