Tuesday, May 17, 2016

Book 36: OK this got kind of grim at the end.

I think sometimes fiction is better at explaining history than nonfiction.

Nonfiction is concerned with facts.  Fiction is about meaning, and impact, and making sense of things. Or, to put it another way: nonfiction is science, but fiction is myth. The stories we tell help us explain the world we know (or don't.)

The Mark And The Void is the first fiction I've read about The Great Crash, as I think of it, that began back in 2007.  It's hard to write about something dramatic that you've lived through, even indirectly, as a general rule. A momentous event is simply, I think, too big to make much sense out of immediately.  That's one reason there's been no decent stories that in any measure take place on or around or about 9/11. Writing decently about something, at least in fiction, requires that the person be able to put it in perspective, and it's hard to do that without something so big and new as 9/11, or The Great Crash -- especially because we are, literally, still living through them.  The wars we are fighting now, as well as the privacy issues around cell phones and the indiscriminate drone killings authorized by the President, are all direct results of 9/11 and the Authorization For Use Of Military Force passed 15 years ago, a law so broad that it allowed the President to unilaterally act without Congressional approval in everything from Afghanistan to Seal Team 6's raid on bin Laden's compound to strikes against ISIS.

Similarly, The Great Crash has not ended.  In 2014 the number of unemployment benefit claims roughly equaled the number filed in 2007. Our unemployment rate is 50% higher -- 6.7% in 2014 -- than it was in 2007. Only 62.5% of Americans are in the workforce; that's the lowest it's been in 35 years.  Job openings are lower than they were in 2007. The 2007-2014 period of time was the worst period for job creation since the 1930s, during the Great Depression.   And so on.  I work in this mire: I spend great chunks of time every day helping people try to hold on to homes and stave off debt collectors, get out from under onerous student loans and away from subprime credit traps.

That's one reason I avoid stories about the events of 2007 and after; I (re)live them every day. Another reason, though, is, as I said, the lack of perspective, the lack of an ability to say something meaningful about the economic collapse we are still suffering.

The Mark And The Void takes place during the Crash, and is, essentially, about it, even when it seems as if it's not. The story focuses on Claude, a French banker who works in a global bank's Dublin headquarters; the bank has survived the initial wave of the collapse because it was stodgy and stable and the CEO wouldn't allow investments into risky and unusual financial tools.

The story is this: Claude is followed for a while by a 'man in black,' who turns out to be a writer named Paul. Paul, who had a very minor book released 7 years earlier, tells Claude he wants to write a modern-day Ulysses, and use Claude as his Leopold Bloom, and asks if he can shadow Claude for a while to get the details of his life.  Claude's bosses okay this, and Paul moves in to the bank. At the same time, the Bank (Bank of Torabundo, referred to as "BOT" throughout the book) has replaced its CEO with "Porter Blankly," a dashing sort of Richard-Branson-esque leader whose directives to his staff are couched in inspirational riddles and say things like "Think counterintuitive."

As it turns out, Paul is not a writer, really, and he is using Claude to get inside the bank to try to rob it; Paul doesn't know that investment banks, like BOT, don't have 'deposits,' and so there is no safe to rob. By the time Claude figures this out, he has been ensnared by Paul; Paul's attempts to convince Claude the book was real and describe some plot get Claude to start falling in love with a local waitress (Paul's twist in the book he proposes) and Claude decides he wants to help Paul write his book after all.

It's hard to boil everything that happens down to an explainable level; the book has several different plots going on and they overlap; Claude's history (raised by a blacksmith, in the 1980s, in Paris) is gone into, and subplots abound.

Then there are, too, the scenes that seem de rigeur for books like this, books like The Great Gatsby and Bonfire Of The Vanities (this book is the equal of both): bankers partying at strip clubs, bread lines, hedge fund offices opulent beyond measure, squalid apartments for middle class people.  Those are the trappings of a book like this and need to be there.

What really hits home in The Mark And The Void is the way it manages to capture all the problems that led to the Crash (and continue it) without being didactic.

Take the machinations of investment banks, the twists that lead governments to support them.  BOT under Porter Blankly begins buying risky venture after risky venture, leveraging itself beyond all respectability and taking on more and more bad debt, and it's finally revealed that Blankly plants to make the bank "too big to fail." The idea is that if the investments pay off, the Bank will profit insanely.  But if the investments go south, the various governments will have to bail out the bank to avoid further economic troubles.

It's both absurd and genius, the kind of thing that makes you think I don't want to believe this could actually be true but... Consider: after Iowa (!) became the state that first passed laws that led to megabanks, banks grew so large and so powerful that Citicorp in 1999 simply ignored federal law in merging with Travelers Group. As soon as the crash started, the current big banks -- JPMorgan, Wells Fargo, and Bank of America -- began purchasing all the banks that had just crashed.  Those banks then received $95,000,000,000 in bailout funds (with Citigroup getting another $45,000,000,000.)  (Meanwhile, 70% of applicants for the government's home mortgage modification program are denied.)

The absurd genius of that move is compared to Paul's efforts: throughout the book Paul tries one get-rich-quick scheme after another, giving various excuses as to why he simply won't write a book his publisher wants him to write: everything from the novel is dead to I have nobody who believes in me and so on. So Paul tries to start websites, bilks more money from Claude and comes up with an idea to steal a painting from the home of a banker boyfriend of a well-known author. The machinations of Porter Blankly and Paul are compared to each other, and in case there's any doubt about whether they're comparable, the characters mention that doing what Porter Blankly is doing at the track is gambling; do it with billions of dollars of other people's money and it's financial maneuvering. 

One of the subplots involves Howie, a coworker of Claude's.  Howie makes some shrewd moves and Blankly sets him up to run a hedge fund that is based on abstract Russian mathematics; Howie explains that the fund is premised on leveraging people's losses, and says that the more the fund loses the more money his investors make.  When Claude protests that that's impossible, Howie says Claude just doesn't understand how advanced maths work.

"Beyond a certain point, complexity is fraud," writer P.J. O'Rourke once said.  Consider the "credit default swap," a derivative invented in 1994. The basic idea is essentially interest against a loan default: a lender can purchase a 'Credit Default Swap," and if the loan defaults, the Swap seller pays the lender the value of the loan (usually) and takes over the asset.  Simple, right?

Right. Except that anyone can buy a Credit Default Swap, even someone who has no actual interest in the loan. Which is to say: anyone (who is a billionaire or multinational) can buy a financial instrument that will pay them a sum of money if a loan (which they did not make and will not receive proceeds from) defaults.  This feature led to there being more Credit Default Swaps in existence than actual loans they 'protected.' This is like several people having a life insurance policy on you, including people who you do not know and who do not know you; in the event that several people held a Swap on a defaulted loan, a system was invented to determine how much to pay each person -- less than face value but more than the cost of buying the Swap, one assumes. Credit Default Swaps were not tracked or monitored or reported. They still are not. Banks could buy Swaps on their own loans (although the instruments were FAR more sophisticated -- and complicated -- than this example) which meant that the Bank made money if you paid your loan, or if you defaulted.

So a bank might make you a loan of $100,000.  If you pay it back, with interest, you pay the bank, say $200,000 over time. The bank runs a risk though: if you don't pay it back, they have to foreclose or sue, and that costs money. But there's an asset behind many loans, a house, say, so the bank has less risk: it will recover some money. Under these circumstances, banks have to be careful of the risk of a loan: make a bad choice and it loses $100,000, at least until it hires a lawyer and gets title to the house and sells it (but because of the realities of real estate, the Bank is unlikely to recover even it's whole $100,000 original investment.)

With trading of mortgages, banks became less concerned if you defaulted. Banks were paid loan origination fees, then could sell the loan for face value or slightly less: if they lent you $100,000, a portion of that (say 7000) would be paid to the Bank as an origination fee, so you only get $93,000 (or the Bank only shells out $93,000.)  It can then sell the loan to another bank, for $94,000 or more, and make a quick $1000 on the deal -- without worrying about risk. Now banks can make riskier loans.

Swaps make that worse, because the bank can get a swap and pay (usually 1.5% of the loan's value per year) for protection. If your bank does that, for $1500 a year it gets insurance on the face value of the loan. If you default in year three, the Bank will have given you $93,000, paid $4500 in Swap fees, for total payouts of $97,500.  Most of your payments in those 3 years are interest, so the Bank's principal is probably still about $90,000. The Swap holder pays the Bank $90,000 and takes over your loan. The Swap holder's investment is $85,500 -- $90,000 to the bank, less the $4500 it received in premiums.  Assuming your house is worth $93,000 (100% financing was pretty common by 2007) the Swap holder could get a return of $8000 on its investment, less attorney's fees. (Most foreclosures are uncontested and the average attorney fee for such a case, at least in Wisconsin, would be under $1500.)

And this is just the surface of the complexity that exists, because Banks could buy Swaps in all sorts of loans. Suppose you know of 5 loans that are likely to default, each with face amounts of $100,000? Pay $1500 per loan -- $7500 -- and you have an interest in $500,000 worth of debt that, depending on how many other Swap holders there are, you will get a decent share of. Almost certainly more than $7500, it seems.

That's the system that we created, and is it any wonder nobody cared anymore if loans failed? Banks made more money if they did.

Against a backdrop like that, is stealing a priceless painting any less ethical, or ridiculous, as a method of earning money? Banks were too big to fail; homeowners were too small to succeed.

Like The Bonfire Of The Vanities, and like The Great Gatsby, The Mark And The Void perfectly captures the essence of an era, with an attention to detail and accuracy that is startling, but with a flair for the human, and the interesting, that makes the book less about what a hedge fund is than what kind of world did we create, and how will we live in it?  The scene of Gatsby floating in his pool, after night after night of staring at the green light is no less tragic than the picture of Sherman McCoy standing in a holding cell in a damp suit with styrofoam peanuts stuck to his legs, and those two scenes are no more or less remarkable than the episode where Paul's son Remington finds an ant at a park and asks if he can keep  him as a pet -- only to later have the ant escape, requiring the family to tear apart an apartment that is already falling to pieces and is half-finished.

For all that, it's a remarkably buoyant book, funny and fast-paced and somehow almost lighthearted.  It's a story within a story within a tragedy, as if two wrongs do make a right and enough tragedy somehow becomes comedy again.  Comedy is simply tragedy plus time, it's said.  The Crash isn't over yet, but it seems somehow not to have stuck.  The people of the Depression, of World War II, of Vietnam, were forever changed by their eras.  My grandmother saved paper bags until she was 90. My grandfather had PTSD and used to wake up screaming about the "Japs coming up the beach."

Somewhere along the way, tragedy stopped mattering. By the 1980s, scandals and wars and crashes seemed to not matter anymore.  There have been numerous financial bailouts, cuts in spending, recessions, bubbles, wars, and terrorism over the last 30 years.  We are not numbed to them; they have simply stopped existing in the same world as we do.  The world has grown so complex that even when we know where the trouble started, we never trace it back or address it. We simply shrug and make a sad joke about it and then let a new startup company move into the old space while trying to decide if we should vote to the millionaire or the billionaire to speak for the people.

Comedy is tragedy plus time? I think not.  Comedy is any effort to understand humanity, because if we laugh hard enough we don't have to notice that nothing is funny.

It's a good book. You should read it.

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