Liar's Poker at Jon Taplin's Blog

Liar's Poker

March 15th, 2008 by Jon Taplin

The esteemed Bill Gross of PIMCO uses the metaphor of the politically incorrect game we used to play as a kid called Old Maid. The object of the game was by subterfuge to stick someone else with the Old Maid card.

Old Maid now has a second life mimicking our financial markets, and at PIMCO we’ve played it frequently in our Investment Committee over the past several months. “Who’s got the ‘Old Maid’?” we ask over and over again – not to make us feel good that we don’t – but to make sure we won’t draw it when its holder tries to pass it on.

The cause of the bank run on Bear Stearns this week was that everyone was afraid the Bear had the Old Maid and they didn’t trust it not to pass it on. As the Wall Street Journal reports this morning, in a bracingly honest article, we have reached a point where the rest of the world has lost confidence in the U.S.

The resulting blow to confidence threatens to further weaken lending, borrowing, spending and investment in the U.S. economy. “Hedge fund blowups have so far been one-off situations. One worry is that we’ll cross some line and there’ll be a systemic wave of fund failures. It’s a reason why the market is so nervous,” says John Tierney, credit derivatives strategist at Deutsche Bank.

I have been chronicling Gross’ warnings for some time here. This is not just about sub prime mortgages. This is about an economy that is terribly over-leveraged. We were astonished last week that Carlyle Capital was leveraged 30-1. Well it turns out that Bear Stearns was also leveraged 30-1. The house of cards is falling, but because everyone is trying to hide the Old Maid, we have no idea how bad it could get.

Tags: Bear Stearns, Bill Gross, Hedge Funds, Old Maid.

0 Responses to “Liar's Poker”

STS

The metaphor is apt, but Gross was borrowing from an older tradition. Keynes cites Old Maid in Chapter 12 of his “General Theory …” The whole passage is vintage Keynes and well worth a read. Here’s the key paragraph:

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional;—it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passed the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.

Comment on Mar 15th, 2008 at 10:46 am
rhb

I was astonished this morning when I Googled “Bear Stearns” and found this link:

http://www.nytimes.com/2007/08/06/business/06bear.html?_r=1&oref=slogin

With all that news coverage how could this have happened except through the aegis of a forgiving government? And an avaricious public, who’s main concern when it comes down to it, is the same old “bread and circus”. Jon, I think your Uncle Sucker is us.

Comment on Mar 15th, 2008 at 2:02 pm
Functional Autonomy » Blog Archive » Safe as Houses

[...] and We were astonished last week that Carlyle Capital was leveraged 30-1. Well it turns out that Bear Stearns was also leveraged 30-1. The house of cards is falling, but because everyone is trying to hide the Old Maid, we have no idea how bad it could get. [...]

Comment on Mar 16th, 2008 at 3:50 pm