Sunday, October 7, 2018

The Chyrsalis Of Impending Doom

by John Patrick Conway, Jr.

You know, I spend way too much time surfing YouTube these days, and I really need to stop it. I've got so many items on my "to do list" that require my immediate attention, but I've fallen prey to the procrastinator's creed of "...why do now what can be put off until the very last minute."

I wasn't always like this, but over the last couple years I've found myself descending into somewhat of a malaise. I recognize it...but I just don't seem to give a shit anymore. So on Monday when I have to go to work in a shirt that has been worn...well, more times than I'm willing to admit here because I never made it to the Dry Cleaners, or I have to buy underwear again because I failed to do my laundry, I'll have no one to blame but myself.

And it's not YouTube, per se, but rather the indignant rage that wells up after watching something that just creams my corn! Today it was a video by a guy named Jordan Chariton who did an editorialization upon an article written by Matt Taibbi in Rolling Stone. The title of the article is: Ten Years After The Crash, We've Learned Nothing. Here's the link below. I promise it's worth your time.

As I was watching this video, however, I imagined myself transported back in time 18 years to when I worked Trade Settlements for Chase Bank's Advisor Custody Unit.

As the named suggested, the unit served Financial Advisers who held big name clientele with deep pockets. Two I recall off hand were the Actor, Producer and Naval Officer Douglas Fairbanks, Jr., and then his estate after he passed away in May, 2000; the other was Comedian and The Tonight Show host Jay Leno. Now, these accounts were mostly Custodial with a few Trusts scattered within, and given the fiduciary nature of such accounts it was an inference of industry standard that they be free of any and all investments speculative in nature. That meant no Options, no Futures and no "inspired" Over The Counter trades. So for my part, I was responsible for seeing that these trades (mostly straight Debt and Equity) bound to or from these accounts were properly cleared and then settled.

Anyway, one of the things touched upon in the article mentioned above was how the Debt Crisis was anything but an unforeseen event. Even from my Middle Office perspective I clearly remember being cognizant of should I say this...something weird going on, and this as early as 2000.

I had begun to notice within the daily movement of securities more and more Collateralized Mortgage Obligations (CMO's) and then later Collateralized Debt Obligations (CDO's). I had studied these instruments in late 1998 while preparing for my Series 7 exam and I remember glibly thinking at the time that these instruments seemed to be the superfluously conjured brainchild of Product Managers within Wall Street's Bond Markets looking to distinguish themselves and justify their existence.

In a manor of speaking, these were derivatives in and of themselves; bonds on bonds grouped in terms of rating classification. Big deal. Somehow this was going to make trading bonds sexy? As it turned out...yeah. But by then the idea had been perverted to heights I'm not sure even its creators at Salomon Brothers could've foreseen.

They really came to my attention when settling these mother-fuckers was becoming a real chore. First was the fact that they were being manufactured at ever increasing rates to the point that the CUSIP's were not being created and disseminated in timely fashion. Day after day I'd be at the Bloomberg Terminal trying to ID these fucking things because I just received a call from a counter party demanding to know why I just DK'd a multi-million dollar trade. On one day in particular, I asked myself...what the hell are these things doing being domiciled in Custody Accounts anyway?!

As if the CUSIP issue wasn't enough, pricing these things were also becoming a problem as well...both before and after the trade. The price at which these instruments traded was something that occurred before I would need to be involved. But occasionally we would get a call from a client or their advisor asking for information on why one of these things was not paying out as they had assumed it would. One I vaguely remember was a CDO that traded as a Zero Coupon Bond. My response was something along the lines of "...Fuck do I know! You're the one with Trading Authorization. You traded it..." Zero Coupons were traded at discount and redeemed at Par. Did this guy really not know what he had got his client into...?

I was only with Chase a year and a half. I left after my department was sold to Investors Bank & Trust around the time we merged with JP Morgan. I kept a curious eye on the housing market, though. The fervor pitch at which its securities traded resembled, to me anyway, a market going off the rails like that of the equities markets in the late 1920's. This time, however, the instruments of choice were Debt oriented, and traded via OTC Derivatives. There was one constant element within both these cases that kept me up at night...and that was the easy extension of credit.

In the 1920's you could trade on the margin levered to the tune of 90%. Meaning you only needed to put up 10% collateral to position a stock trade. If you were fortunate enough to ride the wave of unbridled speculation that gripped America back then, well...Ka-Ching! But if you were like most who thought the ride would never end, and stayed at the party too long, you're 10% was not only wiped out - you were now on the hook for the full margin balance. Sweet dreams, Cupcake.

This sent brokers and traders alike out of windows leaving Wall and Broad Streets running red in blood. Around the country people either committed suicide, or abandoned their families out of shame or despair. Economic activity ground to a virtual halt. There were runs on banks; life savings were lost - no FDIC back then. Sound familiar? It took until the mid 1950's for the DJIA to recover its 1929 high.

Interesting story here. Back in 1929 Joseph P. Kennedy, Sr., the father of President John F. Kennedy, is getting a shoeshine somewhere around Wall Street when the shoeshine boy starts to offer him stock tips. As soon as he gets to his office, he not only unloaded his stock portfolio, but he aggressively shorted the market. Seeing this for what it was, Joe Kennedy figured that if there was ever a sign to get out, that was it.

Be this at it may, my worst fears were confirmed when I learned that Wall Street was marketing "Interest Only Mortgages" to home buyers. My understanding of these particular mortgages was that they made sense to developers, home builders and those in the business of renovating and reselling homes (House Flippers). But to market these to someone looking to own a home was inexcusable. That's when I knew for sure there was a real problem.

When the shit was about to hit the fan in 2008, I'm working at the NYMEX and a buddy of mine who worked on the same floor as me, but in the Futures pit for Heating Oil, got cold-called by a mortgage broker. This person ran his credit and decided he would be a good, really. He starts to ask him if he ever thought of buying a house; that now, more than ever, was a good time and he could get him pre-approved with a great rate. I said to my friend, "...Hey, John. How did this broker get your info to run against your credit? Did you ask about that? And doesn't it bother you they did this unsolicited?" He seemed happy about it at first, but his demeanor changed to that of being nonplussed once I challenged him with these questions.

Around the same time I just couldn't help but notice the amount of offers of credit I was receiving. I mean, I was receiving credit card offers, pre-approved, that could not be justified given my credit rating. I knew then that the end was near. There was a palpable feeling in the air in and around Wall Street. In the after hours bars of FiDi, Tribeca, SoHo, China Town, Little Italy, the Lower East Side, the Village and as far North as was there, you could feel it.

And then it started. Although I worked the Options Pit for Light-Sweet and Natural Gas, I would provide relief during lunch for those in the Options Pit for RBOB and Heating Oil. It was there that a trader received a call from his wife with a warning. She worked for Citi Group at one of their Hedge Funds. The word was out. Hers and other Funds, entire floors and even whole Departments where being escorted to their desks to collect personal belongings and then be escorted out of the building. There was the very real possibility the Bank was about to fail, and if he knew anyone with an account there to run, not walk, to an ATM or a Branch and get what money they could. So this trader makes an announcement to the pit that spread like wild fire across the floor. There wasn't a mad exodus from the trading floor but I did see a handful guys running for the exits. On the Board that showed the state of other markets, the DJIA was already down over 500 points and still falling.

Oddly, the Futures markets seemed to benefit from all the turmoil. Especially the guys up on the seventh floor of the COMEX. The hedgers were attempting to shore up what assets they could in the Precious Metals Pits of Gold and Silver. On second thought, it really wasn't that odd at all. If you ever wondered why Wall Street used the derivatives markets to trade these conglomerations of financial excrement, it goes back to the same levered nature of these instruments. Like the equities markets of the 1920's, before the time of Regulation T, the futures markets still use the same levered nature of putting up only between 5% and 10% margin against its contract least on exchange traded futures. But the OTC market is comprised entirely of privately negotiated contracts. It's basically still the "Wild West" where the trading of securities is concerned, and its private nature is what has forestalled efforts in the past to allow the CFTC to regulate them. I'll circle back to this in a minute.

Well, we all know what happen. Don't we. The taxpayers basically bought Citi-Group to keep it from failing - which is exactly what would have, and should have, been allowed to happen. The same capitalist system they purported to adore all those years was about to consume them for their greed and stupidity. Goldman Sachs and JP Morgan was within a hairs breath of total collapse as well until the US taxpayers saved their bacon with a back door bail out of AIG.

The seeds of this fiasco were actually planted years before when, never before in US history, the Federal Government oversaw the bailout of a private concern, Long Term Capital Management (LTCM) in 1998. This set a dangerous precedent that provided Wall Street with a false sense of security should they ever allow themselves to be brought to the brink of collapse. Turns out it wasn't a false sense; turns out they played it fast and loose and got what they wanted all along. Ironically, from 1996 through 1999 CFTC Chairperson Brookley Born had lobbied the President and Congress to give the CFTC the authority to oversee and regulate OTC Markets. But Wall Street fought her tooth and nail. In the end, even with the failure of LTCM, she was thwarted in her efforts. The stage was now set for the meltdown of not only Wall Street-Bad Actors but the entire US economy.

There's a poster from the OWS movement that sums this up...

Wall Street: Privatize Profits, Socialize Losses

Now that 10 years has past, I'm more outraged than ever. I have come to the sobering conclusion that we are not a nation of laws, and that the application of what laws we do have is uneven, unjust, caprice in nature and applied in arbitrary fashion. Only recently I have come to the conclusion that I have no moral or ethical obligation to place myself at a decided disadvantage when the constructs of justice are clearly stacked against me in favor of a privileged class.

I will hold in abeyance any fidelity to the law, society, and the government of the United States until such time that justice is served to my pleasure and satisfaction. In the mean time I seek the efforts of those to rise up in just revolution, and to suspend the constitution until such time there exists the means and conviction to enforce its tenets evenly and without preference for those with wealth, because the commanding majority of those who hold this nations wealth have not earned it and, therefore, do not rate its assertion of power.

I see now that the government of the United States is an enemy of its own people and, therefore, has no legal authority and deserves no expectation of allegiance.

The worst part of all this is the perpetrators of this epic fraud have been allowed to write revisionist history that excuses their crimes upon this nation. Last week, during a Q&A, Gary Cohn was able to verbally manipulate an interviewer who was clearly uninformed and out classed by him. This asshole had the unbelievable nerve to demand of his interviewer "what laws were broken?" And then attempt to place the responsibility upon the general public for buying homes they couldn't hope to afford. Never mind the fact that these people he was referring to were lied to and manipulated into believing that, in fact, these homes were well within their grasp financially; that institutions the likes of Goldman Sachs provided the market for which the manipulation of toxic assets were packaged and sold to the public as investment grade products.

What laws were broken?! How about fraud and conspiracy to commit...! Are you fucking kidding me?! Goldman Sucks was one of the worst offenders.! They artificially held the mark-to-market on OTC derivative contracts hostage until they could first unwind their longs and then establish a net short...all at their own clients expense. In the end, they were required to pay fines and penalties, but these were nothing more than what can only be described as "the cost of doing business." They still walked away with billions. 

Another dick head to come out of this shit soup smelling like a rose was none other than Jamie Dimond of JP Moron. Today he is held up within the financial industry as some kind of genius. But as Bankers go, he's an utter retard! He drove JP Morgan Chase into the ground. The only financial talent this moron had was probably to bribe President Obama with promises of speaking fees and legal retainers galore. After having left office, it appears that's exactly what he has gotten. God bless America...right?

Well, I accomplished what I set out to do. I can't take my shirts to the Dry Cleaners - they're closed now. Same goes for the laundromat, Oh, well...

Copyright October 6, 2018. All rights reserved.

Sunday, September 23, 2018

Yeah, Good Times...

by John Patrick Conway, Jr.

I just made a particularly negative post to this blog about General Aviation and I just don't want to leave it there. So after searching My Documents folder I found something that may offer some balance to the tone of my blog.

Back in May, 2018 I made this post to the video inserted below because it brought to mind some good memories of my own flight training that began with North-Aire in Prescott, Arizona.

I can't help but to smile when I think back to how my instructor taught me the procedure to side-slip. His approach to demonstrating the skill not only provided for an understanding of the maneuver, it also instilled a confidence within the student of just how powerful the maneuver itself is in controlling the lateral movement of an airplane in flight.

On a particular day with a strong but steady wind down Prescott Valley in Northern Arizona, for about 20 minutes my instructor had me do nothing but  chase straight dirt roads at an altitude of about 50 to 100 feet AGL, the longitudinal axis aligned over the road with rudder and the drift nulled out by the wings bank angle held thru the use of aileron. We did this on all headings about the compass and at multiple airspeeds so as to get a feel of how the ship can be expected to perform under varying degrees of wind direction and velocity.

I count this experience today as one of the three most transformative lessons I had enroute to my Private Pilots License. The other two were executing Falling Leaves so as to get comfortable with stalls while at the same time gaining an understanding and appreciation for the use of rudder as a primary control in correcting for lateral deviations while operating at high angles of attack; the other was the maneuver for Dutch Rolls in developing timing and coordination between aileron and rudder.

Looking back upon these experiences, I think now that I can finally appreciate that old saying: It's not always the destination, but rather the adventure in actually getting there that proves to be the reward...John Conway CMSEL-IA.

Copyright May 22, 2018. All rights reserved.

Their Own Worst Enemy...

by John Patrick Conway, Jr.

If you're a rated pilot then you're aware that every two years it is incumbent upon you to undergo a Bi-Annual Flight Review (BFR) every 24 months with a CFI...that is, of course, if you want to exercise the privileges of your rating(s). The practice consists of an hour oral reviewing current Part 91 Flight Rules and generally an hour flight to review those maneuvers appropriate to your level of certification. It's really not a big deal; you can't fail it. The worst outcome is that the person conducting the review has it within their discretion not to endorse your logbook if he/she feels that you require some remedial training.

So anyway, with this in mind, I've found myself viewing videos on YouTube posted by people who have recently been through flight training to get a sense of how things may have changed over time in the industry. What I've found in some cases is shocking but, unfortunately, not at all surprising.

General Aviation is, in many ways, its own worst enemy. And when I refer the General Aviation I'm also including the leaching tentacles of Insurance Companies that have, uninvitingly, inserted themselves into the equation...the degree to which participation is almost, for all intents and purposes, compulsory. The end result, not surprisingly, is that the cost of participation has increased at a geometric pace over the last 30 years.

In one instance there was a guy who allowed himself to be strung along by his flight school, along with a string of its flight instructors, to the point where he had to acquire 60 hours of flight time before being soloed...There is, under no circumstances, anyway to justify this.

I just watched in horror as this guy related how he was taken to the cleaners and it reminded me of one particularly negative experience I had at Republic Airport on Long Island with an operation called Flightways some twenty years back. They've changed their name multiple times over the years, but the hanger gouge on all its incarnations has always been the same: fucking rip off! In my own case, I aborted an attempt to earn my CFI there but not before signing a contract that committed me to a certain dollar amount that should've provided a discount over the period of my training. The problem was that this same contract did not enjoin them likewise. In the end, I walked away from money in this case because I found the people there to be so toxic...particularly the bitch that acted as manager of the operation then. A lesson I never forgot, or will forgive - including myself for being so stupid in the first place.

Anyway, with respect to the guy I mentioned above, here's a little perspective. When my Dad took flying lessons in a Piper J-3 Cub way back in the 1950's, the instructors would usually solo a student somewhere between seven and ten hours. Today, with multiple layers of air traffic bureaucracy (Clearance Delivery, Ground Control, Tower, and Departure Control) this has only added to the Hobbs Meter readouts to get the same level of experience. In all honesty, it should not take more than 12 to 15 hours of actual flying time to solo a student today in a Cessna 152 or 172...20 hours tops! Anything beyond that, in all likelihood, either the school/instructor is bleeding the student for cash, or their operation is out and out incompetent. Yeah, there may be a few students that are so hapless that additional instruction maybe warranted but, in all likelihood, it almost always falls upon either the credibility or skill of the school/instructor. And in the case of a student who proves so unfortunate in aeronautical skill that they are not safe to solo within these limits, then it is (or it should be) incumbent upon the school/instructor to make this clear or, perhaps, point the student in the direction of another operation. Under no circumstances, however, should a flight school/FBO continue to squeeze a student to the limits of their wallet or self esteem...a practice that has, in my estimation, become an industry standard and marked General Aviation with a completely unnecessary and indelible scar upon its character.

Incidentally, the pejorative used to describe such abusive flight schools, Instructors and FBO's is that of an Hours Shop or an Hours Mill. I don't care what kind of bullshit they try and sell you, or the manner and tone of voice in which they attempt to browbeat you. Anything more than 20 hours to solo, or 60 hours to prepare you for the FAA Check-ride should serve as alarm bells going off.

I recently read that someone stated the "national average" to attain a Private Pilot's License today is 70 hours. That's unadulterated bullshit, and if it is true then that is almost twice that mandated by FAR Part 61 (40 hours), and exactly twice that mandated under FAR Part 141 (35 hours). When I was in training in the late 1980's the average was less than 60 hours for the Private sign off. And here's another thing to consider: The accident rates over the past 30 years have not gone down. In fact they've gone up, and in all likelihood a direct result brought on by the introduction of highly suspect and dubious lower certification ratings such as the Sport and Recreational Pilot Certificate.

My advise to anyone looking to get into aviation as a pilot is to seek out a Part 141 school where the curriculum has been mandated by the FAA. In my day the Cessna Pilot Center's (CPC's) were a solid choice, but when they dropped Jeppesen as their ground school contractor in favor of King Schools my support in their favor waned.

And such it is every couple years or so when I get the urge, that I'm reminded of the sewage that I myself and others are required to navigate if we want to continue to fly. It's not enough to hold your nose and go just anywhere. If necessary, you really have to look far and wide for a reputable operation these days.

I weep for the future of General Aviation...

Copyright September 22, 2018. All rights reserved.