Twenty Third Floor
Technical Business Advantage

Michael Lewis, of Liar’s Poker fame, has written an engaging account of the role that subprime lending played in the global financial crisis. The new book is called “The Big Short: Inside the Doomsday Machine”.

The jargon that Lewis uses is generally explained and shouldn’t prevent non finance geeks from understanding the role of subprime lenders, mortgage originators and, of course, the Wall Street banks that fed the frenzy with CDSs, synthetic CDOs and bonuses for all.

The story places a few characters at the centre of the story. I wasn’t convinced that these guys were all skill and no luck, but they certainly seemed to have a clearer idea of what was going on in the murky, muddy waters of securitisations of that era than many of the supposed experts.

Overall, it’s won’t be the smash hit that Liar’s Poker is, but it’s entertaining reading all the time. The links to Gutfreund are tenuous and smell a little of name-dropping. If Lewis wanted to remind the reader of his role in toppling the ex CEO of Salomon Brothers he succeeded. If he wanted to somehow project the glory onto the new book, he failed.

The Big Short at Amazon.co.uk

The Big Short at Kalahari.net

Check out Book Finder for prices from several stores (new and used) in your currency including delivery costs to your location.

What an utter disappointment. Clem Sunter may (or may not) know something about strategy and scenario planning, but this book does nothing to excite me. The analogy of a fox is pushed and stretched and twisted to incorporate it into every few pages with no benefit. The structure and flow of the book make it difficult to read, there is a combination of too many detailed tactical points (particularly for a book on strategy) and superficial examples that demonstrate nothing.

We are expected to take almost everything as given and accepted, with almost no time spent showing, explaining or proving why these ideas work. Add to that some standard business analysis models reworded and renamed, but giving no better (or worse) insight than the original models makes me wonder what the point of reading the book is.

My Sunter would have done well to have a editor with a little more backbone who could counter this weak effort and ask him to try again.

I agree wholeheartedly with the basic premise; maybe that is the problem. As I read, I moved from nodding vigorously in agreement during the introduction to nodding off to sleep by the second chapter.

The general themes of critical thinking, caution and recognising complexity rather than being taken in by simplistic, post hoc, naive, flawed logic reasons for high performance are important. Authors from Tom Peters to Jim Collins have made a fortune, and entertained thousands, with their books on how to improve organisational performance. However, from the admission that much of the data for “In Search of Excellence” was fabricated to small samples and failed long-term predictive ability out of “Good to Great” the answers are imperfect.

The world of behavioural economics has discovered much about exactly how badly we typically think, especially when we don’t realise we should be in “logical analytical mode”. So much so that the book is now old news.

I don’t know whether the author is so impressed with his own ideas that he imagines the need to spell them out in excruciating detail with multiples too much evidence to allow mere mortal readers to understand, or whether the typical reader is so unfamiliar with the requirements of critical thinking that a ten page pamphlet needed to be expanded to several hundred pages. Maybe the publishers paid per word?

If you need convincing that much of what we are taught about success and the few or single simple drivers of it are, the book might be worthwhile as a tome of evidence. If you require a simple memory aid, there is none better than the 1917 quote of Mencken, “There is always an easy solution to every human problem–neat,
plausible, and wrong.”

The book arrived shorter than I expected at around 60 pages, and was probably longer than it needed to be. The author outlines his major points early on and supplements them with some interesting real-world examples throughout the work. Unfortunately, he also repeats many of the key messages more times than is necessary.

Typos and grammatical errors are widespread. Seriously, get a decent editor and proofreader.

A key message from the book is that lending is not risk-free as some proponents of Islamic finance purport. Restricting interest-based lending means many transactions simply won’t take place. Somehow, the author misses the extension of this message when he recommends a cap on interest charged to prevent usury – nowhere does he consider that this will similarly restrict lending to high risk borrowers since at times higher interest rates are required to reflect the risk.

Overall, a good read, most importantly for those who have not yet understood the flaws of the adolescent Islamic finance industry

Any company, person or country looking to invest in Africa must read Michela Wrong’s book, “In the Footsteps of Mr. Kurtz: Living on the Brink of Disaster in Mobutu’s Congo” .

The book details the history of the Democratic Republic of the Congo from its pre-Stanley (yes, that Stanley) days before east African Muslim traders were replaced by European explorers through to the eventual downfall of Mobuto Sese Seko and the arrival of Laurent Kabila in the mid-90s.

The “Congo Free State” became the personal possession of King Leopold II of Belgium, the only monarch to actually own a colony. Even against the backdrop of typical colonial abuses, it seems King Leopold was a particularly nasty character, taking his Belgian subjects along for the ride even as he pillaged the depths of Africa.

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How The Mighty Fall

Jim Collins set out to write an article on how successful companies fail. For some reason, probably commercial, he decided to turn it into a short book.

He should have stuck with the article idea.

While the ideas presented are certainly interesting, there is nowhere near enough material to justify R290. Almost half the book is “appendices” covering, very weakly, some of the victims of the financial crisis and providing background data and information that gave rise to the conclusions reached.

I usually quite like the idea of having all the information available so the conclusions don’t have to be taken on blind faith. I just don’t see why these couldn’t be provided for free on the web or something.

I was also very disappointed to not see a greater distinction drawn between failure of large, geared financial services firms that take on too much, poorly understood risk and other enterprises with very different reasons for failure. I’m starting to doubt how much Jim Collins even knows about financial services firms and what led to the recent troubles!

Read it for sure, but read it quickly and make sure you’re reading a borrowed copy from some mug like me who actually paid full-book-price for a long article.

The Taxi

It’s fair to say the South African taxi industry isn’t besotted with the Bus Rapid Transport (BRT) system. It’s understandable too. No matter what assurances are provided around newly jobless taxi drivers being placed within BRT, the reality is that a more efficient service with larger vehicles will need fewer drivers.

It’s also blindingly obvious that a more efficient, safer and better controlled public transport system is overwhelmingly to the advantage of pretty much every other citizen in our wonderful country.

A small group (often termed a Special Interest Group) lobbies (politically or through protests or violence) for a change (or the maintenance of the status quo) to their advantage at the expense of the wider population. Taxi owners and drivers have their livelihood at stake. Of course they care disproportionately compared to the rest of us!

The Tea Party

The Boston Tea Party is commonly interpreted as an inspirational story of the colonists of the New World growing tired of economic exploitation and the famous “No taxation without representation”.

Of course this is not the true story. (more…)

Amongst the stormy seas of markets recently (off the back of a credit and liquidity crunch apparently initiated by ongoing and deepening problems with sub-prime loans in the US and the related CDOs), bobs the grey and bloated bodies of a clichéd failure.

Unwavering belief in trends, normal market conditions and trading rules developed out of a less than infinite history of prices have again resulted in burnt fingers and an abundance of flotsam and jetsam on the high seas of international markets. Computer and algorithm-driven “quant funds” have apparently taken a beating in the “unusual” market conditions of late. These systems are usually calibrated to a period of history, to identify profitable trading strategies based on complicated models, multiple factors and supposedly rigorous statistical analysis.
High volatility and correlation across markets took down LTCM (read When Genius Failed 1) before. So-called “programme-trading” or “portfolio insurance” that was blamed (non incontroversially and not fully substantiated) for the 1987 market crash. Portfolio insurance is still alive and well in the form of delta hedging. Turns out the old name had a rather negative taint to it. Don’t get the wrong idea, I’m not against delta-hedging, or any specific trading strategy. I’m just not convinced that the results are all they’re cracked up to be. A system that works well some of the time then fails spectacularly every now and then is not my idea of a good night’s sleep, or a sustainable long-term strategy.

Goldman Sach’s apparently still believes in the system. Then again, they have to say that, don’t they?

The developers of these systems would do well to look at the past from a human and historical view rather than just a limited slice of a time-series. It’s too easy to consider recent history as representative of the future. We all do it, but the trick is to maintain some scepticism and not get carried away by hope, greed and fear.