Jeremy Grantham of GMO long-ago nailed the current crisis, and has long been a warning voice of lucidity here. The weekend Barron's contains a lengthy interview with Grantham, and it is worth reading in its entirety.

The closing comments about why too many people missed this, and how the absurd complexity of current global financial markets exceeds people's cognitive capacity are particularly thought-provoking.

Do you think we will learn anything from all of this turmoil?

We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.

...The great trap is to buy too soon and, in the big move, to sell too soon. I've been saying since '98-'99 that my next major-league error will be buying too soon -- but we will not buy quite yet. But when we do, I suspect it will be too soon again.

What do you see ahead for commodities?

Commodities have a great long-term future, now that the long-term trend has shifted from falling commodity prices to rising commodity prices. Having said that, the next couple of years will be quite different. We are in a global slowdown, which I think will be worse than expected even today, and it will be longer than expected -- so this is not a healthy environment for commodities. Over a shorter horizon, I would be getting out of the way of commodities or I would be short commodities. I'm personally short oil; the firm is short copper.

Do you have any closing thoughts about how we got into this financial state?

I ask myself, "Why is it that several dozen people saw this crisis coming for years?" I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke -- none of them seemed to see it coming.

I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained -- but we end up with an army of left-brained immediate doers.

So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.

If you look at the people who have been screaming about impending doom, and you added all of those several dozen people together, I don't suppose that collectively they could run a single firm without dragging it into bankruptcy in two weeks. They are just a different kind of person.

So we kept putting organization people -- people who can influence and persuade and cajole -- into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don't have those skills.

Where do you see all of this going?

I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect.

More here.

Good column from Steve Pearlstein in the weekend Washington Post. He argues that stop-gaps are now making things worse in the financial crisis, and we need to focus on the things that matter, as opposed to bailing out the bank du jour, or propping up every financial institution that comes looking for money.

What things matter? A CDS clearinghouse, guaranteeing interbank short-term lending, and pre-emptively directing capital toward financial and non-financial companies whose failures might represent the biggest risks to the global system.

Remember the Rule of Holes: When you find yourself in one, the first thing to do is to stop digging.

Right now we're in one of the deepest economic holes anyone has ever seen. And what we need to do is to stop making things worse by continuing to over-rely on financial markets and financial institutions that have proven to be incapable of performing their core missions: getting capital to where it needs to go and pricing that capital in a way that reflects the risks and underlying economic values. We have to stop digging. Another week like this one, and there won't be much left to rescue.

To begin, the markets could use a timeout just about now, something that lasts longer than a weekend and gives policymakers around the world the chance to get a good nice sleep and evaluate their options without feeling like they have to respond to every movement flashing across their Bloomberg screens. It would allow some time for passions to cool and for real investors to regain control of markets now dominated by the computerized short-term trading strategies of hedge funds and hot-shot money managers desperate to recoup some of their losses. It would give banks and major corporations a chance to regain the trust of the markets by issuing unscheduled updates on their financial condition. And it would be a powerful reminder to everyone that markets need to serve the interests of the economy and society, not the other way around.

...Wouldn't that be picking winners and losers? In a way, yes. But remember that the reason we are in this fix is because markets, at least for the moment, are broken and can't be relied on to allocate capital more wisely than Hank Paulson. A little bit of well-timed, well-crafted socialism is just the thing to save capitalism from itself.

More here.

La crédibilité de Paulson se rapproche de zéro. 
    -- éconoclaste

Give the French this: Even the most obvious things sometimes sound so much better when they say them.

[via Felix]

There is a truly numbing piece up on BusinessWeek's site about the mess that Lehman made via taking counterparty collateral obtained in one swap and using it as collateral in a myriad more. Post-bankruptcy, that has led to a sort of interplanetary Where's Waldo?, with counterparties hunting frantically for their posted collateral -- is it here at JPM? at Barclay's? yoo-hoo, collateral! -- largely to no avail.

This sounds mischievous and nasty, doesn't it? Taking collateral from one swap and using it as part of another seems ... ungood somehow. Then again, is it that different from the usual drill in fractional reserve banking (whoa, easy out there all you grassy knoll banking sorts) wherein the money you and I deposit in the bank of your choice is largely loaned out again as fast as possible? It's just re-investing the float, albeit in the shadow banking system, as opposed to its non-shadow banking equivalent.

So, George Bailey would be proud, right? Not so much. While Bailey studiously kept track of his obligations and didn't over-extend himself unduly, Lehman seemingly took the opposite approach, with a molehill of collateral supporting a Lhotse of loans. It was a barker game, a move-fast-and-light excercise that worked just dandy until some of those damn counterparties and reference parties started defaulting. Undercapitalized fuckers.

More here.

Given all the pain in markets last week, I thought it would be a good time to check in again on The Land That Financial Bad News Forgot. Yes, Pakistan.

If you recall, the wise folks running the Karachi Exchange decided back in August that they would put a floor under the KSE at 9100. After watching stocks tumble 40% in the preceding six months, no longer would investors have to worry about their stocks falling further. They could only drop enough to take the index to 9100, and then ... well, they couldn't fall further. Bad news be damned!

So, how has that "no bad news" thing worked out? Is everything sunshine in Pakistan, what with having simply outlawed bad news from having any impact on share prices? Well, here is the 3-month chart of the KSE:

It looks more than a little reminiscent of a dying patient hooked up to an EKG. After a few palpitations, the Karachi market has now flat-lined. It has fallen to the 9100 floor -- okay 9182 -- and now sits there, in the uncomfortable the way non-viable markets do.  Volumes have collapsed, going from a healthy 186-million shares a day to a comatose million shares a day, a 99.4% decline. It is simply no longer a viable exchange, with companies unable to raise money and investors unable to get liquidity or -- heaven forfend -- buy shares. Nothing. Traders are reduced to sleeping and playing video games.

Well, that's better than falling further, right? The KSE had dropped 40% before the floor was put in, so you might (were you a true nutter optimist) argue that this is better.

And you'd be wrong. The Karachi Stock Exchange and the Karachi SEC are meeting this weekend to decide whether or not to simply close the exchange for good. At the same time, the "badla" rate, a sort of interest rate at which investors can borrow money, soared to 100% on Friday, making the record-high Libor look positively like a giveaway. It is, in short, really, really bad.

But the news gets even worse.  The country's debt has been downgraded by S&P deep into junk status; it has just enough foreign reserves to pay for two months of imports; and Pakistan looks increasingly like it will default on a major loan on Friday, plus it has $3-billion more in upcoming debt payments. Unless something happens quickly, we are about to see what happens when you have a systemic collapse in a nuclear power next door to a terrorist hotbed.

More here and here.

My friend Keith at Research Edge has been on a roll of late, and he is irked at Goldman. The reason? Its shelf registration of "indeterminate amount" that GS dropped on the market after the close on Friday.

Goldman conveniently waited until after 5PM on a Friday of the worst week in the US stock market since the early 1930's to file a mixed shelf registration of "indeterminate amount". Marcus Goldman must be rolling in his grave.

Investors, including Warren Buffett, and clients alike must watch what GS and MS do, not what they say. Never mind this ridiculous notion that it's the evil doer short sellers at fault. That is both alarmist and un-American. Bear, Lehman, Merrill, Morgan, and Goldman all said they didn't need capital, remember? Earlier this week, Lehman's Dick Fuld appeared in front of the American people. He still couldn't find it within him to take on 100% of the accountability for Lehman's demise. If you guys are going to get paid to wear the 'C' on your jerseys, let's get real.

Research Edge is built on 3 core principles: Transparency, Accountability, and Trust. I am issuing an open challenge to the CEO's of these two companies, Goldman Sachs and Morgan Stanley, to come to New Haven, CT, and have a Yale student organized town hall meeting on those three items and how they see them fitting into their current business model. CNBC can televise it, instead of wasting people's money and time with "Fast Money". We can start at 6PM, promptly.

Go get 'em, Keith. I'm not optimistic it'll happen, but I'll watch if it does.

"We do what we understand, and no one understood those [subprime loans]," [Burke & Herbert Bank president] Burke explained. "We look dull and plodding."

"Because we are dull and plodding," said his brother, C.S. Taylor Burke III, senior executive vice president.

        -- "As Larger Banks Crumble, Local Firms See Rush", Washington Post 10/11/08

Apropos of nothing in particular, this movie snippet has been running through my head all week. It just felt right, like it explained something or another that had been troubling me.

General Jack D. Ripper: Were you ever a prisoner of war?
Group Capt. Lionel Mandrake: Well, yes I was, matter of fact, Jack, I was.
General Jack D. Ripper: Did they torture you?
Group Capt. Lionel Mandrake: Uh, yes they did. I was tortured by the Japanese, Jack, if you must know; not a pretty story.
General Jack D. Ripper: Well, what happened?
Group Capt. Lionel Mandrake: Oh, well, I don't know, Jack, difficult to think of under these conditions; but, well, what happened was they got me on the old Rangoon-Ichinawa railway. I was laying train lines for the bloody Japanese puff-puff's.
General Jack D. Ripper: No, I mean when they tortured you did you talk?
Group Capt. Lionel Mandrake: Ah, oh, no... well, I don't think they wanted me to talk really. I don't think they wanted me to say anything. It was just their way of having a bit of fun, the swines. Strange thing is they make such bloody good cameras.
     -- Dr. Strangelove (1964)

I missed this 9/17 NY Times column by quant finance svengali Paul Wilmott. Nicely timed and delivered market call:

I’ve taken to comparing the current situation to “Hamlet.” We’ve had the deaths of Polonius, Claudius and Laertes — that is, the falling house prices, the rising commodity prices and the collapse of banks. As of now there is no sign of Hamlet himself, a catastrophic fall in the markets. Yet it’s difficult to believe that markets are not going to undergo a climactic implosion some time soon. If the current situation doesn’t fill investors with fear, then what are they smoking?

More here.

Interesting new research paper in one of my favorite journals (Medicine & Science in Sports & Exercise). Two things caught my eye. First, that the likelihood of developing acute mountain sickness -- an altitude-related disorder that can be life-threatening -- fell with age. I am a frequent high-altitude trekker, and that is news to me. Second, it is fascinating that 41% of the trekkers on Whitney had AMS, and yet 81% of those people still reached the summit. As the quotation goes, In the midst of life we are in death.

Here is the full abstract:

Mt. Whitney: Determinants of Summit Success and Acute Mountain Sickness

Medicine & Science in Sports & Exercise. 40(10):1820-1827, October 2008.
WAGNER, DALE R. 1; D'ZATKO, KIM 2; TATSUGAWA, KEVIN 3; MURRAY, KEN 4; PARKER, DARYL 5; STREEPER, TIM 5; WILLARD, KEVIN 5

Abstract:
Purpose: The aim of this study was to determine the prevalence of summit success and acute mountain sickness (AMS) on Mt. Whitney (4419 m) and to identify variables that contribute to both.

Methods: Hikers (N = 886) attempting the summit were interviewed at the trailhead upon their descent. Questionnaires included demographic and descriptive data, acclimatization and altitude history, and information specific to the ascent. The Lake Louise Self-Assessment Score was used to make a determination about the occurrence of AMS. Logistic regression techniques were used to calculate odds ratios (OR) for AMS and summit success.

Results: Forty-three percent of the sample met the criteria for AMS, and 81% reached the summit. The odds of experiencing AMS were reduced with increases in age (adjusted 10-yr OR = 0.78; P < 0.001), number of hours spent above 3000 m in the 2 wk preceding the ascent (adjusted 24-h OR = 0.71; P < 0.001), and for females (OR = 0.68; P = 0.02). Climbers who had a history of AMS (OR = 1.41; P = 0.02) and those taking analgesics (OR = 2.39; P < 0.001) were more likely to experience AMS. As climber age increased, the odds of reaching the summit decreased (adjusted 10-yr OR = 0.75; P < 0.001). However, increases in the number of hours per week spent training (adjusted 5-h OR = 1.24; P = 0.05), rate of ascent (adjusted 50 m[middle dot]h-1 OR = 1.13; P = 0.04), and previous high-altitude record (adjusted 500 m OR = 1.26; P < 0.001) were all associated with increased odds for summit success.

Conclusions: A high percentage of trekkers reached the summit despite having symptoms of AMS.