The Emperor of Wall Street Has No Clothes!
Just a few years ago, there was a Wall Street CEO, who was so excessively fond of stacking new lines of business, that he spent all his shareholder's money on building a financial supermarket otherwise known a "universal bank". He did not trouble himself in the least about his shareholders; nor did he care about his other stakeholders; clients, customers, creditors, bondholders and the rest of the public, except for the opportunities they afforded him for raking in exorbitant fees, paying obscene compensation to himself and his soldiers and displaying his fancy new French Jet and haughty collection of French antiques. To support this bank juggernaut he cloaked himself in new and evermore sophisticated financial schemes for each passing hour of the day; and as of any other king or emperor, one is accustomed to say, “he is sitting in council,” it was always said of him, “The 'Emperor CEO' is sitting in his splendidly diversified wardrobe."
Time passed merrily in the city which housed his Headquarters; strangers arrived every day at his commodious office suite. One day, two rogues, calling themselves quantitative engineers made their appearance. They gave out that they knew how to structure exotic new securities offering magnificent returns and elaborate terms, the profits from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.
“These must, indeed, be splendid securities!” thought the Emperor. “Had I such structured products to hawk, I might at once find out what bankers in my realms are unfit for their office, and also be able to pull the wool over the eyes of both the wise and the foolish! These structured securities must be spun for me immediately.” And he caused large sums of capital to be given to both the "Quants" in order that they might begin their work directly.
So the two Quants set up shop, and affected to work very busily, though in reality they did nothing at all. They asked for the finest AAA mortgages to pool and the purest streams of income to repackage; after running out of both in short order; they substituted the AAA mortgages with toxic sub-prime mortgages they managed to scrounge up from a broker named Frankie the Flipper and continued their pretended work at the printers until late at night.
“I should like to know how the Quants are getting on,” said the Banker CEO to himself, after some little time had elapsed; he was, however, rather embarrassed, when he remembered that a simpleton, or one unfit for his office, would be unable to see the manufacture. To be sure, he thought he had nothing to risk in his own person; but yet, he would prefer sending somebody else, to bring him intelligence about the Quants and their work, before he troubled himself in the affair. All the people throughout the city had heard of the wonderful property the structured products were to possess; and all were anxious to learn how wise, or how ignorant, their neighbors might prove to be.
“I will send my faithful old Chief Risk Management Officer to the Quants,” said the Emperor at last, after some deliberation, “he will be best able to see how the structured finance business looks; for he is a man of sense, and no one can be more suitable for his office than he is.”
So the faithful old Chief Risk Management Officer went onto the floor, where the Quants were working with all their might, at their securitisation models. “What can be the meaning of this?” thought the old man, opening his eyes very wide. “I cannot discover the least bit of financial common sense in these spread sheets” However, he did not express his thoughts aloud.
The Quants requested him very courteously to be so good as to come nearer their computer screens; and then asked him whether the models pleased him, and whether the numbers were not very beautiful; at the same time pointing to tranches and tranches of securitised toxic sub-prime mortgages. The poor Chief Risk Management Officer looked and looked, he could not discover anything of value in the spread sheets for the structured products designed by the Quants for a very good reason, viz: there was nothing there. “What!” thought he again. “Is it possible that I am a simpleton? I have never thought so myself; and no one must know it now if I am so. Can it be, that I am unfit for my office? No, that must not be said either. I will never confess that I could not see the stuff.”
“Well, Mr Risk Manager!” said one of the Quants, still pretending to work. “You do not say whether the stuff pleases you."
“Oh, it is excellent!” replied the Chief Risk Management officer, looking at the spreadsheets through his spectacles. “These risk models, and the profits yes, I will tell the Emperor CEO without delay, how very beautiful I think them.”
“We shall be much obliged to you,” said the Quants, and then they named the different tranches and described the risk/return profile of the pretended stuff. The Chief Risk Management Officer listened attentively to their words, in order that he might repeat them to the Emperor CEO; and then the Quants asked for more working capital, saying that it was necessary to complete what they had begun. However, they put all that was given them into their bloated bonus knapsacks; and continued to work with as much apparent diligence as before at their structured finance models.
The Emperor CEO now sent a emissary from the Rating Agency of his court to see how the men were getting on, and to ascertain whether the structured products would soon be ready. It was just the same with this gentleman as with the minister; he surveyed the spread sheets on all sides, but could see nothing at all but financial schlock.
“Does not the stuff appear as beautiful to you, as it did to our Chief Risk Management Officer?” asked the Quants of the emissary from the Rating Agency; at the same time making the same gestures as before, and talking of the diversification hedges and safe returns which were not there, all as they signed the lucrative Rating Agency Contract of Engagement.
“I certainly am not stupid!” thought the emissary. “It must be, that I am not fit for my good, but very profitable office! That is very odd; however, no one shall know anything about it.” And accordingly he praised the safe returns he could not see, and declared that he was delighted with both the risk model and profits. “Indeed, please your Imperial Majesty,” said he to the Emperor CEO when he returned, “the structured products which the Quants are spinning are extraordinarily magnificent.”
The whole city was talking of the splendid structured product business which the Emperor CEO had ordered to be woven at the expense of his shareholders.
And now the Emperor CEO himself wished to see the costly manufacture. Accompanied by a select number of officers of the bank, among whom were the two honest men who had already admired the spread sheets, he went to the crafty Quants, who, as soon as they were aware of the Emperor CEO's approach, went on working more diligently than ever; although they still had not designed a single asset with intrinsic value.
“Is not the work absolutely magnificent?” said the officer and emissary, already mentioned. “If your Majesty will only be pleased to look at it! What a splendid risk model! What glorious returns” and at the same time they pointed to the toxic spread sheets; for they imagined that everyone else could see this exquisite piece of quantitative wizardry.
“How is this?” said the Emperor to himself. “I can see nothing! This is indeed a terrible affair! Am I a simpleton, or am I unfit to be an Emperor CEO? That would be the worst thing that could happen–Oh! the risk model is charming,” said he, aloud. “It has my complete approbation.” And he smiled most graciously, and looked closely at the toxic sub-prime spreadsheets; for on no account would he say that he could not see what two of the officers of his court had praised so much. All his retinue now strained their eyes, hoping to discover something on the screens but they could see no more than the others; nevertheless, they all exclaimed,
“Oh, how beautiful!” and advised his majesty the Emperor CEO to have a new su-prime CDO suit made from the profits generated by these splendid toxic sub-prime assets, for the approaching Bailout Procession. “Magnificent! Charming! Excellent!” resounded on all sides; and everyone was uncommonly gay. The Emperor CEO shared in the general satisfaction; and along with a massive Multi Million Dollar bonus or two, presented the Quants with the riband of an order of Managing Directors, to be worn in their Feragamo button-holes, and the title of “Gentlemen Investment Bankers.”
The Quants sat up the whole of the night before the day on which the magnificent Bailout Procession was to take place, and had sixteen mainframes running so that everyone might see how anxious they were to fabricate the Emperor CEOs new CDO suit. They pretended to roll a positive P&L off the toxic sub-prime spreadsheets; blew hot air with their pitch books and threaded mathematical needles without any thread in them. “See!” cried they, at last. “The Emperor CEO's new structured clothes are ready!”
And now the Emperor CEO, with all the grandees of his court, came to the Quants; and the rogues raised their arms, as if in the act of holding something up, saying, “Here are your Majesty's Clothes! Here is the Level III scarf! Here is the sub-prime mantle! The whole suit is as light as an opaque toxic sub-prime cobweb; one might fancy one has nothing at all on, when dressed in it; that, however, is the great virtue of this delicate cloth.”
“Yes indeed!” said all the courtiers, although not one of them could see anything of this exquisite manufacture.
“If your Imperial Majesty will be graciously pleased to take off your bespoke Saville Row clothes, we will fit on the new sub-prime CDO suit, in front of the financial looking glass.”
The Emperor CEO was accordingly undressed, and the Quant rogues pretended to array him in his new sub-prime CDO suit; the Emperor CEO turning round, from side to side, before the financial looking glass.
“How splendid his Majesty looks in his new clothes, and how well they fit!” everyone cried out. “What a model! What risk free returns! These are indeed royal robes!”
“The bailout canopy which is to be borne over your Majesty, in the procession, is waiting,” announced Hank Paulsen, the chief master of the ceremonies.
“I am quite ready,” answered the Emperor CEO. “Do my new asset backed clothes fit well?” asked he, turning himself round again before the financial looking glass, in order that he might appear to be examining his handsome asset backed suit.
The lords of the Finance department, who were to carry his Majesty's bailout train felt about on the ground, as if they were lifting up the ends of the toxic sub-prime mantle; and pretended to be carrying something; for they would by no means betray anything like simplicity, or unfitness for their office.
So now the Emperor CEO walked under his high canopy in the midst of the bailout procession, through the streets of the Wall Street financial district; and all the bankers and traders standing by, and those at the windows, cried out, “Oh! How beautiful are the Emperor CEO's new asset backed clothes! What a magnificent train there is to the toxic sub-prime mantle; and how gracefully the Level III scarf hangs!” in short, no one would allow that he could not see these much-admired clothes; because, in doing so, he would have declared himself either a simpleton or unfit for his office. Certainly, none of the Emperor CEO's various suits, had ever made so great an impression, as these invisible ones.
“But the Emperor has nothing at all on!” cried a little child hedge fund manager.
“Listen to the voice of transparency!” exclaimed his father; and what the child had said was whispered from one to another.
“But he has nothing at all on!” at last cried out all the hedge fund managers and bear traders.
The Emperor CEO was vexed, for he knew that the people were right; but he thought the Bailout Procession must go on now! And the lords of the Emperor CEO's bedchamber took greater pains than ever, to appear holding up a train, although, in reality, there was no train to hold up.
Just a few years ago, there was a Wall Street CEO, who was so excessively fond of stacking new lines of business, that he spent all his shareholder's money on building a financial supermarket otherwise known a "universal bank". He did not trouble himself in the least about his shareholders; nor did he care about his other stakeholders; clients, customers, creditors, bondholders and the rest of the public, except for the opportunities they afforded him for raking in exorbitant fees, paying obscene compensation to himself and his soldiers and displaying his fancy new French Jet and haughty collection of French antiques. To support this bank juggernaut he cloaked himself in new and evermore sophisticated financial schemes for each passing hour of the day; and as of any other king or emperor, one is accustomed to say, “he is sitting in council,” it was always said of him, “The 'Emperor CEO' is sitting in his splendidly diversified wardrobe."
Time passed merrily in the city which housed his Headquarters; strangers arrived every day at his commodious office suite. One day, two rogues, calling themselves quantitative engineers made their appearance. They gave out that they knew how to structure exotic new securities offering magnificent returns and elaborate terms, the profits from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.
“These must, indeed, be splendid securities!” thought the Emperor. “Had I such structured products to hawk, I might at once find out what bankers in my realms are unfit for their office, and also be able to pull the wool over the eyes of both the wise and the foolish! These structured securities must be spun for me immediately.” And he caused large sums of capital to be given to both the "Quants" in order that they might begin their work directly.
So the two Quants set up shop, and affected to work very busily, though in reality they did nothing at all. They asked for the finest AAA mortgages to pool and the purest streams of income to repackage; after running out of both in short order; they substituted the AAA mortgages with toxic sub-prime mortgages they managed to scrounge up from a broker named Frankie the Flipper and continued their pretended work at the printers until late at night.
“I should like to know how the Quants are getting on,” said the Banker CEO to himself, after some little time had elapsed; he was, however, rather embarrassed, when he remembered that a simpleton, or one unfit for his office, would be unable to see the manufacture. To be sure, he thought he had nothing to risk in his own person; but yet, he would prefer sending somebody else, to bring him intelligence about the Quants and their work, before he troubled himself in the affair. All the people throughout the city had heard of the wonderful property the structured products were to possess; and all were anxious to learn how wise, or how ignorant, their neighbors might prove to be.
“I will send my faithful old Chief Risk Management Officer to the Quants,” said the Emperor at last, after some deliberation, “he will be best able to see how the structured finance business looks; for he is a man of sense, and no one can be more suitable for his office than he is.”
So the faithful old Chief Risk Management Officer went onto the floor, where the Quants were working with all their might, at their securitisation models. “What can be the meaning of this?” thought the old man, opening his eyes very wide. “I cannot discover the least bit of financial common sense in these spread sheets” However, he did not express his thoughts aloud.
The Quants requested him very courteously to be so good as to come nearer their computer screens; and then asked him whether the models pleased him, and whether the numbers were not very beautiful; at the same time pointing to tranches and tranches of securitised toxic sub-prime mortgages. The poor Chief Risk Management Officer looked and looked, he could not discover anything of value in the spread sheets for the structured products designed by the Quants for a very good reason, viz: there was nothing there. “What!” thought he again. “Is it possible that I am a simpleton? I have never thought so myself; and no one must know it now if I am so. Can it be, that I am unfit for my office? No, that must not be said either. I will never confess that I could not see the stuff.”
“Well, Mr Risk Manager!” said one of the Quants, still pretending to work. “You do not say whether the stuff pleases you."
“Oh, it is excellent!” replied the Chief Risk Management officer, looking at the spreadsheets through his spectacles. “These risk models, and the profits yes, I will tell the Emperor CEO without delay, how very beautiful I think them.”
“We shall be much obliged to you,” said the Quants, and then they named the different tranches and described the risk/return profile of the pretended stuff. The Chief Risk Management Officer listened attentively to their words, in order that he might repeat them to the Emperor CEO; and then the Quants asked for more working capital, saying that it was necessary to complete what they had begun. However, they put all that was given them into their bloated bonus knapsacks; and continued to work with as much apparent diligence as before at their structured finance models.
The Emperor CEO now sent a emissary from the Rating Agency of his court to see how the men were getting on, and to ascertain whether the structured products would soon be ready. It was just the same with this gentleman as with the minister; he surveyed the spread sheets on all sides, but could see nothing at all but financial schlock.
“Does not the stuff appear as beautiful to you, as it did to our Chief Risk Management Officer?” asked the Quants of the emissary from the Rating Agency; at the same time making the same gestures as before, and talking of the diversification hedges and safe returns which were not there, all as they signed the lucrative Rating Agency Contract of Engagement.
“I certainly am not stupid!” thought the emissary. “It must be, that I am not fit for my good, but very profitable office! That is very odd; however, no one shall know anything about it.” And accordingly he praised the safe returns he could not see, and declared that he was delighted with both the risk model and profits. “Indeed, please your Imperial Majesty,” said he to the Emperor CEO when he returned, “the structured products which the Quants are spinning are extraordinarily magnificent.”
The whole city was talking of the splendid structured product business which the Emperor CEO had ordered to be woven at the expense of his shareholders.
And now the Emperor CEO himself wished to see the costly manufacture. Accompanied by a select number of officers of the bank, among whom were the two honest men who had already admired the spread sheets, he went to the crafty Quants, who, as soon as they were aware of the Emperor CEO's approach, went on working more diligently than ever; although they still had not designed a single asset with intrinsic value.
“Is not the work absolutely magnificent?” said the officer and emissary, already mentioned. “If your Majesty will only be pleased to look at it! What a splendid risk model! What glorious returns” and at the same time they pointed to the toxic spread sheets; for they imagined that everyone else could see this exquisite piece of quantitative wizardry.
“How is this?” said the Emperor to himself. “I can see nothing! This is indeed a terrible affair! Am I a simpleton, or am I unfit to be an Emperor CEO? That would be the worst thing that could happen–Oh! the risk model is charming,” said he, aloud. “It has my complete approbation.” And he smiled most graciously, and looked closely at the toxic sub-prime spreadsheets; for on no account would he say that he could not see what two of the officers of his court had praised so much. All his retinue now strained their eyes, hoping to discover something on the screens but they could see no more than the others; nevertheless, they all exclaimed,
“Oh, how beautiful!” and advised his majesty the Emperor CEO to have a new su-prime CDO suit made from the profits generated by these splendid toxic sub-prime assets, for the approaching Bailout Procession. “Magnificent! Charming! Excellent!” resounded on all sides; and everyone was uncommonly gay. The Emperor CEO shared in the general satisfaction; and along with a massive Multi Million Dollar bonus or two, presented the Quants with the riband of an order of Managing Directors, to be worn in their Feragamo button-holes, and the title of “Gentlemen Investment Bankers.”
The Quants sat up the whole of the night before the day on which the magnificent Bailout Procession was to take place, and had sixteen mainframes running so that everyone might see how anxious they were to fabricate the Emperor CEOs new CDO suit. They pretended to roll a positive P&L off the toxic sub-prime spreadsheets; blew hot air with their pitch books and threaded mathematical needles without any thread in them. “See!” cried they, at last. “The Emperor CEO's new structured clothes are ready!”
And now the Emperor CEO, with all the grandees of his court, came to the Quants; and the rogues raised their arms, as if in the act of holding something up, saying, “Here are your Majesty's Clothes! Here is the Level III scarf! Here is the sub-prime mantle! The whole suit is as light as an opaque toxic sub-prime cobweb; one might fancy one has nothing at all on, when dressed in it; that, however, is the great virtue of this delicate cloth.”
“Yes indeed!” said all the courtiers, although not one of them could see anything of this exquisite manufacture.
“If your Imperial Majesty will be graciously pleased to take off your bespoke Saville Row clothes, we will fit on the new sub-prime CDO suit, in front of the financial looking glass.”
The Emperor CEO was accordingly undressed, and the Quant rogues pretended to array him in his new sub-prime CDO suit; the Emperor CEO turning round, from side to side, before the financial looking glass.
“How splendid his Majesty looks in his new clothes, and how well they fit!” everyone cried out. “What a model! What risk free returns! These are indeed royal robes!”
“The bailout canopy which is to be borne over your Majesty, in the procession, is waiting,” announced Hank Paulsen, the chief master of the ceremonies.
“I am quite ready,” answered the Emperor CEO. “Do my new asset backed clothes fit well?” asked he, turning himself round again before the financial looking glass, in order that he might appear to be examining his handsome asset backed suit.
The lords of the Finance department, who were to carry his Majesty's bailout train felt about on the ground, as if they were lifting up the ends of the toxic sub-prime mantle; and pretended to be carrying something; for they would by no means betray anything like simplicity, or unfitness for their office.
So now the Emperor CEO walked under his high canopy in the midst of the bailout procession, through the streets of the Wall Street financial district; and all the bankers and traders standing by, and those at the windows, cried out, “Oh! How beautiful are the Emperor CEO's new asset backed clothes! What a magnificent train there is to the toxic sub-prime mantle; and how gracefully the Level III scarf hangs!” in short, no one would allow that he could not see these much-admired clothes; because, in doing so, he would have declared himself either a simpleton or unfit for his office. Certainly, none of the Emperor CEO's various suits, had ever made so great an impression, as these invisible ones.
“But the Emperor has nothing at all on!” cried a little child hedge fund manager.
“Listen to the voice of transparency!” exclaimed his father; and what the child had said was whispered from one to another.
“But he has nothing at all on!” at last cried out all the hedge fund managers and bear traders.
The Emperor CEO was vexed, for he knew that the people were right; but he thought the Bailout Procession must go on now! And the lords of the Emperor CEO's bedchamber took greater pains than ever, to appear holding up a train, although, in reality, there was no train to hold up.
