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    Main | Stickman Homecoming: April 2, 2009 »

    Stickman@Columbia Business School: a Homecoming April 2,2009


    Blecture #1 (Beta)


    click here to watch blecture in its entirety 


    Columbia Business School Retrospective (1990-2009): "What On Earth Have We Done to Ourselves?"

    "We're Gonna Need a Bigger Boat"

    We Need to Teach the Dog to Fish

    Who: Stickman and Professor Tomek Piskorski's Real Estate Finance (B8314)

    When: Thursday April 2, 2009 (9:00 am - 10:30 am)

    Where: Columbia Business School, Uris Hall Room 301

    Why: Because



    Published Irregularly Weather or Not We Feel Like ItAny Damned Time We Please



     Important Dislaimer: In case any reader doesn't quite get it, this is parody protected under the first amendment of the Constitution of United Statements of America. If you don't like the law then feel free to go try and change it. If you are interested in further information on freedom of the press we suggest you start with John Milton's masterful essay "Areopagitica" (1644)

    Stickman Comes Out of Retirement; Tiny Tim Still Dead!


    Stickman circa1990 @Uris Hall          Tiny Tim on Laugh-in

    Star Date log entry: Thursday, March 26, 2009 at 01:50AM

    Tiptoe thru the Tulips-- The History of Bubbles and Bursts

    "Greed is good Buddy boy"



    "I helped caused this mess-- I intend to help clean it up"


    File:Tulip price index1.svg

    "Extraordinary Popular Delusions and the Madness of Crowds"by Charles MacKay (1841)


         South Sea Bubble

         John Law and the Mississippi Land Scheme


    Manias, Panics and Crashes" by Charles Kindleberger

    -Minsky Model

    -Lender of Last Resort

    -Moral Hazard


    Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his or her car, because the negative consequences of automobile theft are (partially) borne by the insurance company.


    -Too Big to Fail

    Mini-case study: Continental Illinois


    Banking Flashback: 1976-1981

    Growth in Banking Assets

    5-8-3 yield curve

    Reg Q/Disintermediation/Inflation


    The Continental Illinois National Bank and Trust Company experienced a fall in its overall asset quality during the early 1980s. Tight money, Mexico's default and plunging oil prices followed a period when the bank had aggressively pursued commercial lending business, Latin American syndicated loan business, and loan participations in the energy sector. Complicating matters further, the bank's funding mix was heavily dependent on large CDs and foreign money markets, which meant its depositors were more risk-averse than average retail depositors in the US.


    Payments crisis

    The bank held significant participation in highly-speculative oil and gas loans of Oklahoma's Penn Square Bank. When Penn Square failed in July 1982, the Continental's distress became acute, culminating with press rumors of failure and an investor-and-depositor run in early May 1984. In the first week of the run, the Fed permitted the Continental Illinois discount window credits on the order of $3.6 billion. Still in significant distress, the management obtained a further $4.5 billion in credits from a syndicate of money center banks the following week. These measures failed to stop the run, and regulators were confronted with a crisis.


    Regulatory crisis

    The seventh-largest bank in the nation by deposits would very shortly be unable to meet its obligations. Regulators faced a tough decision about how to resolve the matter. Of the three options available, only two were seriously considered. Even banks much smaller than the Continental were deemed unsuitable for resolution by liquidation, owing to the disruptions this inevitably caused. The normal course would be to seek a purchaser (and indeed press accounts that such a search was underway contributed to Continental depositors' fears in 1984). However, in the tight-money financial climate of the early 1980s, no purchaser was forthcoming.

    Besides generic concerns of size, contagion of depositor panic and bank distress, regulators feared the significant disruption of national payment and settlement systems. Of special concern was the wide network of correspondent banks with high percentages of their capital invested in the Continental Illinois. Essentially, the bank was deemed "too big to fail," and the "provide assistance" option was reluctantly taken. The dilemma now became, how to provide assistance without significantly unbalancing the nation's banking system?


    Stopping the run

    To prevent immediate failure, the Federal Reserve announced categorically that it would meet any liquidity needs the Continental might have, while FDIC gave depositors and general creditors a full guarantee (not subject to the $100,000 FDIC deposit-insurance limit) and provided direct assistance of $2 billion (including participations). Money center banks assembled an additional $5.3 billion unsecured facility pending a resolution and resumption of more-normal business. These measures slowed, but did not stop, the outflow of deposits.



    The final deal saw FDIC buy $4.5 billion of nonperforming assets, which Continental would manage for them. The bank wrote off $1 billion of this amount, and FDIC infused a like sum via the bank's holding company. FDIC required the dismissal of top management, and acquired a controlling interest.[5]


    -Niall Feguson and the G2

    Nothing really new but WOW this one is really different!

    1979 Inflation rears its ugly head, prime rate breaks into the teens, tops out at 21.5%

    1982 Henry Kaufman and the bull market for bonds

    1987 October 19th

    1991-1995 Real Estate Crisis/S & L Debacle/ Junk Bonds/ Golden Age of Drexel/ Resolution Trust Corporation (RTC)

    Commercial Real Estate Actual Loan Losses $50 billion

    1998 Long Term Capital Management/ Asian Flu/ Russian Currency Crisis

    How did it feel? Oscar Meyer Weiner Realty Roast



    2001 Dot Com Bubble Bursts; Age of Greenspan; "Irrational Exuberance"

    "Never Short the Fed"

    2004-2007 Every Credit has some level of AAA

    64,000 AAA Rated Securities

    8 (oops) 7 (oops) 6 AAA-Rated Corporate Credits

    Currently, only six US corporations hold a AAA credit rating from S & P (as of 2/26):


                           Automatic Data Processing

                            Exxon Mobil

                            General Electric

                            Johnson & Johnson


                             Pfizer Inc


    Welcome to the AAA Graveyard

         GE (just downgraded)

         Berkshire Hathaway (just downgraded)

    Cash-on-Hand Litmus Test: "Cash is King"

    Exxon Mobil - Total Cash: $32.007 Billion

    Cisco Systems - Total Cash: $29.531 Billion

    Apple - Total Cash: $25.647 Billion

    Berkshire Hathaway - Total Cash: $25.539 Billion

    Pfizer Inc - Total Cash: $23.731 Billion

    Toyota Motor- Total Cash:$23.151 Billion

    Microsoft -Total Cash: $20.298 Billion

    Google - Total Cash: $15.846 Billion

    Royal Dutch Shell - Total Cash: $15.188 Billion

    Wyeth - Total Cash: $14.54 Billion

    IBM -Total Cash: $12.907 Billion

    Johnson & Johnson - Total Cash: $12.809 Billion

    Intel-Total Cash: $11.843 Billion

    Hewlett Packard - Total Cash: $11.255 Billion

    Oracle- Total Cash: $10.646 Billion


    2007/8 Subprime starts a nuclear reaction


    How a $500 billion problem (okay call it a trillion) turned into a $100 trillion meltdown

    Fannie and Freddie

          The Perfect Storm

    The Madoff Ponzi Scheme

    Evisceration of Trust

    The problem with the rating agencies

    2009 Commercial Real Estate Outlook

          1990's versus 2009  Bad Assets versus Bad Liabilities

           Financial Crisis Has Created an Economic Crisis

           Not whether banks will lend again but rather on what terms:

                     -Advance rates

                     -Low rates, lowe values, excess cashflow- pigs at the trough

                     -Senior/junior/equity food fight

    Shut down of Securitization market

                       Will TARP/TALF/PeePips do anything

    Credit Losses versus liquidity losses

    Diminishing cash flow versus maturity risk: 

                       What do you do when the music stops

    Deleveraging- Car going 80 mph gets thrown into reverse the laws of physics take over

    Need for Speed Bumps

    Too Big to Fail or Too Big to Succeed? A Doctrinal Re-assessment

    The Art of Toast Making

    Mark-to-market accounting

    FAS 157

    SIVs and off-balance sheet exposure

    Margin Calls


    CDO/CDO Squared/Synthetic CDOs and other Financial Exotica

    Credit Default Swaps $62 Trillion Omelette

    Bear Stearns Yes-- Lehman No-- AIG Yes

    TARP, Pee-Pips and other financial follies?

    Asset Liability Mismatch

    Single election remedy problem: LIAR Loans and NINJA Loans


    Rules of Engagement

               Crisis Management (denial/paralysis/acceptance/resolution)

               Share the pain equitably and fairly


    Consensual restructuring/ Chapter 7/ Chapter 11/ Government Intervention (systemic)



             Nouriel Roubini (insolvency regime) NB read

             George Soros (massive anti-biotics for non-correlative derivatives)

             John Paulson (the other Paulson) "laughing all the way to the bank"

             The summer share: Infinite ability to misjudge people


    GM: Tough Love from the CEO-in-Chief

               Pre-pack City



    AIG Bonus Problem

             Tyrrany of the Majority: 90% tax on bonuses

              Federalist 10

              de Tocqueville

    Solutions: Anybody got any good ideas?

    Innovation and Entrepreneurship

    Shakespeare: First thing we do is kill all the Lawyers

    Other tools: fraudulent conveyance/ unjust enrichment/impossibility of performance/ ultra vires

    Change mark-to-market/ FAS 157

    Mark to Model

    The Markets Are Dysfunctional

    Prohibit/disaffirm all/some non-correlative hedging credit and speculative derivatives

    Eliminate the Information Discount

    Will Geitner make it?

    Whose in Charge?

    Rebuilding Trust

    Rebuild confidence

    Never let a good crisis go to waste

    The $17 trillion question

    Premier Wen: You gonna pay me back Obama?

    We're gonna need a bigger boat!

    Turning an Ocean Liner in the harbor -- David Gergen

    Moment of great fortunes; change in sensibilities

    Financial values versus ethical values

    Capitalism at a crossroad

                  New Global Currency


                     The Dollar, the Zeitgeit and the Shark



                 Gold: To Russia with Love

                 The Theory of Negative Interest Rates

                 How to Create 10 million Jobs

    The bottom billion




    "We're gonna need a bigger boat"

    "We gotta teach the dog to fish"


    Location, Location, Location   (very 80s)

    Timing, Timing, Timing (very 90s)

    Confidence, Confidence, Confidence (timeless)

    References (2)

    References allow you to track sources for this article, as well as articles that were written in response to this article.
    • Response
      Extraordinary Popular Delusions and the Madness of Crowds - Stickman University - Stickman@Columbia Business School: a Homecoming April 2,2009
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      Extraordinary Popular Delusions and the Madness of Crowds - Stickman University - Stickman@Columbia Business School: a Homecoming April 2,2009

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