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Reading Recommendations: credit derivatives and markets

I have not shared any book recommendations for quite some time. Blame my basic indolence, if nothing else. But I want to share a couple of recommendations. If nothing else, reading these will give you some background to understand much better what is happening in the credit markets, the debt markets, and the equity markets as spreads diverge and traders (and you) are getting hammered in the markets.

First, read Richard Bookstaber's book: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. This is a very well written and accessable book dealing with how innovations in financial engineering -- more complex models leading to more complex financial products -- are leading the financial markets down the path of an eventual collapse brought about because they have become too complex to understand. He is particularly good in explaining the causes of some of the great, recent, financial collapses, like Long Term Capital in 1998. I know one or two of the LTCM guys and this helped explain their demise to me much better than they ever did.

Then, go forth and get Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives, by S. Das. Das is a former derivatives trader and, on the buy side, consumer of derivatives. He gives very good explanations of how simple derivatives began in order to manage future risk in agricultural products and how they have mutated into Special Purpose Vehicles so that banks can take credit risk off of their books by repackaging the loans into various tranches and selling them into the SPV's who buy them by, often, exchanging government debt purchased on the open market and selling the tranches at various debt rating levels to investors who want or need to take on different kinds of risks for different levels of return. It is maybe a bit more quant orientated than I found helpful (no, even after trying, Mr. Das, I could not make the Black-Scholes model for valuing options make sense to me in terms of the math) but still a brilliant explanation. Taken together with Bookstaber's book, a very helpful read. I loved how Citron, the Orange County Treasurer, used astrological advice to decide which and how many inverse floaters to buy.

Finally, take a look at Taleb's book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. His views about how we know what we know and how we don't know what we don't know are fascinating reads. Basically, luck plays a much higher role in the success of your portfolio manager than does skill. I found it not an easy read because to fully appreciate it (and I am not sure I did) requires a real basic paradigm shift in the way you conceptualize knowledge and your own ability to judge risk and even the basic way in which you filter information in terms of decision making. A very thought provoking read.

So, there you have it, want to understand why the stock market tanked when the sub-prime and collateralized debt markets tanked? Read these books. I could tell you the answer, but it is way more fun to learn it by yourself.

And by the way, I spent about an hour and a half testing my knowledge on a friend who designs bespoke credit instruments for sale to investors in private tranasctions on the over the counter market. Several months ago, I had no real idea about what this person did for a living. Now, I had zero problems in having a detailed discussion about the issues.

You owe it to yourself to read these books, in the order I have listed them.

A book recommendation

So little of what I have been reading these days is worth a shout out. Much of it will not be remembered next month, forget fifty years from now. So, maybe my standards are dropping, but I have to say I enjoyed, The Lost Painting: The Quest for a Caravaggio Masterpiece , by Jonathan Harr. Harr wrote a very readable book about, as the title says, the search for a Caravaggio painting that had been missing for hundreds of years. It was entertaining, it was thoughtful, it was a bit light on the art history, but it was nice enough on the detective work and the explanations of the politics of Baroque Italy were terrific.

Ultimately, it left me a tiny bit nostalgic that I never followed through on the art history degree and career.

An interesting book: Duveen

Every so often, I pick up a totally random book and read it. Not a hard thing to do, since I just read that 500 books a day are published in these United States. This time, I picked up a book when I was a little drunk. I was in the library of a private club, after dinner, and I borrowed a book. A book I had no recollection of borrowing the next day. Well, by which I mean, I remembered borrowing a book but had no recollection of the subject matter of the book. I'm glad I borrowed it, it was really a great read. It's called: Duveen. Duveen chronicles the story of Joseph Duveen, the most successful dealer in art and Old Masters to ever hit the field. Duveen sold to Frick, Morgan, Rockefeller, Huntington, Post, Dodge, etc. He sold some of the most celebrated paintings ever to grace our shores and he sold some of the most expensive fakes and dogs, too.

One episode in this book that stood out for me was the recounting of the sabotage and assassination attempts by Germany in WW I. Apparently, there was great anger over the US funding of British war efforts early in the war and there was a movement afoot in Germany to kill the bankers, like Morgan, who were coordinating the lending. The view was to kill the bankers would kill the credits and choke Britain off completely. In fact, over the Fourth of July weekend, 1915, a man who gave his name as "Frank Holt" broke into the Morgan residence and tried to kill Morgan, shooting him twice. Holt was also responsible for leaving a bomb in the US Senate, next to the office of the Vice President. The bomb went off and made quite a mess. Holt, however, was not really Holt. According to that link above:

He was German-born Erich Muenter, and he was wanted in Cambridge, Mass., for poisoning an earlier, pregnant wife with arsenic in 1906. An unidentified Chicago source told The Times that Muenter took his two children and his dead wife's body to Chicago, where he left the children with his mother- in-law and had the body cremated. He left town and hid out in Mexico, where he worked as an accountant. He later reappeared in Texas as Frank Holt, married again in 1910 and had three more children.

Holt/Muenter committed suicide in the Nassau County jail before trial.

The Germans also attempted to sabotage US shipping during this period, convinced that passenger boats were carrying munitions for England.

Holt/Muenter was apparently involved in this as well since he had sent a letter to his wife warning her about explosions which were going to take place on several boats. The book suggests that for Holt/Muenter to have managed all of this, he would have had to have had accomplices. None have been identified.

Among the goals of the German agents was to paralyze the US economy. To that end, Franz von Rintelen, a Berlin banker and sabotage expert, sent over $4.5 million dollars to finance the placing of bombs in 35 merchant ships and to foment a strike at the Remington Arms plant. Von Rintelen worked for Franz von Papen, then military attache to the German embassy. Von Papen would go on to be Chancellor of Germany, later. Eventually, these activities resulted in the sinking of the Lusitania, which may have contained a "cigar" full of TNT in the bowels of the boat. Either way, the sinking of that boat by a German U-boat helped bring the US into WW I.

The book also contains a terrific appendix of the paintings sold by Duveen, where they are now, and what attribution they now bear. I may buy a copy of the book if only for this appendix!

One other interesting thing I learned from the book as about the existence of the Huntington Museum, in California, which contains the great paintings bought by Huntington from Duveen. I'd really like to get out there to see it one day.

Anyway, a throughly enjoyable read and I recommend it.

Book Review: "Nelson: Love and Fame"

Over the holidays, I entertained myself with a biography of Lord Nelson, one of the most famous in a long line of justly celebrated English Admirals. Nelson was the most successful and winningest Admiral the English had during the Napoleonic wars, winning a great victory at the Battle of the Nile and dying at his greatest victory off of Cape Trafalgar, in Spain. This biography of him looked just the thing to take away with me to Guatemala. I must say that despite the books faults, and some were major, I enjoyed it just the same.

First, too much on his "Love". I think that the book went into too great detail about Nelson's various affairs of the heart. I remain skeptical that it was necessary to dissect all of them, again and again. It would have been enough to give us a flavor of them, I think.

Second, too many sentences that suggest that the biographer was making a guess. I would have liked a little less speculation and a bit more certainty. That said, it is impossible to really achieve certainty and I realize that. I just would have liked fewer guesses. I can't give any examples.

Third, Vincent, the author, takes the time to fight all of Nelson's personal battles for him here, even going so far as to attempt to discredit any Nelson contemporary critic who dared raise objections to Nelson's conduct. This grew tiresome after awhile and tarnished Vincent's reputation for impartiality. It can't really be true that every one of Nelson's critics was always wrong. That is the impression Vincent leaves.

Finally, and this is my biggest disappointment with the book, there really should have been a chapter about the operation of the Royal Navy and the life of the sailor and the officer. This would have provided invaluable context. Something about the role of naval tactics prior to Nelson would have been very helpful, too. I have some background here because I have read a bit in the area, but even I would have benefitted from such discussions.

So, on balance, go ahead and read it. It was not bad, had good maps of the battles, and gave a good flavor of Nelson's life, a life worth knowing something about.

Recent Read

I have been reading this week a slim memoir by Richard Pipes, entitled: Vixi: Memoirs of a Non-Belonger. This was a fabulous read. Dr. Pipes has had a fascinating life and he breaks it down into three periods: 1, his escape from Poland during WW II and almost certain death at the hands of the Nazis followed by his acclimation to the US and earning a Ph.D. at Harvard; 2, his time as a prof. at Harvard during the Golden Years of the 50's and 60's; and, 3, his service at the National Security Counsel under Pres. Reagan. Of the three periods, only #2 is kind of boring.

Period 1: Escape from Warsaw. This was particularly interesting for me as all of my Polish family who didn't immigrate to the United States were killed during the Holocaust and it was compelling to read about the journey of a family who was luckier or had more foresight than my own. You felt as if the Pipes family was absolutely one step ahead of the Fascist bureacracy the whole way but just barely. As if they were closing the back door to the house as the Fascists were coming in the front door. It felt that close. I also enjoyed Pipes' descriptions of his first college days in the US and how he acclimated to America.

Period 3: Life with the NSC. Pipes was a Soviet specialist and very critical both of the Soviet Union (he was called one of the great Cold Warriors) and of detente and the scholarly / diplomatic class that was build up with a vested interest in business as usual with the Soviets. He and Reagan shared the view that business with the Soviets was a moral issue and the Soviet system was inherently corrupt. He provided, it appears, a lot of the theoretical support for Reagan's positions on arms control and countering Soviet actions with decisive responses. Pipes was the one who pushed for sanctions during the Solidarity crackdown in Poland, for instance. Absolutely fascinating reading and I just wish there was more of it. Pipes paints Haig as a freak, by the way, who Reagan detested and he has few if any nice things to say about Nancy.

Upshot? Go and read this. I think you'll enjoy it. I picked it up at the library but intend to buy a copy for my father in law as a gift.

Art. Rape. Politics. Gender. Power: a reflection

My dad gave me a copy of "The Rape of the Masters", by Roger Kimball which I am trying to read on the train in the evenings. This is a great read and you should run to the store and grab a copy.

A little background first. I am by vocation a lawyer and by avocation a frustrated architectural historian. I am removed from the formal study of art history by about 15 years now. Having read Kimball's book, I'm happy I did not make art history my vocation.

Kimball's point is that art historians have stopped looking at art, stopped doing research in primary sources (like, say, journals written by artists) in favor instead of projecting their own views of politics, gender, racism, bias, and every other popular ideological movement from the last 30 years onto the painting. They stop looking at the art as art and start to call it a text, which they can thus read and search for hidden meanings "written" into the text. It is at once both absurd and disturbing. The effect is to destroy the art and to deny its important cultural weight, to remove from the art of Van Gogh its special character as something important in Western thought, to thus attack Western thought and culture as itself unimportant and, indeed, oppressive. The art becomes a tool in the hands of those who wish to deny the Western heritage and to disclaim it.

You should read this book. The art historians, secure in some of the most prominent sinecures of academia, are consumed by their own interest in seeing vaginsa (spelling intentional to avoid odd searches), some with teeth, castration concerns, fears of anla raep (sp., again), etc. It is remarkable. Kimball illustrates his point by picking ten paintings, including color plates of them, and then fisking the academics who write about these works and the artists who painted them.

The thing is, I happen to agree that art is political, to a certain extent. Not every work of art is a political message but I do believe that artists reflect and are part of their society, that they reflect to some degree the social mores of the time (whether reacting against or in agreement) and that you can understand art through its social context. What you can't do, however, is reach back with your own concerns and forcibly impose them on the art (which ain't a text) in order to distort the image to meet your own needs. That's uncool. And sloppy, no matter how many foot notes you include.

But the thinking and the material Kimball pokes fun at are seductive. It's fun to try to do this, as an intellectual exercise. While riding the train this morning, I tried to engage in this exercise. I envisioned Munch's painting, The Scream, and tried to write about it as if I were a modern art historian. The Scream is about a lot of things. I doubt strongly that it is about any of the things I subscribe to it below in the EXTENDED ENTRY (click away, if you dare).

Let the game begin (please note that I have done no research on this and am not copying anybody else's silly ideas, ok?):

Munch's Scream: An Essay on Sexual and Gender Confusion

Here we have before us a "painting", a text, if you will which lends itself to a close reading of the pseudo-sexual conflict and confusion Munch was experiencing at the time he created this, to the extent that any man can create as man was not made to give birth.

Look at the sinuous lines of the water and the air and how they are echoed in the form of the Screamer, a figure left ambiguous as to its gender. It is bald, perhaps a woman shorn of her hair, disfigured by society and robbed of her crowning glory, made unrecognizable in her robes. Or is it a man, thrown into conflict between his feminine nature, as made evident by his long, beautiful hands, and his angular, hard body. What horror does s/he contemplate? What is s/he looking at? For, by becoming the viewer, s/he becomes the viewed and is merging the two experiences into a text replete with meaning and submeanings. Much of this text can only be discerned by a careful and rigorous reading.

If it is a he, is he consumed by his fear of castration? By his overwhelming sense that society has removed his manhood? Note, if you will, that he is robed in black. Is he mourning his loss? His powerlessness? His hands held to his face in shock as the painter/surgeon wields his knife. We know that Munch's father was an Army doctor. Munch would not have been unfamiliar with surgery or the consequences and perhaps a close reading allows us to see that here, even if Munch himself was unconscious of it, as he must have been.

Or is his/her gender subsumed by questions of fear, questions of how a repressive society forced him to choose? We can see that in the approaching figures in the top hat. They clearly represent all of the rigid, patriarchal hierarchy in all its horrible repressive self. Note how that top hat thrusts into the air, punctuating the painting with a phallic object as if to mock the subject, to show the screamer what has been taken from him. It is clear, is it not, that the only permissible use of the penis here is where it is harnessed and restrained by existing societal expectations. The artist fears the penis and he constrains it within the teleological construct of the hat. It is a powerful image and a haunting progression of images as we move from the penis/hat to the scream of the castrated, dressed in doleful robes of mourning.

Ok, I have to stop here. I fear that this is going to warp my mind for the whole day if I don't stop now. Thanks for getting this far.

History Recommendations

Jester asked me for some history recommendations after reading my post below about the decline in teaching of history in schools. After some thought, and after looking through my book shelves, I decided to make the following recommendations. It was fun to take a tour back through the book shelves. I have a lot of books, most of them I love. I eliminated some of the more obscure things, like The Politics of Dreaming in the Carolingian Empire (Regents Studies in Medieval Culture), and tried to think of a good selection of well written works which did not require a lot of background to enjoy. I could put up many more books and I realize, as I review this that I am leaving many of my favorites out. Perhaps I'll revisit the subject if people find it interesting but I must call a halt to this post now. I hope you enjoy this post, it took me a rather long time to put up.

I include not just straight history, but biography and historical fiction as well. Biography is history and should be thought of as such, it seems to me. Biographers always put their subjects into historical context and, by concentrating on one key figure, provide a good focal point to view an era. I also like historical fiction because much of the good stuff is based on fairly rigorous research and can be a great entree into an area for someone who is seeking an introduction. But, more below.

HISTORY:

Breakout: The Chosin Reservoir Campaign, Korea 1950, by Martin Russ. This is riveting, can't put it down kind of stuff. 12,000 U.S. Marines were trapped during the Korean War by 60,000 Chinese troops and conducted a fighting retreat. It's a brilliant book.

The Great Game: The Struggle for Empire in Central Asia. Anybody read Kim, by Kipling? Fabulous book and it got me interested in this period. The struggle between Russia and Great Britain for India, played out all over the region. This is a great book about this period. This topic has become more relevant considering how much strife in the world is currently traceable to this region. I also, in the same vein, recommend: Tournament of Shadows: The Great Game and the Race for Empire in Central Asia.

The First World War, by Keegan. Keegan is one of the foremost military historians writing today. This is a great book which takes you from the start to the end. This was one of the most important world events of the last century and gives the reader a greater understanding of what followed.

Stalingrad: The Fateful Siege, 1942-1943, by Antony Beevor. This reads like fiction, it's so well written. This was the ultimate armed conflict between two morally corrupt ideologies, fought in the streets and gutters of a destroyed city. Also great information about the cult of the sniper. Highly readable.

Six Days of War : June 1967 and the Making of the Modern Middle East, by Michael Oren. The author had access to archives in Egypt, the US, and Russia. He interviewed former Israeli and Egyptian soldiers. This is riveting, can't put it down history. It also helps explain the roots of the current situation in the Middle East. This is very topical.

Patronage in Renaissance Italy: From 1400 to the Early Sixteenth Century, by Mary Hollingsworth. This was a great read, although it may be out of print. Basically, it suggests that the role of patronage was under-credited with respect to the Renaissance. The painters and sculptors needed patrons who could afford the art and were willing to collaborate in the creative process. Esoteric but enjoyable.

Hannibal Crosses the Alps: The Enigma Re-Examined, by John Prevas. Where did Hannibal cross the Alps to strike at Italy and Rome? How did he do it? Prevas claims to have figured it out. It's a terrific little book.

John Julius Norwich is one of my favorite authors and I'd send you out to check out at least two of his works. A History of Venice was originally two volumes when published in England but one volume here in the States. Another great read. The history of the rise of the Republic is fascinating and I cannot recommend it highly enough. I think that study is what led Norwich to write the three volume series on the Byzantine Empire. This is another great contribution to a poorly understood, at least by me, era.

The Pity of It All: A History of the Jews in Germany, 1743-1933, by Amos Elon. I never realized the incredible contributions the Jews made to German society and culture before I read this book. Jewish integration makes what followed all the more incomprehensible. A sad but fascinating book.

Carnage and Culture : Landmark Battles in the Rise to Western Power, by Victor Davis Hanson. This is a very interesting and timely book about what makes the West special in terms of civic virtues and economics. It details the critical battles and gives terrific historical background in chapters devoted to each battle. A wonderful survey.

Now, a little lighter history. The Boys of Summer, by Roger Kahn. When baseball was an art and writing about it a game. This is about the mid-20th-century Brooklyn Dodgers and how Kahn grew up while following them around and writing about it.

BIOGRAPHY

Cicero, by Anthony Everitt. I read this one over Christmas vacation last year by the pool. Another terrific read. Gives a lot of detail about the history of the Republic and the rise of Caesar and Marc Antony. Cicero was considered Rome's greatest orator.

Lafayette, by Unger was a very readable biography of an important figure in both the American and French Revolutions. Not too many people spanned both. One of the things from this I was surprised by was learning how close a thing the American Revolution really was to failure. They don't teach you that in school.

John Adams, by David McCullough is another revolutionary war figure biography. This was a long book but it never dragged. It won a Pulitzer Prize. Adams was an American hero and I recommend the book.

A Clearing In The Distance: Frederick Law Olmsted and America in the 19th Century, by Witold Rybczynski. Olmsted was the first great landscape architect in the US and this is a terrific read. A little obscure for some, but a good look at the building of Central Park in NY. I enjoyed it a lot.

HISTORICAL FICTION

The Killer Angels, by Michael Shaara, details the battle of Gettysburg and specifically Col. Joshua Lawrence Chamberlain, whose 20th Maine regiment of volunteers held the Union's left flank on the second day of the battle at Little Round Top.

Gates of Fire : An Epic Novel of the Battle of Thermopylae, by Steven Pressfield is a novel about the battle where 300 Spartan knights and their allies kept some 10,000 Persian invaders at bay. This is hard to put down.

Sharpe's Eagle, by Cornwell. This is the first of the series. I've read them all. They deal with the exploits of an officer in the 95th Rifles during the Napoleonic Wars. Sharpe was raised from the ranks. Cornwell ends each book with a nice historical essay about the events which inspired the book. Warning: highly addictive series.

Master and Commander is the first of the Patrick O'Brian series about the Napoleonic War and the Royal Navy. These are the equivalent of literary crack. Don't pick these up unless you are prepared to lose a lot of time. My wife hates it when I re-read this series, which I've done about five times. All twenty books. It may be time again soon, come to think of it.

Dark Star, by Alan Furst is gripping. Most of Furst's work is set in the period just before the start of WW II and he evokes a time now long gone and made more poignant by knowing that it was on the edge of extinction. All of his book are fantastic and I await the next one with keen anticipation.

Happy reading, Jester (and anyone else who might enjoy the above)!