Since 1995, I've been spending a couple of weekends each year in La Parguera, Puerto Rico, diving the wall with Captain Angel.
I went to San Juan, Mayaguez, Caguas, Aricebo and Ponce on business, helping one of our subsidiaries through their audit in September and installing and upgrading computers, new software, local area networks, telephone equipment, and wide area networks.
There were lots of problems with computers broken in shipment, power failures and burned out electronics. Eventually, I had all six of the Puerto Rico offices interconnected to each other, Tampa and the National Office in Atlanta by a wide area network. When we started they didn't have a single computer.
The picture above is Captain Angel. One of the fringe benefits of my side duties on the island was always a diving weekend in Parguera. I took Mrs. Phred there a couple of times. My last time I took my son. Once I took a strange consultant named "Bob" from Chicago when we changed accounting systems. When I went online to book a dive trip today, I found that Angel closed down last January. It is a shame. He is a nice young man with a lovely wife and two young children. Sometimes he would get a call on the boat and smile and say that the baby just had a bowel movement. He had a nice life running dive trips out to the wall. I had hoped that he would succeed.
The dives were among the best I've done. They started at about 60 feet and went down a coral covered wall with lots of fish and eels.
There is the last time for everything. Due to the tenuous nature of existence, we can never be sure when it's happening. I'm going to miss the Parguera Divers polo shirts and the rainbows over the phosphorescent mangrove bay.
I'll really miss the cool Parguera Divers polo shirts with the little neon fish logo.
My son enjoyed the last trip. He's a poet/lawyer/guitar player with (so far) six very handsome and well-behaved children. I'm not biased about that in any way about that.
First off, I would like to wish my Little Brother in Wendover a happy birthday and a future life of happiness, equanimity and love....I don't have his telephone number with me. Happy Birthday, David!
I'm drinking more than my fair share of dark rum. I go down to the local liquor store and treat myself to a bottle of dark Bacardi select...I eyeball the Bacardi 151... but that way lies madness...
Flashback to 1964...I have a roommate, Ted, who is a blond good-looking fraternity guy from Palm Beach...He tells me about "pig parties". That is where you compete to find the least attractive possible date and then delight in their embarrassment when they realize that they have all been invited to a party for ugly women. He actually seems a little guilty relating this to me...maybe there was hope for him?
My deviant non-empathetic roommate produces a bottle of Bacardi 151. I end up with a traffic ticket for driving my Harley-Davidson Sportster at 110 MPH in a 30 MPH zone at 2 AM in front of the Tallahassee police station. Only a year earlier Jim Morrison, my former almost roommate, was charged for stealing an umbrella from a police car. The judge gives me a break after seeing my military ID, but he chews me out good...but at least I didn't get caught stealing a stupid umbrella...
Outside the hotel room tonight, they are blasting away with Puerto Rican tunes...one of the songs is about "muchos saxophones"....I sit in an Audit Committee meeting with 12 staff and volunteers...it's embarrassing to be the only non-bilingual person in the room...they all speak English for my benefit...If I come back, I will be fluent in Spanish...
My pay grade is GS0...I'm a volunteer.
So what about that credit freeze? One problem is colateralized debt obligations (CDOs). These are bundles of securitized sub-prime mortgages. They were rated AAA by the rating organization when issued primarily because of "insurance" against defaults...more about that later.
The banks are using models to value these CDO assets which reflect home price declines in metropolitan areas. For example. the San Francisco Metropolitan Area (SFMA) has just experienced a 24% house price decline. The problem with that is that housing prices in some San Francisco areas are down 70% and in other area only 5%. The banks should be using zip code data to value mortgages and CDOs. This would result in valuing CDOs at near market value. For example, many banks are carrying CDOs worth 15% on the dollar at 75% or more.
I don't think $700 Billion is going to do much to correct the "exuberant excesses" of the last seven years. It's a ten trillion dollar issue...but wait...what about credit default swaps?...and what happened to the Investment Banks?
A Credit Default Swap is like an insurance policy against CDO defaults. Warren Buffet called these instruments of financial mass destruction five years ago. The Investment Banks collected big fees on these policies for years but never set aside payment reserves or anticipated any defaults on mortgages. So when the housing market went south two years ago, eventually "hedge fund" managers panicked and withdrew assets from the investment banks leading to the collapse of Bear Sterns, Merrill Lynch, AIG Insurance, Lehman Brothers and others...what's a "hedge fund"? Please...Don't even ask.
While "subprime" mortgages, borrower fraud, speculative greed and low interest rates created a huge housing and mortgage bubble, a bigger problem now looms...negative amortiztion or "pay option" mortgages. These have brought down Washington Mutual and Wachovia, two of the biggest US Commercial banks. How's this for a deal...sign an 8% mortgage but pay only 2% until your mortgsge balance reaches 125% of the original loan...then you get a letter that your payments have doubled or tripled. You owe maybe twice as much as your home is worth after a 30% decline in value...to walk or not to walk...that is the question...
Meanwhile, inter-bank lending has virtually dried up because banks realize that mortgage assets of other banks are significantly overvalued or impossible to evaluate based on current valuation models. Depositors are making panicked (but somewhat justified) withdrawals from banks where they hsve more on deposit than the $100,000 FDIC insurance limit. The $44 billion in the FDIC fund won't go all that far in the current climate.
I've evaluated the finances of my own credit union. Here is some scary stuff on their provision for bad debts:
2005 $12,000,000
2006 $12,000,000
2007 $60,000,000
2008 $150,000,000
So what about suspension of the "mark to market" method of accounting for mortgage assets that just got signed into law as part of the bailout package? Now banks don't have to writedown assets to what they fetch in similar sales...how helpful..
The Mayans had a ceremony for it. Every 52 years they would forgive debts and burn possessions to ensure the return of the sun and let the good times roll again.
Then there was Nicholai Kontradieff. Nicholai worked as a Soviet central planner in the 1930s. By plotting worldwide price levels and economic activity over a 200 year period, he became convinced that there was a long wave of capitalist economic activity and that things collapsed every 50 to 70 years in a kind of nuclear winter lasting about 15 years.
The chart below shows debt in America climbing to 340 percent of gross national product at the beginning of the great recession.
Kontradieff believed that this periodic collapse, accompanied by deflation, called the Kontradieff Wave, was caused by an unsustainable increase in debt levels. The Soviets threw him in prison, where he died. Part of his theory was that the Winter of the wave paved the way for capitalist economic renewal. This did not sit well with Marxist theory or Uncle Joe Stalin.
The debt crisis, credit crisis and economic crisis were merely the opening acts in the approaching end of the long wave. The big crisis will be the currency crisis. This will begin to unravel in the next few years as basic commodities like food inflate and creditor Nations begin to realize that they are holding huge amounts of dollars, euros and British pounds that won't buy much of anything of value and all head for the exits at once. The music will stop and there won't be any chairs.
It's time to invest in guns, seeds, gardening tools and dirigible stamps. It was swell while it lasted. I thought 1974 was the wave, but now I know that the mother-of-all Kontradieff waves is about to hit the beach....How's that for mixed metaphors?
A butterfly flaps its wings in western Africa. The disturbance grows into hurricane Katrina and destroys New`Orleans.
In 1968, as I listen to a Chinese high-frequency English language propaganda program while flying over the South China Sea, I'm unaware that David X. Li is growing up in rural China. It is hard to imagine that Li's thoughts will ultimately cause the greatest international financial collapse in the history of the world.
Li grows up and becomes a Wall Street "quant". He invents something called a "Gaussian Copola" which was universally used (or misused) as a tool to quantify the risk of default of mortgages, CDOs, Credit Default Swaps and other exotic securities.
It's hard to believe that the thoughts and theories of one little guy from China could be responsible for all this, but it seems to be true.
On second thought, I am familiar with tendency of managers to misinterpret the work of brighter subordinates. In 1972, I did a multiple regression analysis on the relationship between total ticket revenue from college football games and a collection of independent variables.
The factor that had the highest correlation to total game revenue was the quality of the opposing team. The Execs that read my study immediately scheduled a number of high quality teams for the following school year. They neglected to consider the cost of guarantees to high quality teams. While my formula revenue projections were on target, the net result was an unmitigated financial disaster as expenses far outstripped revenue. That was the last year the University fielded a team.
Destroying a college football program is small potatoes compared to destroying a world economy...A little butterfly named David X. Li flapped his mental wings and blew it all away.
I'm drinking more than my fair share of dark rum.
I go down to the local liquor store and treat myself to a bottle of dark Bacardi select...I eyeball the Bacardi 151... but that way lies madness...
Flashback to 1964...I have a roommate, Ted, who is a blond good-looking fraternity guy from Palm Beach...He tells me about "pig parties". That is where you compete to find the least attractive possible date and then delight in their embarrassment when they realize that they have all been invited to a party for ugly women. He actually seems a little guilty relating this to me...maybe there was hope for him?
My deviant non-empathetic roommate produces a bottle of Bacardi 151. I end up with a traffic ticket for driving my Harley-Davidson Sportster at 110 MPH in a 30 MPH zone at 2 AM in front of the Tallahassee police station. Only a year earlier Jim Morrison, my former almost roommate, was charged for stealing an umbrella from a police car. The judge gives me a break after seeing my military ID, but he chews me out good...but at least I didn't get caught stealing a stupid umbrella...
Outside the hotel room tonight, they are blasting away with Puerto Rican tunes...one of the songs is about "muchos saxophones"....I sit in an Audit Committee meeting with 12 staff and volunteers...it's embarrassing to be the only non-bilingual person in the room...they all speak English for my benefit...If I come back, I will be fluent in Spanish...
My pay grade is GS0...I'm just a volunteer.
So what about that credit freeze? One problem is collateralized debt obligations (CDOs). These are bundles of securitized sub-prime mortgages. They were rated AAA by the rating organization when issued primarily because of "insurance" against defaults...more about that later.
The banks are using models to value these CDO assets which reflect home price declines in metropolitan areas. For example. the San Francisco Metropolitan Area (SFMACDOs). This would result in valuing CDOs at near market value. For example, many banks are carrying CDOs worth 15% on the dollar at 75% or more.
I don't think $700 Billion is going to do much to correct the "exuberant excesses" of the last seven years. It's a ten trillion dollar issue...but wait...what about credit default swaps?...and what happened to the Investment Banks?
A Credit Default Swap is like an insurance policy against CDO defaults. Warren Buffet called these instruments of financial mass destruction five years ago. The Investment Banks collected big fees on these policies for years but never set aside payment reserves or anticipated any defaults on mortgages. So when the housing market went south two years ago, eventually "hedge fund" managers panicked and withdrew assets from the investment banks leading to the collapse of Bear Sterns, Merrill Lynch, AIG Insurance, Lehman Brothers and others...what's a "hedge fund"? Please...Don't even ask.
While "sub prime" mortgages, borrower fraud, speculative greed and low interest rates created a huge housing and mortgage bubble, a bigger problem now looms...negative amortization or "pay option" mortgages. These have brought down Washington Mutual and Wachovia, two of the biggest US Commercial banks. How's this for a deal...sign an 8% mortgage but pay only 2% until your mortgage balance reaches 125% of the original loan...then you get a letter that your payments have doubled or tripled. You owe maybe twice as much as your home is worth after a 30% decline in value...to walk or not to walk...that is the question...
Meanwhile, inter-bank lending virtually dried up because banks realize that mortgage assets of other banks are significantly overvalued or impossible to evaluate based on current valuation models. Depositors are making panicked (but somewhat justified) withdrawals from banks where they have more on deposit than the $100,000 FDIC insurance limit. The $44 billion in the FDIC fund won't go all that far in the current climate.
I've evaluated the finances of my own credit union. Here is some scary stuff on their provision for bad debts:
2005 $12,000,000
2006 $12,000,000
2007 $60,000,000
2008 $150,000,000
So what about suspension of the "mark to market" method of accounting for mortgage assets that just got signed into law as part of the bailout package? Now banks don't have to write down assets to what they fetch in similar sales...how helpful..
Ok. So here we are in Florida. It’s October. The Gulf Stream water temperature is 82 F.
For the last six years, the only time I went SCUBA diving was when I went to Puerto Rico in September to work on prepping an affiliate for audit. Then I would do 4 to 8 wall dives down in the sleepy fishing village of Parguera with Captain Angel.
Last year I had the pleasure of taking my son down to Puerto Rico. He wisely decided to snorkel and swim at the dive site (he hadn't dived for 20 years and he had six children hoping he would come back).
So, in the grand scheme of things, why not spend the next two months diving in the SCUBA Mecca’s of Palm Beach and the Keys. What is retirement all about, anyway?
My 1985 gear has gotten me though a lot of dives, but the pieces have been failing. The face mask fell apart in Puerto Rico last year. The buoyancy control device (BCD) blew out in Arkansas. The fin straps broke in Key West.\
Your gear keeps you alive 150 feet down. I think I need new regulators, new fins, a compass that works and a new BCD. I don’t really trust the old stuff anymore.
No…I’m not going to buy a dive computer. Real divers refer to their plastic dive table cards. I’ve done maybe 1800 open water dives. I’m a certified PADI Dive master. I should be diving more.
Back in the day, I always got more mileage and time out of my tank than the younger divers. Last year that wasn’t true. 51 years of heavy smoking is beginning to outweigh a relaxed frame of mind in terms of air consumption
That’s my take on the meaning of life. It should get us though a few months.
I sit next to my son on the flight to Puerto Rico and remember bringing him and Mrs. Phred back from Tallahassee Memorial Hospital 37 years ago. He is sleeping next to me now. This is the first time we've spent together in many years.
We pick up the rental car and head west from San Juan to Arecibo and then down into the mountains to La Parguera. It takes three hours to drive 50 miles though the mountain switchbacks. We come to the intersection of 128 and 428. We decide to take 428. A man come out on his front porch and yells “Doan go THAT way!”. The road degenerates quickly into one lane and we expect to see banditos with machetes.We find a turnaround point and the man comes out and yells “I toll you!”. We laugh and wave.
The first dive is at 100 feet. I see stoplight parrotfish, queen angels (iridescent blue and gold) and trumpetfish. We do a five minute safety stop at 20 feet to bleed of nitrogen and a one hour surface interval and then go down again. Our divemaster is from Miani..we talk about visiting Cuba.
The 14 pounds of lead I’m carrying take me down very quickly. I’ve lost 30 pounds of fat since last year. Fat floats. 12 pounds is enough this year.
The next day the sea is much higher. Everyone on the boat is puking except me…I offer a bite of sandwich to a customer from Topeka who pukes on the deck next to me. I rented an underwater camera. The CD will be ready in the morning. I hope the shot of the green moray eel comes out.
