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The margin (collateral set aside to assure payment) was generally small to zero. These unregulated items often were held by subsidiaries, so they wouldn’t appear explicitly in the financial statement of the parent company. A case in point was American International Group (AIG), a huge worldwide insurance company, which—when the crisis hit in 2008—was threatened with collapse. During the US government handout of hundreds of billions to save the financial system, AIG was the largest single recipient—a whopping $165 billion. They had issued trillions of dollars in CDSs through a subsidiary, backed mainly by their name. As the bonds they insured dropped in price, they had to post collateral to back the (now losing) CDSs they had sold. Eventually, they couldn’t pay, threatening to create hundreds of billions in losses for banks and investment houses worldwide. Not only did the US bailout of AIG help domestic companies such as Goldman Sachs, which held $10 billion of bad paper assets from AIG that was absorbed by the taxpayers, but the largesse was distributed worldwide to cover AIG’s defaults. To see how crazy this was, imagine that Joe Sixpack offered to sell you a CDS on your $320,000 loan to your friend for $1,600 a year for five years. Joe is doing well, has a million-dollar house with no debt, and is therefore “good for the money.” Happy with $1,600 a year in extra income, Joe continues to sell CDSs on residential mortgages. Unregulated, he sells a thousand just like the one he sold you, and his income grows to $1.6 million a year. If these loans average $320,000 each, he is insuring a total of $320 million, all backed by his million-dollar house. You object, arguing that Joe couldn’t sell this many CDSs because once he’s sold a few of them people would realize there was a good chance he couldn’t pay off in a crisis. Ah, but what if Joe did this in a subsidiary and didn’t disclose the vast scale of his operations? Welcome to AIG.
A Man for All Markets
Edward O. Thorp
The internal debate about confidence calls to mind a well-known concept from the radio pioneer Ira Glass, which could be called the Taste/Talent Gap. All of us who do creative work . . . we get into it because we have good taste. But it’s like there’s a gap, that for the first couple years that you’re making stuff, what you’re making isn’t so good . . . It’s really not that great. It’s trying to be good, it has ambition to be good, but it’s not quite that good. But your taste—the thing that got you into the game—your taste is still killer, and your taste is good enough that you can tell that what you’re making is kind of a disappointment to you. It is in precisely this gap that ego can seem comforting. Who wants to look at themselves and their work and find that it does not measure up? And so here we might bluster our way through. Cover up hard truths with sheer force of personality and drive and passion. Or, we can face our shortcomings honestly and put the time in. We can let this humble us, see clearly where we are talented and where we need to improve, and then put in the work to bridge that gap. And we can set upon positive habits that will last a lifetime.
Ego Is the Enemy
Ryan Holiday
Such a preference for demonstrative over electoral politics was often reinforced by a badly flawed reading of the careers of Mahatma Gandhi and Martin Luther King. They did rely on marches, sit-ins, and other forms of physical protest to put moral pressure on their opponents, who claimed to believe in the democratic principles Gandhi and King were invoking against them. And they sought to disturb the status quo so that it would be less socially disruptive for officials to accommodate them than to continue to repress them. But neither of these great leaders chose this route in preference to using the votes of their millions of followers to gain their ends. They engaged in direct action precisely because this was the only method available to them—Indians in the British Empire had no right to vote on their situation, and African Americans in the American South had that right in theory but hardly in practice. Once they gained full access to the ballot box, they sensibly made that their main focus. When LGBT leaders cited Gandhi and King, I offered my own counterexample—the National Rifle Association’s great success in dominating the policy debates about gun control, despite being in a minority on the issue in every national poll I have ever seen. As I enjoyed pointing out, especially to those LGBT activists who decried my lack of “militancy,” I have never seen an NRA public demonstration. They do not have marches. There have been no NRA mock shoot-ins to rival the die-ins staged by AIDS activists. And those liberals who try to comfort themselves with the notion that the NRA wins legislative battles because of their vast campaign contributions are engaged in self-deceptive self-justification. The NRA wins at the ballot box, not in the streets and not by checkbook. The NRA does what I have long begged my LGBT allies to do, at first with mixed results, and more recently with much greater success. They urge all of their adherents to get on the voting rolls. They are diligent to the point of obsession in making sure that elected officials hear from everyone in their constituencies who opposes any limits on guns, especially when a relevant measure is being considered, and they then do an extraordinary job of informing their supporters of how those officials cast their votes.
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