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On Drip, Rake and Big Swinging Dicks

Bruce Krasting's picture




 

 

Years ago, when I was a Wall Street banker, there was a ton of pressure to make money TODAY. If you made money today (the calendar year) you got a big bonus, you got a raise and promotion and more capital allocated to what you were doing so that in the next year one could make even more money. These were powerful incentives, More money in one's pocket was great, the promotions looked good but the increase in capital was what made one a star. The more capital you had available, the bigger the dick was the thinking. And if you had a lot of bank capital at your disposal to make deals you were a "Big Swinging Dick". There were also powerful disincentives - if you didn't make money TODAY, you got canned at the end of the year.

So every day I went to work thinking about how I could make some bucks on that day. I was doing FX swaps at the time, but think about making a simple loan. Say you had a client who wanted to borrow some money and was willing to pay LIBOR +3. If you wanted to turn that loan into a TODAY event you dropped the LIBOR spread and charged a big upfront fee. The 3% interest spread was "Drip" income as it accrued on an annual basis. The upfront fee was a "Rake" that increased the TODAY income and achieved the desired dick growth.

Which deal was better? 1) A five-year loan at LIBOR +3, or 2) a five-year loan at LIBOR +1 and a fee of 3% at closing? Option #1 had better all-in economics, but no dick factor, so I (and everyone else) chased after #2. The bonus pool was filled with 10% of the fee income (Rake) but none of the interest income (Drip).

The incentives for TODAY income caused a pollution of future income; that was fine with the Brass as they were also looking to boost current income as they had stockholders to worry about, and they wanted to have very big dicks.

 

I left the Big Casino before 2000, but I know that the mentality that existed back then continued all the way through 2008 when the SHTF. The demand for TODAY income only got worse, and as a result some horrible deals got done. Capital was mis-allocated, bonus's were paid on shitty deals that generated fees, but later resulted in huge losses. The thinking was "Worry about TODAY", if tomorrow it rains, you can get another job. As much as any other factor the Drip versus Rake and the Big Dick mentality was the cause of the bubble that burst so loudly.

I was reminded of this history (I don't think things are any different in 2014) as a result of a report from the CBO (Link) on how the government evaluates its many lending activities. The Federal Government has outdone what Wall Street has been trying to do for years. The numbers are huge, the consequences will be be high.

According to the CBO the three big D.C. providers of credit are all playing the Rake versus Drip game. Between The FHA (mortgages), EXIM Bank (AKA Boeing and GE) and the many student loan programs the D.C. crowd is front ending billions of 'rake' income that should be accounted as future 'drip' income. The CBO concludes:

 

The life-time costs of federal credit programs are recorded upfront on an accrual basis (that is, they are recognized in the year in which the loan is made). The lifetime cost of a federal loan or loan guarantee—called its subsidy cost—is measured by discounting all of the expected future cash flows associated with the loan or loan guarantee to a present value at the date the loan is disbursed.

 

At first glance this looks okay. D.C. recognizes its 'costs' up front. But when you look at the actual numbers you see that the year one 'Subsidy Costs' are all negative (meaning a profit). If the same lending activity were measured on a 'fair value method' the upfront profit would turn to a loss. The CBO report concludes that the difference between what is fair value and the way Washington treats debt would result in at $332 billion difference over the next ten-years:

 

fcracbo

 

myth

The CBO report is screaming, "This is F-ed up! Fix this now, or pay a price later!" Of course, nothing will come of this. D.C. will continue to be a mega lender, and part of the reason is that it books all the drip income as rake, and this makes a couple of people in Washington Big Swinging Dicks. Like Wall Street, the Big Dicks are only concerned with today, if things blow up, they just move on to another job. CBO sums it up pretty well:

 

When the government extends credit, the associated market risk of those obligations is effectively passed along to taxpayers, who, as investors, would view that risk as having a cost. Therefore, the fair-value approach offers a more comprehensive estimate of federal costs.

 

Some of the bigger Dicks in D.C.:

 

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PIc1

 

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Tue, 05/27/2014 - 08:19 | 4797837 NEOSERF
NEOSERF's picture

The buttf#&$% the American Taxpayer has been taking is getting increasingly painful due to the increasing length and girth of these BSDs...seems like there are more of them and yet prison would be the place they could actually have the greatest impact.

Mon, 05/26/2014 - 21:41 | 4797110 SAT 800
SAT 800's picture

Oh, I'm sure everything will work out just fine.

Mon, 05/26/2014 - 10:11 | 4795266 Vooter
Vooter's picture

Shouldn't the "Big Dicks" just be shot? I mean, really--isn't that the gist of what we're talking about here?

Mon, 05/26/2014 - 09:37 | 4795189 LawsofPhysics
LawsofPhysics's picture

After years of "working" as a wall street insider and making bank, this fucker wants to "fix" shit.

Feel free to pay down any government expense you want with your own wealth Bruce.  After that I have a guillotine that you need to see.

Mon, 05/26/2014 - 02:50 | 4794799 Escapeclaws
Escapeclaws's picture

Making money the Krasting way. You play poker with this dude--he's clever, he's fast, and he can make your head spin with all the insider argot--you'll lose! He's a Wall St rapper.

(Meanwhile, there were those simple folk making a modest living doing real work that wasn't based on calculations of net present value who are vulnerable to cuts in social security. To bad for them, the Wall St rapper has turned his gimlet eye there already. He's fast, he's clever, and he can make your head spin, poor sucker...)

Sun, 05/25/2014 - 22:01 | 4794488 grunk
grunk's picture

If I interpret the photographs correctly, Arne Duncan and President Obama seem to have a disagreement on acceptable swinging dicks.

Mon, 05/26/2014 - 05:10 | 4794881 mrdenis
mrdenis's picture

 So Size does matter .........

Mon, 05/26/2014 - 08:05 | 4795033 negative rates
negative rates's picture

Length and size are two different things.

Sun, 05/25/2014 - 20:26 | 4794274 Herdee
Herdee's picture

Seems like Obama and his cronies are determined to turn a lot more U.S. cities into Detroit like ghettos.

Sun, 05/25/2014 - 19:14 | 4794157 AdvancingTime
AdvancingTime's picture

Another lie and myth revealed. I recently found myself thinking about the decline or collapse of great empires and realized that it is often hard to predict when or how their demise will occur. One sign of the end is a massive growth in crony capitalism and corruption. Many analogies can be taken from this idea, the empire need not be great and timing is always hard to correctly gauge.

The signs of decline may be everywhere but that does not guarantee the end is near. As the foundation crumbles away it is not uncommon for those in power to extend their rule by many tricks and changing the rules in order to gain a new lease on life. This is another example of such a trick. More on the subject of how empires collapse in the article below.

http://brucewilds.blogspot.com/2014/05/how-empires-collapse.html

Sun, 05/25/2014 - 15:15 | 4793698 Yen Cross
Yen Cross's picture

 Ohhh fuck. The tribal elder is covering his ass... It's going to be ugly in June.

Sun, 05/25/2014 - 13:26 | 4793489 TheFulishBastid
TheFulishBastid's picture

If your dick is raked or dripping, please go see a doctor immediately.

Sun, 05/25/2014 - 23:05 | 4794586 Kprime
Kprime's picture

if you experience a rake lasting longer than 4 hours you may be deaf and blind.  Call your doctor immediately.

Sun, 05/25/2014 - 12:23 | 4793376 disabledvet
disabledvet's picture

This nigger is all about the sell side. But you ain't gotta a clue until you understand "someone really is buying your bullshit."

That's the dude who pays for EVERYTHING.

That's why you get bailouts for BANKS folks (not bankers...but BANKS.)
They're the "buyers of the bullshit."

These treasury rates are plunging cuz simply put "whatever we're selling they ain't buying." Only an idiot believes Permanent Bailouts aren't the result.

To say I respect those trying to go out and get a vote is an understatement. "When we're not kissing the babies we're stealing their lollipops." But you have to respect the bursar. He's the one putting the smile on your war effort. (And yes, that guy was a Congressman from Iowa btw. Scott somethingor other I believe.)

So darn skippy...this ain't no love boat and the Bankers "who don't make any money" are cutting the check for your ENTIRE Government.

You're collecting a Social Security check or public pension? Say hello to your paymaster America.

Sun, 05/25/2014 - 12:02 | 4793333 ebworthen
ebworthen's picture

Nice one Bruce.

Sure, D.C. is pushing out the credit (debt) so the Wall Street Warlocks and Witches can make their rake and drip. 

At the same time it buys votes for the politicos who present it as "helping" constituents.

All at taxpayer expense of course.  Fiscal and fiduciary responsibility?  That went out the window in 1913 I'm pretty sure.

Sun, 05/25/2014 - 23:11 | 4794600 tempo
tempo's picture

Who has the biggest one is determined by who can give away more entitlements and health care. That's all that count plus being PC.

Sun, 05/25/2014 - 11:54 | 4793320 kellycriterion
kellycriterion's picture

Gee, you don't say? That's how OPM works. Get more input. To hell with output. Greater input, less output, more for you, more for partners, allies, relatives, anyone who may be able to help you.

Those are the inherent incentives. The more certain you can be of obtaining OPM and perhaps in ever increasing quantities the more those incentives grow.

The more intangible the measurement of output the more those incentives grow.

The people who are part of the constant struggle to achieve greater output over input? The people who have to trade their work, their ingenuity to make a livelihood? They're at a bit of a disadvantage, wouldn't you say?

Of course you've known this. Everyone knows this at some level. The semi-hypnotic state of the conscious mind not withstanding. There's a parallel mind that identifies self interest without so much BS.

And notice you don't have to be Jewish or a Bilderberger. Fantastical convoluted edifices of rationalization usually referred to as ideologies? Just different pitches.

The best conspiracy is one that everyone is in on.

Sun, 05/25/2014 - 11:39 | 4793280 whidbey-2
whidbey-2's picture

This kind of financial management can not fail.  Of coarse, the currency of the economy becomes questionalbe. But the biggest most bodacious frauds are beyond belief and consequently are rarely believed before a collapse. Madoff went to jail, but this one is too big to jail. the lesson is own gold?  I think not.

Sun, 05/25/2014 - 11:15 | 4793218 machineh
machineh's picture

The cash-basis accounting uniformly used in government (despite an accrual-basis Financial Report of the U.S. being published annually) fails to debit cash income for the accruals needed to fund future promises.

Even worse, Soc Sec and Medicare are treated as off-balance sheet, since they are not contractual and Congress can amend or cancel them at any time.

Bottom line: the largest financial entity on the planet is a deceptive, fraud-ridden flimflam.

But what would you expect, when it's run by a cozy Depublicrat duopoly that's been in power for 150 years?

Sun, 05/25/2014 - 10:25 | 4793098 Eireann go Brach
Eireann go Brach's picture

Isn't that cracker Flavor Flav beside Shaun Donovan?

Sun, 05/25/2014 - 10:08 | 4793072 max2205
max2205's picture

B r u c e !

Sun, 05/25/2014 - 09:22 | 4792988 Seize Mars
Seize Mars's picture

Good work Krasting. This ties into the "Shadow Banking System" as Tyler has discussed. Very important. Keep up the good work.

Sun, 05/25/2014 - 21:45 | 4794430 booboo
booboo's picture

"The CBO report is screaming, "This is F-ed up! Fix this now, or pay a price later!"

No it's not and that is just one of the many problems with state controlled oversight of the.............. state

Sun, 05/25/2014 - 11:03 | 4793193 lordbyroniv
lordbyroniv's picture

 

Bruce is a fascist statist.  All his rantings are designed to buttress the rotted financial system as a salvagable entity.

Breaks my heart that ZH'ers embrace this fool.

Guess it has to do with him being around since the beginning.

 

Mon, 05/26/2014 - 08:57 | 4795125 mendigo
mendigo's picture

A person who is part of the system cannot normally see the underlying flaws in basis of the system. Rather they obsess about flaws in the details of the system. They want to chip away at the system without undermining thier own position. At various levels of government they take on debt that will be passed to future generations. All government debt should be limited to short termessentially pay as you go or else they run up the debt balance until interest payments equal disposible income.

That and no work should actually be done by government employees rather should all be subcontracted to private industry but with stronger oversite. Government should not be in the business of eduation. Somehow we need to breakdown the military industry which seems to control our foreign policy. Government should eliminate all oversite of wall street except for common criminal activity. Should focus on strong banking system. 

Mon, 05/26/2014 - 06:58 | 4794952 DavidC
DavidC's picture

lordbyroniv,
Either I can't read (and I think I can) or you and I weren't reading the same article.

DavidC

Sun, 05/25/2014 - 15:49 | 4793742 negative rates
negative rates's picture

Those are your beliefs, and no they are not salvagable.

Sun, 05/25/2014 - 12:35 | 4793398 Bruce Krasting
Bruce Krasting's picture

Funny, you read this and conclude that I was trying to "buttress the rotted financial system as a salvagable entity."  I wrote it thinking the opposite.

 

Sincerely,

Fascist Statist

Mon, 05/26/2014 - 11:09 | 4795396 Oquities
Oquities's picture

so you read Liar's Poker, huh?

Mon, 05/26/2014 - 00:22 | 4794667 Dane Bramage
Dane Bramage's picture

Darling fascist bully-boy,

Give me some more money, you bastard.

May the seed of your loins be fruitful in the belly of your woman. Neil.

 

https://www.youtube.com/watch?v=VbOlJAU8llY

Mon, 05/26/2014 - 06:20 | 4794921 Ctrl_P
Ctrl_P's picture

Boom Shanka

 

And if i could, +9999

Sun, 05/25/2014 - 16:21 | 4793816 kellycriterion
kellycriterion's picture

I'll have you know that Mr Krasting will give a sound thrashing to any pillow that dares challenge him.

Sun, 05/25/2014 - 12:48 | 4793427 Greenskeeper_Carl
Greenskeeper_Carl's picture

Well played Bruce. There are some basement dwellers who believe that anyone who has EVER worked in any kind of financial services or who don't say exactly what they want to hear is the 'enemy'. The last thing I want here is a complete echo chamber.

Mon, 05/26/2014 - 10:18 | 4795276 Vooter
Vooter's picture

"There are some basement dwellers who believe that anyone who has EVER worked in any kind of financial services or who don't say exactly what they want to hear is the 'enemy'."

That's generally how wars work...

Sun, 05/25/2014 - 14:12 | 4793601 oddjob
oddjob's picture

Basement dwellers know Krasting is a fiat apologist, and if he wants to talk about big swinging dicks that really comes as no suprise.

Sun, 05/25/2014 - 11:54 | 4793318 joego1
joego1's picture

Bruce stoled your date right?

Do NOT follow this link or you will be banned from the site!