Sunday, February 21, 2010

The Mask of Solvency

On reading the news of Goldman Sach's involvement in the Greek Government's heretofore successful plot to negatively obscure their fiscal position from the rest of the world (with the notable exception of Goldman Sachs, it seems worth noting) a vision sprang to mind. In it, a group of Greek Finance Officials are seated on one side of one of those over-long conference room tables found in the upper floors of modern office buildings facing two people from Goldman Sachs- Europe's Chief Institutional Derivatives Salesman and his mid 20s blond bombshell assistant.


After the obligatory pleasantries are completed the assistant distributes folders to the Greek Officials, bending over slightly in front of each man in the process. "As I was saying on the phone, Gentlemen," the GS salesman interjects, interrupting the not well concealed ogling, "we at Goldman Sachs can structure a portfolio of derivatives to hide your true fiscal position from both potential investors and the prying eyes of the European Central Government. We call it, 'The Mask of Solvency' portfolio."

Fade out.

What an interesting name, and notion; The Mask of Solvency- a means for the insolvent to appear to all but the most discerning observer as solvent as the best AAA credit, e.g. the US Government (irony intended).

The invented-but-still-possibly-accurate name of the GS ploy reminds me of a book on Psychopaths by Psychiatrist Hervey Cleckley, The Mask of Sanity. The depiction of Psychopathology seems to me a most useful prism through which to view current financial affairs.

To wit (from the book): It must be remembered that even the most severely and obviously disabled psychopath presents a technical appearance of sanity, often one of high intellectual capacities, and not infrequently succeeds in business or professional activities for short periods, sometimes for considerable periods.

More often than not, the typical psychopath will seem particularly agreeable and make a distinctly positive impression when he is first encountered. Alert and friendly in his attitude, he is easy to talk with and seems to have a good many genuine interests. There is nothing at all odd or queer about him, and in every respect he tends to embody the concept of a well-adjusted, happy person. Nor does he, on the other hand, seem to be artificially exerting himself like one who is covering up or who wants to sell you a bill of goods. He would seldom be confused with the professional backslapper or someone who is trying to ingratiate himself for a concealed purpose. Signs of affectation or excessive affability are not characteristic. He looks like the real thing. Very often indications of good sense and sound reasoning will emerge and one is likely to feel soon after meeting him that this normal and pleasant person is also one with high abilities. Psychometric tests also very frequently show him of superior intelligence. More than the average person, he is likely to seem free from social or emotional impediments, from the minor distortions, peculiarities, and awkwardnesses so common even among the successful.

The idea of a mask of solvency must have seemed like a stroke of genius to those whose masks of sanity had faded as far from conscious awareness as breathing. Successful arbitrageurs, after all, are well practiced in accepting the facsimile of a thing as the true thing itself. Thus, for most, the S&P 500 future is seen as identical to a portfolio of those 500 stocks, even though it only delivers (or takes) cash on settlement. As with the psychopath itself, only careful observation of behavior in all facets of life distinguishes the arbitraged facsimile from the true thing.

Usually, the distinguishing characteristics only manifest, i.e. the masks slips, as seems the case with Greek debt, when the damage has been done.

Or is damage done? Is there a difference in experience between merely the appearance of a thing, or quality, like solvency or sanity, and that thing or quality in truth?

It seems man has been pondering this question for Millennia, which is to write that it is a question each person apparently needs to answer for his or her self. In Plato's Republic Socrates asks if there is a difference between a man who appears Just but is not and a man who is truly Just. Athens too, it seems, had its share of Psychopaths in positions of influence inspiring such questions.

In our modern, financially centered system, Solvency, not Justice is the issue. Recasting Socrates' question, Is there a difference between a financial entity which appears solvent but is not, and one that is truly solvent? Would it not be better, as Socrates' listeners asked (about Justice) in the Republic, to enjoy the extra consumption afforded those who can mask their insolvency?

Socrates argued against such a view, while admitting that those so masked might reap temporary benefits. His reward for such truth-seeking views was death ordered by an Athenian Government which was in the process of devolution from the core of a great empire to a city with little sovereignty.

Whether the question has been answered accurately is up to everyone to individually decide.

One wonders if any of the Greek Finance Officials recalled Socrates' views when offered the Mask of Solvency. Regardless, I suspect Socrates' wisdom is now evident to them.

2 comments:

Bob said...

Hi Dude,

I came across your old post on Market Making recently. Since you are one of the few people I know who has worked both in Market making and Market taking, I thought you are uniquely qualified to answer some questions.

1) How is the compensation structure typically laid out at the prop firms ? On their website, I usually read that employees get a discretionary bonus. Is that usually tied to the amount of revenues you generate ?

2) How difficult is to transition from Market making to Market taking ? Since you are not usually taking a directional view as a market maker, I was wondering how much of that experience does the market taking firms would value ?

3) In general, which one of the two would you say is more stressful or challenging ? I know that is a very general and subjective question, but I get the feeling that Market taking is more stressful in a sense that you have to actually take a view on the direction of the market. Please let me know your thoughts.

Thanks for your help.

Sincerely,
Jay

開會討論 said...

haha~ funny! thank you for your share~ ........................................