A Colossal Failure of Common Sense

I recently read "A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers" by Lawrence G. McDonald (with Patrick Robinson).  Lawrence McDonald had a mid level job at Lehman Brothers for four years ending in 2008 (he was fired a few months before Lehman went bankrupt).  This 2009 book gives his view of the place near the end.  McDonald shares the copyright with professional writer, Patrick Robinson (who I know nothing about), but the writing is not polished.

This book is seriously flawed but it held my interest for a while (I found it dragging a bit near the end).  What value the book has is that of chronicling one person's experience and perspective, it is not good for an overall big picture view of the financial crisis or even of Lehman's collapse.  For this reason I think the complaint in the WSJ journal review that the book devotes too much space to McDonald's earlier career and background is wrongheaded.  I think it is useful to know that his parent's divorce led to a period of (at least relative) economic deprivation, that he had to make an extraordinary effort (taking a job selling pork chops just to establish that he could sell and then studying for and passing the securities exam on his own) just to get an opportunity for a Wall Street career and that he resented the rich private school kids who appeared to have an easier path.  I found McDonald's personal story of some interest and some of his anecdotes illuminating although perhaps not always in the way the author intended.  For example McDonald tells the story of a gambling trip in which one of his co-workers goes down $160,000 playing blackjack.  When McDonald sensibly suggested that perhaps it wasn't his night the co-worker gave him a "quitters never win" lecture and continued playing.  In this case his luck did turn and according to McDonald he ended up $475,000.  McDonald appears to feel this depiction of his co-worker is highly favorable but I would draw different conclusions.

The book does have numerous problems.  It is not very well written.  The explanation of some of the complex financial products Lehman dealt with is muddled at best (perhaps in part I suspect because McDonald didn't really understand them himself).  McDonald isn't very revealing about his personal finances.  At an earlier point in his career he and a friend founded a website devoted to convertible bonds which (by his account) was quite successful leading to its purchase by Morgan Stanley.  But McDonald doesn't tell us the sales price or his cut.  At Lehman he receives a bonus he is happy about but then is disappointed by his bonus the following year.  But again he does not reveal the actual amounts (perhaps he suspects many readers will be unsympathetic to complaints about a $700,000 (or whatever) bonus).  The details of his bonus are important because a large portion was in the form of Lehman stock which he was not allowed to sell for several years.  This means his opinion that the government should have bailed Lehman out is not disinterested.  In general McDonald appears to have a number of biases which I suspect color his account.  Also McDonald was not high ranking enough to have personal knowledge of top level internal conflicts and in addition he left Lehman some months before the end.  So the book's version of the key events in Lehman's collapse is third hand, poorly sourced and probably not completely reliable.  And in my view the book doesn't have much of interest to say about the larger context, the financial crisis that precipitated Lehman's collapse.

So in summary while I found this book interesting in places for the view it gives of an aspect of Wall Street I can't really recommend it.

Completely worthless

As I expected,  my Eastman Kodak stock became completely worthless last week when the company emerged from bankruptcy and the old stock was cancelled.  So I will be able to write off my loss on my 2013 taxes.

It is perhaps of some interest that although every informed person knew the stock was about to become worthless, trading continued (valuing the stock at a few cents a share) right up to the  end.  So the stock market is not perfectly efficient.

I contributed to this inefficiency in a small way by not selling my shares last year.  This was a result of my natural sloth and the fact that the proceeds would have been small relative to the hassle involved (given that I was holding paper certificates).  As it turned out this worked out well as the recent raise in the federal capital gains tax rate means the write off will be worth more to me in 2013 (although this is just luck, I wasn't considering it at the time).

Syria

President Obama has asked Congress (and by extension the American people) for authority to order military strikes against Syria.  In my view this request should be rejected.

I think American policy should embody a presumption against war.  We should undertake military actions only when they are clearly in the national interest.  The connection to the national interest in this case is extremely tenuous.  Syria poses no direct threat to the US.  There is a claim that Syria has violated an international norm.  Be that as it may I believe a more important international norm is that nations shouldn't attack other nations absent an immediate and direct threat which isn't present here. 

It is also very unclear what any American strikes are expected to accomplish.  There appears to be a significant danger of mission creep.  If our first strikes don't appear to accomplish much other than killing a bunch of people are we going to get more and more involved in an attempt to justify our earlier involvement?

In short I don't see a compelling case for military action so I would refrain.

New York refund arrives

My New York State income tax refund finally arrived on Wednesday.  It wasn't as much as I was expecting because it turned out I had made an error (using the wrong tax computation worksheet) in figuring my tax.  This was a bit annoying although I can get some (but not all) of the difference back from New Jersey by filing an amended return which I did.  Hopefully New Jersey will process this a bit faster than my original return.  I was also annoyed to learn that although New York theoretically pays interest on refunds delayed more than 45 days this only applies if the interest is at least $1 so I was out of luck there too.

While looking over the New York tax computation worksheets I noticed something bizarre.  Suppose a married couple is taking the standard deduction of $15,000 so that their taxable income (line 38) is $15,000 less than their AGI (line 33).  Then if I have figured correctly, if their AGI is exactly $2,000,000 their tax will be $135,972.5 while if their AGI is just $50,000 more (that is $2,050,000) then their tax will be $179,487 or $43,574.50 more.  This is a marginal rate of over 87%.  Taking federal taxes into account some people in this situation seem to be facing a marginal rate of well over 100% for this income range.  This makes no economic sense, it is just evidence that the New York legislature can't be bothered to write sensible tax laws.  

Millstone River Park

There is a new hospital, University Medical Center of Princeton at Plainsboro, near my townhouse.  As part of the deal to construct the hospital a park, Millstone River Park, was created next to the hospital complex.  When I first checked it out last April I wasn't too impressed, it seemed kind of barren and boring.  But just a couple of months later in June it was more impressive with a spectacular display of wild flowers.  A lot of the wild flowers have gone to seed but it still looked pretty good when I took the photo last Saturday.  The park does have some issues.  It is quite close to Route 1 and part of the park gets quite a bit of traffic noise.  And while the park is near the Millstone River for the most part it is separated from the river by a strip of private land.

The main park trail is a paved loop about one half mile long with some gravel spurs going off towards the river.  Along with the flowers quite a few trees have been planted.  Time will tell how well the trees do, some them don't look so good at the moment although perhaps some attrition has been allowed for.

Limit Orders

Wednesday I purchased stock with a limit order for the first time in my life.  While I have long owned various stocks I was not an active trader and had no need for a brokerage account until recently.  However my new employer required me to sell most of the IBM stock which I had accumulated through an employee stock purchase plan over many years.  I could have sold it through the plan itself but it was much cheaper to transfer the stock to an online broker and sell through them instead so that is what I did.  I thought I should reinvest the proceeds in the stock market.  I did reinvest the majority some time ago but my usual procrastination left some proceeds in cash (not such a great move as the market has been going up).   But I finally figured out some more stuff to buy.  When I did so I used limit orders (as opposed to the market orders I had used previously).  These are pretty simple to use, normally cost no more, and guard against getting your order filled at a completely unexpected price due to some market glitch.  Such glitches are perhaps unlikely but as news reports show occasionally do occur and it seems reasonable to guard against them.   So I placed limit orders a few cents above the bid ask spread to protect against an unexpected price spike.  As I expected my orders went through right away (although in one case at my limit) just like market orders would have.  Limit orders are a bit more work and have some potential pitfalls (like only getting a portion of your order filled) and so may not be worth the bother to protect against what are unlikely events in most cases.  However in some cases (like trying to trade an illiquid security) they seem to offer worthwhile protection so it seems useful to know how they work.              

Traffic Report

Last weekend I drove up to Connecticut.  I took the Saw Mill to I684 and was cruising along in the right hand lane when someone in the middle lane cut in front of me and then slowed abruptly.  I had to brake hard to avoid hitting them.   It turned out they weren't just being a jerk, the traffic from people trying to take the I84 exit had backed up a couple of miles on I684 creating a rather hazardous situation.  I rather belatedly (it had been a few years) recalled that I had encountered this before so it is a longstanding problem.  In this case I84 itself was fine, the issue was one exit lane wasn't enough to handle the volume.  However if I recall correctly the problem can also arise because of slowed traffic on I84 which is only two lanes at that point.   There are signs near the exit warning about slowed traffic but it appears there is a need for more warning signs a couple of miles further south on I684.