Stop the Presses! Deep Thoughts From Jeremy Grantham

Tyler Durden's picture

Jeremy Grantham's latest is a must read, not least of all for this terrific encapsulation of prop trading, which everyone now believes was just a wonderful and innocent little byproduct of a broken system. Grantham calls it for what it truly is:

Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest. They may or may not think it important or that it caused this or that problem, but they know it’s a real conflict.  Congressmen, since when wasn’t conflict of interest and poor ethical standards reason enough to change the law? But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems (see last quarter’s Letter). Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank. Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff. Let’s
learn from our near disaster. Viva Volcker!

Hopefully Congressmen will listen more to proven professionals like Grantham over chattering heads covered in half an inch of make up on CNBC. Many more terrific insights on Bernanke, the economy, markets, and so much more, from one of the great minds out there.



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Species8472's picture

Equity markets almost always peak when rates are low

Since when? They seem to peak when the yield curve gets near flat. When interest rates start to go up you are only about half way there.


but hey, since we are really in a bear market maybe he's right.


Mr Lennon Hendrix's picture

If BS continues his reign of terror inside the FED, and continues to sell financial heroin to the markets, Volker can chase the dragon all day, but to no avail.  I hope he knows that rates should currently be upwards of 10%  Good luck bud.

TheGoodDoctor's picture

I know I shouldn't do it, but Cramer was causing me disbelief. Someone should write an article on "The Audacity Of Cramer" from tonights episode. "Prop trading had nothing to do with the downfall in the market." He kept saying it was no money mortgages, bad buyers and bad lenders.

Funny, I didn't hear the douchebag say one thing about the MBS. Anyway, the whole episode was based on supporting the financials and bashing the Obama admin. Though Cramer says he isn't political!

I couldn't believe what I was hearing out of his mouth. He even had a pinata with Lloyds face on it which he later broke open to have gold coin chocolates come out on the floor.

I seriously felt my intelligence was insulted tonight. "It isn't prop trading!" This from the same douchebag who says never make a market order. Please tell us why old sage Cramer!

ghostfaceinvestah's picture

Fed MBS buys stopping in March, look out below.

TurboBob's picture

"Fed MBS buys stopping in March, look out below"

Fat Chance.


Anonymous's picture

I agree with most of it but who made him a weatherman?

QuantTrader's picture

Grantham is a great investor but he needs to retire.  Always just talks his book.

Anonymous's picture

It's like these white shirted criminals don't know what their doing.
Look at Long Term Capital Management, the Savings and Loans thievery, Rubin, et al,, against regulating derivatives, Greenspan, Congress repealing Glass-Steagall, Fannie, Freddie and on and on!

I'm getting F'ng sick of this corruption and the screwing of this nation.

What the hell?

whacked's picture


What makes me enraged though is the fact that this has been going on for so long and the arrogance still displayed by the US is absolute.


One day you may wake up and realise that you do not own the rest of the world, you have no rights on the rest of the world and you take up so little of the world, pollute so much and expect too much!


My stupidity though, I thought Nixon's era was the last straw and you would wake up!

Carl Marks's picture

The U.S. can do anything it wants... until it can't.

Anonymous's picture

Hey great inspiration! Marx would be proud of that quote. And that indeed was what Alexander the Great, Nero, Genghis Khan, Attila the Hun, Napoleon, Hitler and many others thought too. So the USZ is doomed then?

Anonymous's picture

So now ZH has become an adamant supporter of the Obama plan to ban prop trading? I thought your guys position was that it was pointless.

Anonymous's picture

So, who doesn't talk his book?

Dirtt's picture

Carbon emmisions blah blah blah

Anonymous's picture

Hold on. Is your basic idea in the 1st paragraph that prop trading played a role in the crisis bc traders taking home huge bonuses encouraged the salesmen of ABS to take agressive risks? That sounds a bit silly. Congress should crack down on this (in part) because when traders make a ton of $ others act stupidly. I really don't get you sometimes. Are you a commie?

Anonymous's picture

i hope the communists blow you up - mingus

Great Depression Trader's picture

Heres how the banker bailout scammed me.

I got my law school student loans from Citi and Wachovia. I figured they would go broke and that some type of haircut would be applied to my loan. Then, in the fall of 2008 the big banks blew up. Citi and Wachovia were in trouble and should have gone to 0. Moreover, the rest of the big banks also should and would have blown up and also would end up in ch 7 bankruptcy. But then of course, the golden rule was applied, "he who has the gold makes the rules". The big banks got congress to bail them out and also allowed the federal crock of shit reserve to print trillions. Also, fake accounting rules were allowed to reign. Thus, the big banks survived.

In addition to the above, the federal government decided to buy my loan from wachovia and citi. Now im paying $1045.86 a month to the Department of Education . I made a deal with citi and wachovia, not with myself (i.e. the DOE which is a federal department which is funded by my taxes). I was betting that the big banks would blow up and thus chose them as my lenders (specifically Citi and wachovia). Were the banks to go ch 7 then we would effectively have a debt jubilee and here is how. With all the major credit providers being destroyed due to their own recklessness there would be less credit in the system and less money, thus deflation. Then, my student loans would be sold at a auction to the highest bidder. With less money and credit in the system the bid would be low, .20 to .40 on the dollar. In theory, i could have bought back my own loan for .30 cents on the dollar and that would be the end of my debt slavery.

I always knew that i was overpaying for lawschool ($36,000 a year) but figured that the system would go to hell. Unfortunately for me the golden rule was applied and i got fucked in the ass by Bernanke, Obama, Geithner, and the rest of the wall street mob. You see, .20 X 36,000 is 7200. $7200 a year for lawschool is reasonable and fair value i believe. A bunch of professors spoke and repeated the same shit they spurt year after year from a outline. Yet i got stuck with a massive loan because i went to law school at the height of the credit bubble. Deflation is occuring all around us yet i still have to pay par value to the DOE, which paid Wachovia and Citi par for my notes. The federal gov had no authority to buy my loans from the banks which should have failed, yet now im stuck with the bill while wachovia (now wells) and citi got the cash and split. This is fascism at its finest; merger of corporations and government. I made a deal with two lenders, not the fed government. The people on the other end were going to disappear (as corporations they are ficticious entities that exist only as a abstraction of a bunch of numbers). Yet, my government, basically me, bought my own loan and now i have to pay it to myself. In reality, the people in charge of the government (which is not me but a bunch of criminals that control a racket) bought a loan from private sector loan sharks that dont have the big guns to enforce the racket. Ridiculous.

This is how i got taken in the takeover.

TheGoodDoctor's picture

Might you use that law degree and sue the Federal govt. then? There are many reasons to do so. Not to mention for the purposeful devaluation of the dollar. But I think you will be able to pay your loans just fine once inflation hits. See, its six of one half a dozen the other with your situation. And don't lawyers make at least 80k out of the gate anyway?

Anonymous's picture

Based on contract law you entered into an agreement with these banks - why should you think that you should skip out on it even based on their very obvious incompetence and theivery. Sorry! earn a living and pay it off! I could have become President too, but I didn't feel like paying the price in time, money, and relationships. You screwed yourself. Correct me if I'm wrong, but I thought only free market capitalists spoke here.

Great Depression Trader's picture

Correct me if I'm wrong, but I thought only free market capitalists spoke here.

What part of "im now paying the DOE" did you not understand? As a market capitalist, i stated that were the free market free to operate back in the fall, the banks would have failed and my note would have been sold at auction for .20 to .30 on the dollar. Also, i made agreement with the BANKS to pay back the loan, not myself, err the federal gov that only operates because of the taxes that I, u, tyler pay.

RockyRacoon's picture

Sorry to hear you were disappointed. 

Sounds like you simply gambled and lost.

Works that way sometimes.

Don't you know the house always wins?

Great Depression Trader's picture

Yup, the golden rule as i stated. Now i know the house wins. And knowing is half the battle. And no, lawyers dont make 80k starting unless theyre super students from super schools.

Anonymous's picture

You obviously missed the contract law class during your education. The bankruptcy of a contract counterparty does not discharge your debt.

If I had a home or car loan through an actual lender than went bankrupt, I can't stop paying it just because they defaulted. That lender's creditors will come after me.

Anonymous's picture

Principal and interest are fixed while your income and ability to service your debt is variable. Malice aforethought gaming of the system continues by "free lunchers" just like yourself.

You wish to be paid lawyer's wages and fees and would undoubtedly hold your accounts receivable to contractual terms, but wish to discount the costs you freely entered into to pay.

Indeed, it is very apparent that moral degradation is at the root of this financial crisis and it permeates to every level.

Recently educated to the law but a moral infant, how do you expect to thrive if all your peers and colleagues have the same attitude?

Finally we understand that "gaining the system" is just theft from ourselves.

There will be a terrible price to pay until people come to realize this fact.

Anonymous's picture

The Republic is threatened by bankruptcy, yet we find ourselves still needing to hash out small points? Even the CDS exposure of AIG to GS was GS prop trading. 'Hedging' was just an empty excuse for the overload of CDS-buying and trading. Prop trading has even rendered the Fed's and Treasury's massive actions a plaything for yet more skimming. The mortgage Deterioration Ratio is currently 3/1, with the average delinquincy 9 months. The MS and Tischman/Speyer/BlackRock jingle mail has completely legitimized consumer-level walk-aways. The Fed will not be willing to hold the MBSs they've bought up once the mortgage defaults accelerate and housing values weaken further due to walk-aways and bank losses. The MBS purchases will soon become another 1.5 trillion of US debt on the books of Fannie Mac before the summer is out, as the Fed gets reimbursed by cash raised via new T-bond sales. With state governments marching into distress and bank capital yet again dissappearing, we'll be loaded with WWII-level debt, but without a Europe to rebuild, or an Asia in ruins. We had no war. We just had Congress, the mortgage brokers, the IBanks, three ratings agencies, Fannie Mac, and the Fed allowing, encouraging, facilitating an all-out bankers' feast. There is nothing else to it, no fancy "blame enough to go around" refrain should distract us. We know exactly who did what. It's in the records, the mortgage files, the votes, the board meetings. And for the irresponsibility of these people, the Nation's young and old will suffer for a decade without recouping the personal profits from the two or three thousand people most responsible? We'll keep Bernanke on? Geitner? I live in a Nation of the oblivious selfish, so used to looking after their own special deal that they care not what the public ledgers reveal, what consequences of their greed and betrayal. "I'll get mine!" Yes, you'll get yours, if you haven't moved to Singapore or Dubai. You'll live in infamy. Our young men and women now willing to fight for our ideals and safety will soon turn away from the challenge in disgust, so we'll be forced to institute a draft. Our innovators will move to less-burdened markets. All this loss just to pump up the short-run profits of the iron triangle.. bankers/real-estate-vampires/congress? Yes. Neither a war on drugs nor a war on terror is justified if we cannot wage a war of retribution on the frauds, the deceivers, the liars, and the conveniently blind pols and raters, turning them out of careers, Congress, Boards, and taking their money to help refill the Treasury. We should build a memorial Wall of Shame on the Mall and start carving in the names, one by one, as the evidence is sifted.

tom a taxpayer's picture


Anon- Excellent points. "There is nothing else to it, no fancy "blame enough to go around" refrain should distract us. We know exactly who did what. It's in the records, the mortgage files, the votes, the board meetings."

Yes, rampant criminal activity must be attacked head on.  The greatest financial crimes in U.S. history cry out for justice! Take off the kid gloves, and hit these criminals with the iron fist of justice.  We need coast-to-coast arrests, from Countrywide to ratings agencies to Goldman Sachs and every one in between. We need Shock and Awe RICO prosecutions and mass trials in style of the Maxiprocesso (Maxi Trial) of the Mafia in Sicily during the mid-1980s that resulted in hundreds of defendants convicted. 

It takes only one prosecutor to investigate just one crime, and follow the money and the connected crimes, and bring down the overlapping criminal enterprises using Racketeer Influenced and Corrupt Organizations Act (RICO) prosecutions.

This is a target rich environment, and the criminal activities (fraud, Ponzi schemes, extortion, looting of treasury, cover-ups, etc.) are continuing today. So the investigation and prosecution can begin anywhere and follow the trail: Countrywide, the mortgage industry and the appraisers or Freddie and Fannie or Citi and the big banksters or with Goldman Sachs and other Wall Street banks or the rating agencies or AIG or with the federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve, especially FRBNY, and any members of Congress who aided and abetted.

These overlapping criminal enterprises raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered federal/state/municipal financing, pension funds, and the banking system, caused massive unemployment, sent the economy into a downward spiral, endangered the world financial system, extorted the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy, and now are costing taxpayers hundreds of billions, even trillions of $.

We need RICO confiscations of the hundreds of billions in illegal "profits" from the criminal enterprises of the banks, mortgage industry, and Wall Street Mafia. We need prosecutions, RICO convictions, RICO confiscations of mega-billions of dollars of ill-gotten gains, repayment of taxpayers, and 20 years-to-life hard time prison sentences. 

And the prosecutor who leads the charge will become a national hero. 


BoeingSpaceliner797's picture


Recently, I mentioned all of your points (with the exception of applying RICO statutes already on the books) to a former acquaintance from the SEC.  I was met with the standard, "Do you realize how long it takes and how much manpower to bring a case against fraud?"  I replied that that sounded like an endorsement of certain levels of corruption being acceptable in society and was told I was being "overly simplistic."  To me, this conversation underscored the magnitude of the problems facing the US, starting with lack of political will and general lack of morality.  And, yes, I am applying those two in the broadest measure possible with regard to the US.

tom a taxpayer's picture

BoeingSpaceliner797 - Thanks for the info. Unfortunately, the response of the SEC person is symbolic of the SEC's attitude and poor record. I think the best hope of serious prosecution is one or more State Attorney Generals going on the warpath against Wall Street. A federal prosecutor would also be great. The fed may be forced to get into big time prosecution if the State AGs lead with a big case.

I have hope for big time prosecution because there are so many Wall Street criminals that it only takes one criminal to drop a dime, and one prosecutor to answer the call. Wall my little friend RICO.

Anonymous's picture

Great Depression, the lawyer, failed in the initial analysis. It should have been that any institution willing to lend you $100,000 with no collateral or cosignors was destined to fail. Shorting Citi and Wamu would have paid off the loan. You misplayed the game.

What_Me_Worry's picture

Don't talk of things you have no idea about, please.

Washington Mutual had $26B in cash at the time of seizure.  They were a well-capitalized bank at the time of seizure.  They were willing and able to pay each and every depositor as they requested their money.  They held back an additional $4B at the holding company level as an additional backstop.

Washington Mutual WOULD NOT have failed if they weren't seized.

Great Depression Trader's picture

Did i ever say WAMU? I said WACHOVIA. And besides fuck that JPMC conspiracy theory crap WAMU was toast alongside the rest of the megabanks. And if they survived the initial derivative blast they would have failed later.

Anonymous's picture

"You misplayed the game."

Excellent comment. Precisely.

BigBagHolder's picture

You cannot really separate "prop" from "customer" trading.

If all you think about is naive order matching stock trading, its easy to think like this.  This describes very little trading that goes through a broker-dealer (that stuff is all electronic already).

So now... what happens when a customer calls me up and wants to sell 4-days average volume in an S&P500 stock?  Can I bid?  Can I buy it?  Well... then I have a "prop" position right?

Well, I dont really like being long $5B of some large tech company stock I just bought from a customer.  But at the same time, I dont really want to dump 4-days volume today.  So maybe I identify 25 other large cap tech stocks and I sell 20% daily volume in each.

Man... now I have a prop book.  But at least I am market neutral.

If you think about anything outside of equities... things tend to trade in large blocks in less liquid opaque markets.  What I am describing are simply the necessary consequences of the exposures that arise from those customer trades.

Not that this cannot be mis-managed... which costs people alot of money.  But that is life.  Bad judgement happens.

Its unlikely that the govt or ZH can successful outlaw bad judgement.

numbers's picture

Hey wacked. I don't know what country you're in but who the fuck appointed you the chief of the morality police? Your arrogance and assumed moral superiority is disgustingly European.

MrPalladium's picture

From the Grantham PDF:

"The Fed is capable of being extremely out of touch
with the real world – “what housing bubble?” – plus
more doctrinaire – “no, the low rates had no effect on
housing” – than anyone could have imagined."


"The Fed learns no lessons!"

I had always believed that the Fed was focused on its spoken objectives of stable prices and near full employment, and that policy perspectives would change as experience dictated. In other words, policy would adapt and change in order to achieve those stated goals.

But recently I am coming to the conclusion that the Fed's stubborn insistence on making good all debt held by banks betrays the Fed's real purpose which is to ensure the profitability and survival of those banks and allied financial institutions, the rest being mere eyewash for public consumption.

I am particularly curious about the transmission belt by which this real objective is communicated, and even more important, the enforcement mechanisms by which the Fed's chairman, governors and employees are induced to understand and relentlessly pursue this real objective.

How far down the chain of command does understanding of the real purpose flow?

sun1's picture

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